Why Citi shows that big isn't always best

Merrill Lynch restricted use of its private jets. Deutsche Bank refused to pay their employees' taxi fairs. But Citigroup took penny pinching to a new extreme this week when it banned colour photocopying and single-sided printouts across the company.

After a year of shakeouts and writedowns, banking titans are still making token moves to shake off the weight they gained in the boom years. More than $500bn in dodgy debt may have been expunged from their balance sheets. But as former IMF chief economist Ken Rogoff warned this week, "the worst is yet to come" there are plenty more sins to confess.

Citigroup, America's biggest bank, has been guiltier than most. By Bloomberg's calculations, the group has had to write down more than $55bn in bad credit over the last year far more than any other bank.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Since former premier Chuck Prince fell on this sword last December, new CEO Vikram Pandit has axed more than 14,000 jobs and embarked on a whirlwind tour of the company's operations which stretch over 160 countries looking at ways to cut costs and streamline the business.

But no amount of directives about stationery and efficient paper use is going to make Citigroup an efficient organisation. The ugly truth is that Citigroup is too big for its own good. And problems at the group started a long time before its recent debacles.

As former chief executive John Reed told the Financial Times earlier this year, the landmark $166bn deal that brought Travelers Group and Citibank together in 1998 was doomed from the start. "It only took about a year before all the benefits of the merger were wiped out".

With 380,000 employees stretched across four separate arms, the company had become so huge that it outran management's ability to keep track of even the most basic tasks. Expenses spiralled and employees got swept up in a haze of corporate politics. As Fortune's Carol Loomis puts it, "the top requisite for managing this menagerie was not operating expertise, but a capacity for herding cats". Four chief executives tried, all failed.

The irony was that Citigroup's vast size was supposed to be its biggest selling point. At the time, everyone in the banking sector was looking to pair up. Banking monoliths JPMorgan Chase, Bank of America and HSBC all emerged from this period of consolidation. The idea was that if you made yourself big enough, and spread yourself across enough operations, nothing could bring you to your knees not a series of defaults by Latin American governments, and definitely not a property crash.

The trouble with the "too big to fail" doctrine was that the banks started believing their own propaganda. With employees operating under the illusion that nothing can topple the organisation, it doesn't take too many company cowboys to foster a reckless risk-taking culture. As Rob Cox points out on Breaking Views, the danger with an organisation this size, is that "this culture goes unchecked by the fear that it will have to bear the full force of the market's wrath for its transgressions".

But the logic of building banks this big has more obvious flaws. Even if you broke Citigroup up into its three smaller entities consumer banking, capital markets and wealth management the resulting companies would still have a market capitalisation of over $50bn and be just as well positioned to withstand turmoil as its monolithic parent. There is simply no conceivable reason beyond empire building to attempt to run a company that size.

By spreading themselves across a range of operations, banks also lost sight of what differentiated each individual bank from the rest of industry. If you take a look at the main operations that were brought under the umbrella of Citigroup once it merged from credit cards to mortgages to investment banking it's hard to see how these all string together. Citigroup has been trying to be all things to all men, and it just didn't work, says hedge fund manager Tom Brown.

So what does the future hold for Citi? Well it makes good sense at this point for the group to follow the lead of UBS and start breaking up its business. Pandit has said that he'll keep the group together, pointing out that it is a market leader in wealth management and corporate banking. Pandit sees Citi as a 'universal bank'. But the era of the universal bank has surely past. "Having found itself stuck in nearly every plague the financial industry has endured over the last decade," said Rob Cox, "it's time to dismember the colossus".

Ken Rogoff predicted this week that this crisis would bring a fresh wave of consolidation in the US financial sector. But if there's one lesson to be learnt from the last decade of mega mergers in the sector, it's that very often the whole is less than the sum of its parts.