A report earlier this week from KBW reignited the big-bank break-up buzz last fired up when Goldman took on JPMorgan’s structure and sought to split it asunder. As I read the latest analysis – which argues that Citi would be worth fifty percent more in pieces – it reminded me a lot of girlhood games. These often started with hypotheses along the lines of “Now, I’m a mermaid,” after which all went swimmingly. To assume that a bank is more valuable in pieces than as, at least for Citi, a still-struggling whole, requires not just laying out the “what if,” but also suggesting that the “how to” is even close to plausible. As AIG’s efforts to spin off its private mortgage insurer (MI) make clear, wanting to be a mermaid doesn’t necessarily get you the tail.
In the Citi, JPM, and MI cases, analysts, advocates, and (for the MI) an activist investor have posited that the regulatory burden imposed on these systemic behemoths is alleviated by breaking them into small pieces. This, though, assumes that the smaller pieces are not only small enough to escape costly regulatory scrutiny, but also that – even if the bits are small – no one thinks them still systemic. The MI case is significant because, even though the new firm would be well below the FSOC SIFI-designation thresholds, a rating agency downgraded the independent company in part because the firm could still pose systemic risk that might warrant regulation.
If a relatively little-bitty MI still sparks this worry, how would the very large bits of Citi fare, especially when sold to someone with the capacity to take them on? To buy pretty much any part of Citi will take a whole lot of capital which would mean a whole lot of size that would then get bigger after the acquisition and, quite likely, win the systemic-risk designation all for itself. Any such transaction might add value to Citi’s shareholders, but at considerable cost to the acquirer’s which I suspect someone will notice.
Assume, perhaps, that the acquirer is of size and not subject to the painful rigors of U.S. regulation. This is hypothetically possible for Citi because much of what KBW wants it to kick out is international. For example, the company would split off Banamex and what’s left of its global retail franchise.
But, to whom? I have not seen home-country banks in emerging economies exactly rolling in dough right now. The global franchises that usually head to such locales – HSBC, Standard Chartered, Barclays – are busy selling off as much of themselves as they can. A large non-bank interested in retail payments? Maybe, but none has shown much appetite for legacy operations, let alone those housed in problematic regimes.
Of course, some of the crown jewels KBW cites are U.S.-domiciled. Could someone pick one or more of them up?
As we noted in our analysis earlier this week of the Goldman-GE deal, the FRB has opened the door, at least a bit, to intra-GSIB mergers. As a result, someone who’s already systemic could take some of Citi’s leavings. It’s hard, though, to see how enough of the bank could be moved this way to make a meaningful dent in Citigroup’s overall systemic profile. And, if the transactions don’t cut the company’s regulatory costs, then the hypothetical value-add goes bye-bye.
Could Citi sell its stuff through IPOs? Perhaps the most interesting aspect of the downgrade of AIG’s MI is the higher risk profile presumed when a financial guarantee operation is cast outside its parent’s protection. Citing an “implicit guarantee” from AIG, the rating agency finds the MI riskier on its own and thus warranting a lower rating. Stand-alone companies might thus cost more to run than those within big SIFIs, another blow to the hypothetical value-add of separation.
For me to be a mermaid, I’ll need a careful plan that includes not just a glamourous tail and an undersea castle all to myself but, in the real world, goggles, a cold-water wrap or two, and a way to feed myself on more than coral. It’s possible, but for sure not probable. To know whether a big-bank divesture plan can work, one needs to look not just at the rules and make them all disappear by magic, but also at the hard reality of financial-sector M&A in the cold, cruel world.