Citigroup: Good Bank, Bad Bankby Tim Manni
In an effort to convince investors of their viability, Citigroup has decided to shrink its balance sheet by 1/3, diverging a majority of their bad business and assets into a separate entity. Citi’s Chief Executive Vikram Pandit has ultimately agreed to dismantle the financial supermarket into a more streamlined unit which is expected to focus upon larger corporations and wealthy individuals. In essence, Citi will create a good bank and a bad bank:
Bankers said the new unit would remain on the company’s books but its results would be reported separately from the rest of the business in an effort to convince investors of the company’s viability. The non-core unit could be eventually sold in parts or as a whole or spun off once market conditions improved, they added.
Who would be the potential buyer for these toxic assets? In his speech yesterday in London, Fed Chief Ben Bernanke addressed the possibility of the Federal government purchasing assets from so called “bad banks.” The other possibility is that various investors interested in “vulture funds” will be willing to purchase the assets at extremely discounted prices.
While this approach is nothing new, it could provide Citi with a unique opportunity for a drastic turnaround — given a buyer for their assets is interested. The new structure has proven worthy in past, yet some have called the strategy only a temporary fix.
For more about the good/bad bank concept, be sure to read this Wall Street Journal blog entry.