Citigroup Could Fail

Citigroup Inc. (NYSE:C) stock closed today at $3.77, giving the global banking group with assets of more than $2 trilliona market capitalisation of just $20 billion, down from $31.70 just 12 months ago and $55 only 18 months ago.

Could one of the world's largest banks follow the footsteps of AIG, the world's largest insurer that got into grave difficulty 2 months ago? The accident prone and bloated Citigroup could indeed fail in the coming months.



Although the pundits maintain that the universal banking model is gaining ground in the turmoil, both Citigroup and AIG's troubles pose the question of diseconomies of scale and scope in banking and financial services. Banks that are 'too big to fail' are probably also too big to be efficient, as shareholders are finding out.

Small and specialised banks are likewise more prone to failure due to hard times in their locality or specialisation, there must be some happy medium between too big and broad and too small or specialised. Large enough to develop a strong corporate culture, be a known quality and gain the benefits of diversification, but not too large to become bloated and over complicated.

It seems almost inevitable that at least one super-sized bank will get into such difficulty as to fail or require a rescue, during the present distress. It seems hard to see how Citigroup can raise capital with its share price so low, and hard to believe it doesn't need to raise more capital in the coming months. Its size is bordering on the too big to rescue: perhaps it needs $100b in capital should it suffer a loss of confidence?

Unlike General Motors, Citigroup requires confidence to operate, and can't just limp along to failure either.