Citigroup is likely to be broken up. The New York Times highlights the story in Rubin Leaving Citigroup; Smith Barney for Sale.

Citigroup signaled a breakup of its unwieldy financial supermarket model with a possible deal to sell a share of its prized retail brokerage business to Morgan Stanley, said several people with knowledge of the discussions, underscoring the enormous problems the bank continues to confront even after receiving taxpayer bailout funds.

The new chapter of wrenching change came as former Treasury Secretary Robert E. Rubin, who came under fire for his strong support of that model in an advisory role that helped fuel the bank’s troubles, said he would resign.

The developments highlight how badly Citigroup has been damaged by the global financial crisis. Deepening losses, declining confidence in its leadership and a desperate need to raise capital have forced the bank to rethink the strategy it has clung to for years.

“This is either a one-off or the first inkling of a dismantlement of the company, taking apart of what John Reed and Sandy Weill did,” a senior executive with ties to the company said, referring to the two leaders who forged the landmark deal to bind Citicorp and Travelers Group in 1998.

With pressure mounting on Vikram S. Pandit, Citigroup’s chief executive, the company’s executives say the decision to split off Smith Barney, the “crown jewel” brokerage business he said he loved a few months ago, suggests the bank’s troubles are so deep that he is looking to reshape the company in a former image of itself.

While a deal is not yet final, such a change would position Citigroup to look more like Citicorp — a global franchise with strengths in trading, corporate and investment banking, and international consumer banking — than the bloated and unwieldy company it has become.

It also could lead to yet another shift in power on Wall Street. A joint venture with Morgan Stanley would create the nation’s largest brokerage network of 20,000 advisers, edging out Merrill Lynch’s thundering herd of brokers that Bank of America snapped up in September. Citigroup and Morgan Stanley had been in preliminary talks about a joint venture with Smith Barney as early as summer, according to people briefed on the talks.

Long Overdue And Long Predicted

The breakup of Citigroup is both long overdue and long predicted.

Flashback Monday, July 14, 2008: Citigroup’s $1.1 Trillion in Mysterious Shadow Assets.

$400 billion down and $1.1 Trillion to go. I have said this [since the] summer of 2007 but it’s worth repeating again: Citigroup will not survive in one piece. If Citigroup survives at all it will be a mere shadow of its former self.

Flashback Monday, November 17, 2008: Citigroup’s Town Hall Meeting

Citigroup doubled loan loss reserves. Will that be enough to keep up with the deteriorating economy? Unemployment is going to soar and along with it writeoffs in credit cards, home equity lines of credit, commercial real estate, consumer loans, etc. Citigroup is still behind the curve in writeoffs in my estimation.

…The chart shows the market has increasing doubts about Citigroup’s survival, or if it does survive, that it survives in one piece. And the icing on the economic cake is the loss of another 50,000 jobs even if it does survive.

Flashback Friday, November 21, 2008: Credit Risk Rises on Citigroup Breakup Speculation

Balance Sheet Blues

Concern over its balance sheet is indeed one of the issues. Credibility of Citigroup management is another issue. I discussed both yesterday in Citigroup Blames Short Sellers For Collapse and previously in Citigroup’s Town Hall Meeting.

Repeating what I said yesterday, “the market seems to believe Citigroup is insolvent and so do I”. It remains to be seen if Citigroup does decide to break up and if so at what price for each piece, or if another bank can take them over completely.

Move Orchestrated By The Fed

This sale smacks of a preemptive move orchestrated by the Fed and/or Treasury. Claims made by Citigroup in its Town Hall Meeting that it was well capitalized were a joke. Likewise, Citigroup’s blaming of shorts when only 2.7% of the float was short was an act of desperation.

Had the Fed not stepped in to provide capital to Citigroup, it would have gone the way of Lehman.

Citigroup is still in jeopardy and the Fed is not willing to risk another massive run on any bank like we saw at Bear Stearns and Lehman. This is a preemptive move and I speculate not a choice made by Rubin or Pandit but rather made for them.

Breaking Up Is Hard To do

Don’t take your love away from me
Don’t you leave my heart in misery
If you go then I’ll be blue
‘Cause breaking up his hard to do
Remember when you held me tight
And you kissed me all through the night
Think of all that we’ve been through
Breaking up is hard to do
They say that breaking up is hard to do
Now I know, I know that it’s true
Don’t say that this is the end
Instead of breaking up I wish that we were making up again
I beg of you, don’t say goodbye
Can’t we give our love another try
Come on baby, let’s start anew
‘Cause breaking up is hard to do

Neil Sedaka Breaking Up Is Hard To Do lyrics

Goodbye Citigroup, Hello Citibank.

Kiss Citigroup goodbye, at least as you now know it.
Let’s see if Citigroup’s card unit is next on the block.
Let’s also watch how many heads roll in a sale of Smith Barney to Morgan Stanley.

Mike “Mish” Shedlock
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