Implicit in Andy Kessler’s WSJ op-ed this morning is a vision of serial acquirer Sandy Weill top ticking the banking market. Two years before Gerry Levin made the disastrous AOL-Time Warner deal, now universally recognized as the last gasp of big media, Weill rolled up the last of his monster acquitions.
by 1998 Mr. Weill consummated a $76 billion merger of Travelers with Citibank. In 2000, he ended up as sole CEO.
Were their any real synergies from Citibank’s one-stop shop? I doubt it. It failed because internal compensation incentives mainly stressed units, not the whole, the downside of all behemoths. Plus, I don’t know how many customers bought stocks at an ATM machine, because almost simultaneous to his big merger, the Internet disintermediated most of Mr. Weill’s businesses. The best rates and terms and service were in the Giant Supermarket on the Web, rather than just in Sandy’s shopping cart.
Each segment’s profits became suspect as Fed Chairman Alan Greenspan lowered short-term rates to 1% in November 2002. While usually a boon for banks who borrow short and lend long, those pesky long-term rates stayed low, as the Chinese kept buying 10- and 30-year Treasurys. This flattish yield curve meant lower returns on investment. Mr. Weill stepped down in 2003.
Normally, when a bank sees smaller returns on investment, it stops investing, or at least slows down and lowers its equity until better returns are available. Others did. But this was Citigroup, which never sleeps, where money lives, and the bank DNA was watered down. Instead of reining in, those in charge went for it. Borrowed more. Levered up.
If I read the implications of Kessler’s piece right. Banking stalled out with everything else at the turn of the century. Only Greenspan’s low rates and leverage were able to mask a serious structural problem for another half-decade and more. Though Kessler is quick to point out that the repeal of Glass-Steagell is not the culprit by citing the relative health of JPM, BAC and WFC. It was Weill and Prince’s reckless management.
Unlike the listing and wallowing Time Warner, Citi is at least being forced to resolve its contradictions.
The End of Citi’s Financial Supermarket
Wall Street Journal; January 16, 2009