The New York Times raises an important question facing Citigroup (NYSE: C) and Merrill Lynch (NYSE: MER) -- is the financial supermarket -- an idea pushed by former Citigroup CEO Sandy Weill -- an idea whose time is past? I think it's time to kill this failed concept -- it's bad for customers, employees, and shareholders.
Twenty-five years ago, I won a competition at the consulting firm where I worked to advise an insurance company about how it should respond to the financial supermarket idea. Back then, Sandy Weill had taken his brokerage firm -- Shearson -- and merged it with Lehman Brothers (NYSE: LEH) and ultimately American Express Co. (NYSE: AXP) to create a company where someone could get all their personal financial needs taken care of under one roof. My job was to find other companies that this insurance company could buy to implement the financial supermarket concept.
But the financial supermarket is a non-starter from the customer's standpoint. It doesn't even work inside the institution where it's housed. After Sandy Weill got kicked out of American Express, he tried to rebuild the concept from scratch -- starting with Commercial Credit and extending to Travelers Co. (NYSE: TRV) and ultimately merging it all together into Citigroup. This is all well described in Amey Stone's King of Capital.
But as the write-downs at Merrill Lynch and Citigroup suggest, the financial supermarket doesn't really help to diversify earnings. The problem is that, because there are so many linkages between the different services, when one goes down, many others tumble at the same time. We are seeing now how problems in consumer banking -- due to subprime mortgages -- create problems for institutional investors who bought securities backed by those bad loans. And it will squeeze credit card borrowers as well.
But there have always been deeper problems with the financial supermarket. It makes consumers nervous because they don't want one company having access to all their accounts. What if that one institution gets into trouble? What if the consumer has problems paying back a loan? These possibilities make it likely that a financial supermarket could cut off a consumer's access to financial services suddenly and completely.
Finally there are the internal problems of managing a financial supermarket. When Sandy Weill acquires all these different companies, the concept does not work unless all the different units work together effectively. But they have different cultures, different compensation programs, and systems that don't talk to each other. So it would be very difficult for a consumer that had credit cards, mortgages, and wealth management to view all their accounts with the bank at once, since the systems would not link together.
So I think it's time for Citigroup and Merrill to focus on what they do well and put the financial supermarket concept to rest. I know that it will try to come back from the dead in the future -- if for no other reason than to provide investment banking fees for the firms that help do the deals needed to build the concept.
But it's proved to be a loser over the last quarter century, and Citigroup and Merrill have a chance to do their shareholders, employees, and customers a favor by plunging a sharp spike into its still-beating heart.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup and Travelers stock and has no financial interest in the other securities mentioned.
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Reader Comments (Page 1 of 1)
11-06-2007 @ 6:54AM
GCM said...
This is a classic case of how hindsight is always 20-20. Merrill and Citigroup are merely the first of many large, conglomerated or “supermarket” firms that will suffer from the poor lending practices and exaggerated market appreciation in the early part of the millennium. The exposure of bad debt from subprime loans soaking up massive amounts of capital on companies’ balance sheets is the manifestation of poor risk-awareness by these massive firms as well as by the mortgage brokerages. That said, however, the “credit-crunch” is not the result caused by the amalgamation of different financial sectors under one corporate name, but rather, it is the result of lax and ill-considered lending practices by mortgage originators. Admittedly, the blame is, in turn, transferred to the major banks such as Merrill and Citigroup for not performing sufficient due-diligence on the mortgages they were buying, packaging, and selling to investors as CDOs and the like. That said, however, I certainly disagree with the assertion that former Citigroup CEO Sandy Weill – father of the hedge fund – is to blame for the subprime meltdown two and half decades after he introduced the “supermarket” financial firm. While having various financial sectors combined under one roof may “link” a firm’s banking sector with its investing or lending sector, there is little if any documentation to prove that is actually counterintuitive to a firm’s profitability (which is good for both investors and the firm). Finally, I would argue that if anything, there would be a significantly greater amount of positive synergies arising from the linkage of various financial sectors under one roof due to enhanced communication channels and a uniform corporate vision with intertwined interests and goals. Not to mention that if every big bank were to sell off its individual business units there would in all likelihood be far more units for sale than potential buyers.
11-16-2007 @ 5:52PM
J McBain said...
Enough with this "your color Card".
Green
Blue
Platinum
Gold
Black now
Plum
Lets keep it simple.
J. McBain (Charter card holder) 1958