Time to break up Citi?

Posted Apr 21st 2008 3:53PM by Peter Cohan
Filed under: Citigroup Inc. (C)

FT.com reports that The American Federation of State County and Municipal Employees (AFSCME) wants to break up Citigroup Inc. (NYSE: C). I agree with AFSCME on this point and that cost me an appearance today on CNBC's Closing Bell with Maria Bartiromo.

Why does AFSCME want Citi to break up? Its Employees Pension Fund long has had concerns about the viability of the Citi business model and thinks that now is the time for a bold plan to restructure the company. FT.com notes that AFSCME believes that [Citi] "operates more like a run-down department store than a financial supermarket." I agree with the union about breaking up Citi.

The concept of a financial supermarket is deeply flawed for three reasons:

Don't keep all your eggs in one basket. People don't want to put all their financial services business with one company. It's too risky and gives the supermarket too much control over the consumer's finances.
Diversification is a flawed rationale for corporate strategy. The concept that the different businesses offset each other during business cycles is not supported by the facts. Right now, Citi's consumer and commercial businesses are going down the tubes simultaneously.
Complexity makes it hard to hit the numbers. Citi is way too complex to manage in the sense of driving steady earnings growth every quarter.

A year ago I advocated breaking up Citi into a business and a consumer bank. From there, additional pieces could be spun off until there is a profitable core that can win in up and down markets. That would likely generate more consistent earnings growth and create an attractive investment.

But I am still a bit uncomfortable with the argument for a break up. That's because I am not sure what are the right pieces to keep and which ones would be more valuable in the hands of others. Figuring that question out is a huge analytical project. And I'd be happy to do it. Unfortunately, since I agree with AFSCME's position my chance to argue on its behalf will not happen this afternoon.

After arguing my point of view, I found out that CNBC had already booked a union advocate and it was looking for someone to take the other side of the argument.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup shares.

Tags: AFSCME, C, Citigroup, inthenews

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Reader Comments (Page 1 of 1)

4-21-2008 @ 4:45PM

barneyrin said...

cost you an appearance on the tube????
what a shame for someone with the morals of a crack dealer!!!!

4-21-2008 @ 4:58PM

Dan Barnett said...

So Peter misses his time with the "Money Honey". Ah well.

The previous comment is unwarranted. Though I would point out that Mr. Cohan has been knocking Citi stock for several months. Now his disclosure shows he owns some. I think an expalnation about why he changed his mind would be in order. But the personal attack us un-fair, un-substianted, & un-warranted.

4-21-2008 @ 6:51PM

alan said...

Mr. Cohan has at least been consistent for the past 9 months or so, while the Citi apologists have just swayed in the prevailing breeze.
What I don't understand is Citi's strategy to sell high cost preferred stock and senior notes. I believe they are trying to peddle another $6 Bil of what they are calling perpetual preferred at 8.5+ %. How can they afford to keep paying investors these rediculous rates to raise capital.
So, here is the question. What if they offered their depositors ( yes, customers) let's say, a 5.5 % four or five year deposit note.
I would be willing to bet that in one month they would sell in excess of $20 Bil. It goes on the same side of the balance sheet and it's a no brainer for their customer accounting systems to support it.
The caveat, it goes to a lot of little guys rather than Citi's syndicated partners. That's why they will never consider it . It's too simple of an approach, it may actually make customers happy, and may raise more capital than they know what to do with !!!!

4-21-2008 @ 11:45PM

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