Is Citigroup too big to succeed?

Until recently, Citi was not only the largest U.S. financial institution, but the very embodiment of the new financial order. Under the relentless empire building of former chief executive Sanford Weill, it was Citi that brought down the old regulatory wall that had separated commercial banking from investment banking and insurance.

The combination of Citibank with Solomon Smith Barney under the bright red umbrella of Travelers Insurance was accepted with a regulatory wink and nod by the Federal Reserve while then-Fed Chairman Alan Greenspan worked to persuade Congress to make it legal by repealing the Glass-Steagall Act, put in place during the Great Depression to prevent another market crash like that of 1929. Now that another market crash has required the government to rescue Citi, there will certainly be those who wonder whether the New Dealers didn’t have it right all along.

The rationale for saving Citi is that with US$2 trillion in assets, more than 300,000 employees and operations in 100 countries, this was a bank that was too big and too interconnected with the rest of the financial system to be allowed to fail. The question now, however, is whether an institution of that size and scope is also too big to succeed.

For no sooner had Weill stitched together his empire than it began coming unraveled as a result of a series of soured investments and embarrassing ethical scandals that cost shareholders tens of billions of dollars. In the years since Weill’s departure, as various pieces of the company have been sold off or closed down, it has become obvious that the promised economies of scale had been overhyped, the synergies across business lines had never developed and the cultures and systems of the various parts had never meshed. The whole thing was simply too big and too complex to be managed.

It has also proved too big to be regulated. Over the past 20 years, the Federal Reserve, Citi’s chief regulator, has been unable to get a handle on the bank’s excessive risk-taking and incessant corner-cutting. Time after time, Citi rushed to jump aboard the latest gravy train — developing country loans, commercial real estate, Internet stocks, subprime lending and securitization — and time after time, Fed regulators failed to spot a problem until it was too late.

The Fed undertook what amounted to a rescue of Citi back in the early ‘90s, opening its lending window and lowering interest rates to avoid a collapse. This time the problem is even bigger and the rescue more explicit, with the Fed itself having to put its own balance sheet at risk to fix a problem that could have been prevented or contained if its own regulators had only been more vigilant.

While it was Weill who created the modern Citi and the business model on which it is based, it was his hand-picked and hapless successor, Charles Prince, who steered the company into the ditch.

It didn’t have to be that way.

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