What a difference a decade makes. The 10-year anniversary of Citigroup has brought the hacks, the commentators – and some ex-Citi employees executives – out in force; just see John Reed’s extraordinary outburst in an FT interview on Friday about what he sees as the sad decline of the financial powerhouse he helped create.
Reed’s views will undoubtedly deepen a debate that has dogged Citigroup since its birth on April 6 1998, says the FT’s US business editor, Francesco Guerrera, in a Thursday analysis.
Contributing to that debate is Roger Ehrenberg, the veteran investment banker and former Citi dealmaker, who, in his blog Informationarbitrage, gives us his 10 most common merger pitfalls and says that in general, mergers destroy value and Citi is no exception.
It is striking, he notes, how former stewards of acquisition-happy, overly-complex, unwieldy enterprises end up saying either “We made a big mistake,” or “We’ve got to undo this.”
Yet, says Eherenberg, even in the face of obvious failure, “as noted by the poor relative and absolute stock price performance since the merger, together with the massive amount of capital that has been needed to bolster the equity base”, consider these words from one of the firm’s most senior executives (also from the FT article):
Don Callahan, Citi’s chief administrative officer, defended the merger, saying it had “revolutionised” the financial sector.“After 10 years there is still no other financial services firm that has the combination of businesses or the global reach that Citi has,” he said.
“If this is what revolution yields, I think we need fewer revolutions”, concludes Ehrenberg. Another ex-Citi employee, Paul Rose, writes in his blog Conglomerate on Friday:I had left Citi’s trading desk for law school a few months before the [merger] deal was announced, so I fortunately missed the apparently ugly attempt to combine Salomon’s trading floor with Citi’s (ex-Salomon/now Citigroup traders were rumoured to be still answering their phones by saying “Solly” instead of “Citi” some months after the merger).So what is the verdict on the Citigroup merger?, asks Rose. “We’ve been reminded for a couple of weeks now the crucial role that confidence plays in financial stocks (and now the SEC is investigating alleged efforts to bring Bear down through false rumours). Perhaps, as has been speculated, Citi will need to restructure to restore the market’s trust.”
The FT’s investment editor John Authers, meanwhile, recalls that when the news was first announced that Citicorp and Travelers Group would merge to create a financial behemoth called Citigroup, the FT predicted it would “redefine world finance”.
So it has proved – but not quite in the way the FT had in mind.
The merger revived hopes for a global financial “one-stop shop” that could cross-sell products over one platform. The deal also meant, to great rejoicing, the end of the Glass-Steagall law, which split commercial and investment banks.
Some voices suggested that the new Citi would be “too big to fail”, and so intrusive regulation would be needed to make sure it was “too good to fail”. They were ignored.
A decade later, the market has changed its mind. Citi has underperformed the S&P 500 by more than 30 per cent and the S&P financials index by almost 25 per cent over that time. Its stock has fallen 16 per cent.
Rather than a sleek one-stop shop, Citi is perceived as unmanageably big.
It took the market nine years to perceive this, notes Authers. As recently as September, Citi traded at a higher multiple to its book value than the S&P financials index as a whole.
More worryingly, he adds, the credit market “now believes that the unthinkable, a Citigroup default, is thinkable”.
Citi’s credit default swaps once traded at less than 7.54bp over Treasuries — implying it was safer than most governments. During last week’s panic over Bear Stearns, they ballooned to almost 250bp and remain near 150bp. As Citi is far too big to be allowed to fail, the chance of it defaulting is roughly equal to the chance of a systemic financial collapse.
That such fears were even countenanced suggests the argument for heavier regulation seems overwhelming, concludes Authers. That would help remove fears of a meltdown — but also guarantee lower profitability for financial groups in future.
See a video discussion between Authers and Guerrera about Citi’s last 10 years, on the FT’s View of the Day.
The final word – for now – about Citi, however, should perhaps be devoted to the conspicuous silence of Chuck Prince, who undoubtedly rues the day he blithely told the FT in an interview last July: “So long as the music is playing, you’ve got to keep dancing. We’re still dancing”, just one month before the music stopped last year.
As Lex noted shortly after that ill-fated interview, as Citi’s problems became more evident: “It gets a bit lonely on that dance floor when investors go on a massive buyers’ strike”.