Sick Twist of Fate, Citigroup's Model Was Right (C, JPM, WM, GS, MS, WB, BAC, MER)

There is one interesting irony in this whole financial meltdown which goes which many will not want to admit.  Citigroup Inc. (NYSE:C) and the financial supermarket model may actually be emulated by the entire banking and brokerage sector.  Citi’s performance and execution have not been successful, but if you look at what is happening in the banking and brokerage sectors right now it is almost impossible not to see the parallel.

Last year, Wachovia (NYSE: WB) essentially doubled its brokerage andfinancial advisory business with its acquisition of A.G.Edwards.  Wachovia is more troubled than its crosstown rival Bank of America (NYSE: BAC), so this isstill an unfinished story.

JPMorgan Chase (NYSE: JPM) acquired Bear Stearns in a government-orchestrated buyout earlier this year, which arguably may havebeen a real estate grab more than an operational grab.  But much of thebrokerage, clearing, management and trading operations were kept.  It has alsojust bought the assets and deposits of Washington Mutual (NYSE: WM)this morning for a song.  Oddly enough, it was apparently willing to buy WaMu foraround $8.00 per share earlier this year.

Last weekend marked a monumental change in the bulge bracketbroker dealer and investment banking firms.  Goldman Sachs Group (NYSE:GS) and Morgan Stanley (NYSE: MS) changed their charters to bankholding companies.  Now, many think it is a matter of time beforethey start buying up cheap deposits.  Warren Buffett eveninvested $5 billion into Goldman Sachs this week.  Interestinglyenough, Morgan Stanley shed its Discovery credit card operations to getout of the credit card business, but it may be back in that businesssooner than anyone would have guessed a year ago.

Bank of America earlier had been exiting certainunderwriting and investment banking operations, but it has recently doubled down in its buyout of Merrill Lynch & Co. (NYSE:MER).  It also acquired Countrywide in ahighly criticized move.  We think that was possibly a mandated rescuepackage, but that is a different story entirely.  B of A is also upagainst the deposit ceiling caps imposed on U.S. banks, so new dealswill have to be elsewhere in the financial services sector.

So, take a look at Citi today.  It is a bank, credit card issuer and loan originator. The company also has investment brokers and financial planners,underwriting, and trading. CEO Vikram Pandit has laid-off some workers and hasrestructured its units.  But the financial supermarket model remains in tact.

JPMorgan is becoming even more of a major player, and is one of the healthiest on WallStreet and Main Street.  Bank of America is looking more and more like Citigroup, albeit a far more successfulversion.  When Goldman Sachs gets involved in a banking deal, then thatbusiness will be transformed too.  Unfortunately, the stocks ofWachovia and Morgan Stanley are being punished hard this morning after WaMu’sfailure as more concerns that their counterparty risks anddefault risks are rising faster than they can combat them.

Citigroup is going to be an interesting case study for the future atmany universities for their capstone classes.  Imagine having yourbusiness model vindicated after years of criticism, but still managingto fail in the execution and delivery.

Jon C. Ogg
September 26, 2008