John Reed, who as CEO of Citicorp merged it with Sandy Weill’s Travelers Group just over a decade ago, admitted it last spring, telling the Financial Times that “the specific merger transaction clearly has to be seen to have been a mistake.” Now current Citi CEO Vikram Pandit—who has been talking to Reed on a pretty regular basis—has come around as well. According to both the FT and WSJ, Citi is planning to ditch most of the remaining Travelers businesses (consumer finance and stock brokerage mainly; insurance is already long gone).
After a spectacular merger that necessitated a major change in banking law—the 1999 repeal of the Glass-Steagall Act which separated commercial from investment banking—it seems at first glance that Citi is saying “never mind.” That’s a slight exaggeration. Citi reportedly does want to hold on to the Salomon Brothers investment banking business (underwriting and M&A) that came from the Travelers side. But its operations would be “constrained, especially in proprietary trading and securitisation,” the FT reports.
What is the meaning of all this (other than that times are really tough at Citi right now)? I have three theories:
1. It’s possible that this was all just a case of mismanagement. The universal banking model that Citigroup was emulating is pretty well established in Europe, and doesn’t invariably bring disaster. Maybe if Weill hadn’t forced Reed and Jamie Dimon out, Citi could have turned out all right. Maybe.
2. Then there’s the Dick Kovacevich Rule. The Wells Fargo chairman—a former Citicorp executive—has long argued that the transaction-oriented investment bankers and relationship-oriented commercial bankers simply don’t mix. As he told me a while back:
When you have a large diversified company the only thing that holds it together is a shared culture and common vision. You can’t have multiple cultures working in a large company or it is going to be dysfunctional.
It seems like this will continue to be a bit of an issue even in the pared-down Citi. Although the remaining investment bankers will be so obviously subordinate to the rest of the company that it probably won’t be much of a clash for at least a few years.
3. Finally, there’s the possibility that the investment banks/securities firms that have evolved over the past quarter century just aren’t very good businesses. They’re great businesses to work in far as remuneration goes (the working conditions aren’t always so hot). But investing in them as an outsider is turning out be, on a risk-adjusted basis, something akin to stuffing cash down a garbage disposal—albeit it without the fun grinding noises.