http://online.wsj.com/article/SB123189282009079369.html

January 14, 2009

By Holman W. Jenkins Jr.

Somewhere in his memoirs, Henry Kissinger confides his judgment that small, vulnerable nations breed the best statesmen (he cites Singapore’s Lee Kuan Yew and Austria’s Bruno Kreisky), whereas big, powerful countries can get by with mediocrities.

The same must be true of companies, especially any as big and impregnable as Citigroup. For 10 years this column has exhausted its metaphors on Sandy Weill’s sand castle, in one form or another suggesting what was wrong with the idea of a “financial supermarket” was its misuse of the very word supermarket. The stock market has been no more enthused about Citi’s strategy for most of its existence, and yet couldn’t do more than kibitz. A company as big as Citi, and as protected by federal banking regulations and anti-takeover rules, doesn’t worry about rough treatment at the hands of raiders or activist shareholders.

Not that the supermarket strategy would have been bad if it properly reflected what a supermarket is — an exercise in horizontal integration that brings together the products and services a consumer would need to manage his financial life. Citigroup was an exercise in vertical integration. A supermarket doesn’t mistake who its customer is — the retail shopper.

Associated Press

Citigroup co-CEOs John Reed, left, and Sandy Weill join in a three-way handshake with Robert Rubin, 1999.

Yet Citi tied itself up in conflicts over whether its customer was the manufacturer of investment opportunities, such as companies floating stocks and bonds, or the consumer of them, such as retail investors and their financial advisers and fund managers. One result is that hardly a financial scandal could darken the headlines without casting a shadow over Citi. It was an accessory to Enron, a purveyor of tainted stock “research” to telecom and dot-com investors, a minter of disingenuous off-balance-sheet vehicles to hold massive bets on mortgage derivatives.

All this badly dinged what Citi really had going for it, perhaps the world’s best global financial brand. John Reed, the CEO of predecessor Citicorp and one of the culprits (it must be admitted) in the merger to make Citigroup, was wont to say he saw “Citi” becoming a universal consumer icon like “Sony” or “Nike.” He and Mr. Weill spoke at the time of one day having a billion customers — up from 100 million.

Presumably they didn’t mean one billion CFOs peddling IPOs, or one billion Special Purpose Vehicles stuffed with off-balance-sheet subprime mortgages. They meant customers for traditional banking services, who’d rely on Citi to manage their wealth, transactions, debts and cash balances, extracting safe and steady revenue without playing a lot of Wall Street roulette.

Citi, under Mr. Reed, had pioneered the ATM, which revolutionized consumer banking, and under his successors has done a decent job with online banking, and one day could do perhaps a superb job in integrating personal finance with the cell phone.

Alas, a Bruno Kreisky or Lee Kuan Yew, living by their wits, would have stuck to their strategy once they’d settled on it, because their precarious little countries couldn’t risk a false step. A monumental bulk like Citi can afford to be distracted by any yummy thing that came along. Invariably, too, it only noticed the latest yummy thing once it was largely played out. Citi raced into subprime lending after others had already overmilked that cow. In 2001, it used its big balance sheet to sweeten the pot and grab the biggest bond-underwriting assignment in history — for WorldCom.

Dissenting shareholders and analysts were as a tinny, distant voice, barely audible inside the monolith. Not even immolating itself in the current subprime disaster could prompt the bank’s latest manager, Vikram Pandit, to rethink the strategy of aimless imperial size. Ironically, it took the federal government, bailing out Citi with nearly $300 billion in taxpayer cash and guarantees, to create a constituent finally big enough to breathe the suggestion “change” and have it heard, which is what happened this week.

Shoot the investment bankers, we recommended in a column 10 years ago. Mr. Pandit finally did, leaking plans yesterday to spin off what were once Smith Barney and Salomon Brothers and to reorient Citi again toward becoming a global consumer bank. Ten years on, Citi will apparently resume its original mission of — if it can survive the current turmoil — seeking its billionth customer.

The supermarket is dead. Long live the supermarket.

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