If they are too big to fail, make them smaller.”
-Nixon Treasury Secretary George Shultz about Fannie Mae and Freddie Mac
The operative expression about many of the bailouts we have seen — AIG, JP Morgan (via Bear Stearns), Goldman Sachs, Fannie/Freddie and of course Citibank — is “Too Big To Fail.”
Perhaps the better expression is “Too Big to Succeed.”
The idea of a massive, one stop financial supermarket is now under fire. Of course, the idea of ANY massive conglomerate has for the most part, been discredited. Unsuccessful monsters are usually the result of huge M&A deals, disparate business lines, frictional corporate cultures. Think AOL-TIme Warner, Citi-Travelers, Tyco, etc. Oracle has been one notable exception to this, but that is because they have mostly bought firms started by former employees, keeping the family relationship.
The most successful growth by acquisition strategies tend to be where a bigger company absorbs mostly smaller firms. Cisco and GE are the masters of this slow, small acquisition to round out product lines and technologies. They don’t disrupt the corporate culture, the acquired targets are thrilled for the windfall, the integration tends to go much more smoothly.
Indeed, when it comes to conglomerates, we tend to see a two-part cycle. During the first part, acquisitions, mergers, big combinations are all the rage. Its a giant ego stroke for the CEOs, and it generates lots of fees for the iBankers. The second half of the equation comes when the awful handiwork of the M&A binge needs to be unassembled. That generates criticism of the CEOs, and lots of fees for the iBankers.
With the components of CitiGroup being taken apart and returned to their original boxes, this is merely another typical cycle playing out. Where it might take an interesting turn in the near future is the recognition that these firms are too unwieldy to run, too complicated to manage risk, too big to succeed. That gives impetus to discouraging these mergers, mega banks, and loss of competition. Are shareholders, the economy, and the taxpayers better off with just three mega-banking centers? Or, are we all better served with dozens of mid-size and large banks, versus only a few behemoths?
I am in the camp that finds most of these giant mergers do not work very well. Just about everyone — excepting the CEOs and iBankers — fare better with more banks of a size below ginormous.
Over the past 10 years, Shareholders have voted against the mega-banking centers. The question for the next 10 years will be how the politicos and regulators, especially the Fed and FDIC — vote on the matter.
Sources: Pandit Dismantles Weill Empire to Salvage Citigroup Bradley Keoun and Lisa Kassenaar Bloomberg, Jan. 14 2009 http://www.bloomberg.com/apps/news?pid=20601087&sid=aPe0BmS_BI_w&
Citigroup Ready to Shrink Itself by a Third DAVID ENRICH WSJ, JANUARY 14, 2009 http://online.wsj.com/article/SB123185686674677225.html
Citigroup Plans to Split Itself Up, Taking Apart the Financial Supermarket ERIC DASH NYT, January 13, 2009 http://www.nytimes.com/2009/01/14/business/14citi.html
Originally published at The Big Picture blog and reproduced here with the author’s permission.