Sandy Weill thinks that Citigroup should
be big, and gave this quote to Bloomberg:
Being large and having a strong balance sheet enables a company to withstand
the financial turmoil that happens every now and then in global markets.
The quote did not go down well with Tom Brown, who responded
What he means is exactly what we’ve been saying here for months: Citi has
gotten so big, and lumbering, and broadly diversified that it simply can’t
generate meaningful organic growth anymore. The law of large numbers won’t
allow it. Great, Sandy! If all I wanted from my investment was an instrument
that would "withstand financial turmoil" I’d simply buy Treasury
bills and be done with it. Presumably Citigroup’s shareholders want something
more than that.
They’re both wrong.
Weill is quite right that if a bank has a strong balance sheet, that will allow
it to withstand financial turmoil. That’s what a strong balance sheet is.
Being large, however, protects you only in the moral hazard sense that regulators
are likely to consider you "too big to fail". Which will come as no
consolation to shareholders, who get wiped out in any bailout situation.
I think that what Weill means is that Citi is so enormous it is necessarily
well diversified. It can’t be brought to its knees by a property crash, say,
or by a series of Latin American sovereign debt defaults, because it has its
eggs in too many baskets. This is a fair point – but the same thing could
be said of many much smaller banks.
What Weill does not mean is what Brown says he means, which is that
Citi can’t grow organically. Indeed, at this point, Citi is so enormous that
it has very little choice in the matter: it’s so big that it can spend $8.5
billion on 69% of Japan’s Nikko Cordial, for instance, and no one so much as
blinks. In retail banking, Citi is not as aggressive as its faster-growing rivals,
and the solution to that problem is not to start buying those rivals, and it’s
not to spin off Citi’s retail arm. Rather, it’s simply for Citi to get more
And Brown would do well to look at what the Law
of Large Numbers actually says before he cites it. It’s a law in probability
theory, and it really isn’t applicable to Citigroup at all.
As for the relative merit of Citigroup stock and Treasury bonds in a time of
financial turmoil, on that question reasonable people can vary. Certainly the
former has done much better than the latter of late.
The question isn’t whether Citigroup is too big to grow – if the parts
can grow on their own, then the sum of the parts can grow just as much. The
real question is whether Citigroup is too big to manage, and whether
it’s possible to steer a ship that big and complex. But if HSBC isn’t too big
to manage, Citigroup shouldn’t be impossible to control: they’re not that far
apart in size.
The difference is that HSBC has a corporate culture, while Citigroup still
feels like a set of very disparate parts. If a strong leader could communicate
a simple and effective vision for the company, the calls for its breakup would
soon cease. But such people are hard to find.