Citigroup, and the Financial Supermarket are Dead.
Citigroup shareholders have been destroyed by a parade of gaffes that arrived courtesy of a hard driving, arrogant culture seeking to dominate everything. The corporate hubris has been repeated at Bank of America, American International Group, and to a lesser extent J.P. Morgan Chase. All parties have exhibited desperation to compete with each other merely to merge and acquire the U.S. Banking system, as we knew it – into oblivion. Banks that are “Too Big to Fail” are simply too big.
How did we get here? How did we arrive at this ongoing spectacle of staggering billion dollar bailouts, sweetheart preferred stock deals, shotgun marriages that crush shareholders, and stifling government control?
We must revisit the 1933 Glass-Steagall Act.
Glass-Steagall was legislation enacted from the depths of the Great Depression in response to the outright collapse of the U.S. Banking system. Glass-Steagall constructed a wall between insurance, commercial banking, and investment banking. Bank holding companies that accepted deposits and loaned out money were therefore forbidden to underwrite and trade securities. The mandate held for the next 66 years – until it was curiously repealed amidst the height of a feeding frenzy of 1999 stock market dot-com speculation.
Casual observers blame the Republican Party and the 1999 Gramm-Leach-Bliley Act that destroyed financial services delineation for promulgating today’s credit bust mayhem. Of course, reality is far from simple.
Travelers Insurance and Citibank had already driven the deathblow stake into the heart of Glass-Steagall with a brazen 1998 merger that was technically illegal. Also, a Republican triumvirate may have introduced the Gramm-Leach-Bliley Act – but the bill was widely supported by legislative Democrats and signed by President Clinton. Citigroup, not the U.S. Government shall serve as the primary catalyst of this mega-bank, financial supermarket movement.
Citigroup emerged as the most dominant publicly owned financial institution in the world behind the slick deal making of Sanford Weill and his fiery, number crunching lieutenant Jamie Dimon. Beginning from a Commercial Credit Baltimore backwater – the pair navigated the rubble of has been financial entities to eventually Lord over the banking industry.
The Playbook: borrow ridiculous amounts of money, buy decrepit banks on the cheap, slash costs, and generate revenue to meet debt service; Repeat.
The strategy crystallized into a dizzying decade of mergers and acquisitions from the late 80’s and into the new millennium. Gulf Insurance, Primerica, Smith Barney, Shearson, Solomon Brothers, and Travelers were to fall underneath the Travelers Group umbrella.
Weill flouted the Glass-Steagall law with his 1998 Citicorp – Travelers merger (at the time, the largest deal ever), appropriately banking that the insurance-deposit-investments firewall was indeed, dead. Of course, President Ford and Treasury Secretary Robin Rubin were recruited as board members and adequate insurance to promote the ultimate 1999 Gramm-Leach-Bliley Act.
My, how time flies.
10 years later and Citigroup is the teetering $1 / share financial on the brink, Sandy Weill is out of banking, Jamie Dimon is now on the prowl for J.P. Morgan – seeking to destroy the Citi that he once built, and the Federal Government refuses to kowtow to Big Bank equity holders – effectively wiping them out with an irreversible spigot of tax payer dollars that has diluted every last shred of mega-bank ownership.
Opening checking accounts, peddling insurance, underwriting securities, rapid-fire trading all underneath one roof simply does not work. The complicated dealings and inevitable failures have been exacerbated by the shocking leverage strategies that arrived courtesy of such bloated balance sheets.
Basic mathematics indicate that gargantuan commercial banks could not compete in terms of profit margins with investment banks; whereas the Merrills, Goldmans, and Lehmans could never match the sheer firepower of a mega financial center – bankrolled with timed deposits that carry lower rates of interest available to our very own U.S. Government. All financial players upped the ante and levered up the risk only to cannibalize their own selves.
Lehman is dead. Bear Stearns is dead. Goldman Sachs is a bank holding company.
Citigroup, Bank of America, and J.P. Morgan control approximately one-quarter of U.S. deposits and the failure of either institution would be absolutely cathartic. Hence, the U.S. Treasury will methodically print money to bail out these big banks at all costs. We have officially entered the Lost Decade Japan Zone. A failed business model that is propped up by throwing good taxpayer dollars after bad money controls our financial backbone.
I am forecasting that the gridlock, bailouts, and capital infusions will last for several years – until these banks that are “too big to fail” are broken up into smaller, nimbler units.
Citigroup is Dead, Bank of America is on Life Support, and J.P. Morgan may be the next in line. Dimon seems hell bent upon mimicking the career path of his former Citigroup mentor. The toxic assets acquired via the Washington Mutual and Bear Stearns acquisitions are ticking time bombs set to implode at any moment.
Although Dimon was lauded as a Savior and even blasted as an opportunist for these Wall Street fire sale acquisitions sponsored by the U.S. Government – the combined intrinsic value of both banks is $0 at most. Frankly, J.P. Morgan shareholders should have been dutifully compensated for being forced to accept this garbage.
The Financial Super Market is Dead.
Citigroup is Dead, Sources:
The Long Demise of Glass-Steagall, www.pbs.org
Glass-Steagall Act (1933), www.newyorktimes.com
U.S. Senate Committee, Graham Leach Bliley Act, http://banking.senate.gov/conf/
Putting Japans Lost Decade into Perspective, http://www.npr.org/templates/story/story.php?storyId=101066132