The much-speculated joint venture deal between Morgan Stanley and Citigroup Inc. has stirred up commentary that feels like Christmas dinner leftovers from about three years ago. Oh God, not again! Citi chairman Win Bischoff is again about to be canned, CEO Vikram Pandit is either under pressure or has the board's confidence, and the man with a thousand lives, board chairman Richard Parsons, floats behind every story like the ghost in the machine. When did Parsons develop this reputation for omnicompetence? At Time Warner Inc.?
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Then there's the old chestnut of the financial supermarket. Unloading Smith Barney into the JV is the first sign that Citi is breaking up, suggesting the death knell of Sandy Weill and Robert Rubin's globe-spanning behemoth. No matter that Rubin, who is leaving, floated into the Citi orbit as a high-paid, here-today, gone-tomorrow adviser, years after Weill and John Reed (not Rubin) hatched the great Citi-Traveler's merger. You can argue that Rubin had a hand as Bill Clinton's Treasury Department chief in allowing that deal by pushing to repeal Glass-Steagall, but he was taking a position shared by most of the administration and most financial regulators.
And, of course, there's the continuing theme that with Citi "breaking up," the financial supermarket is dead. But wait. Like Franco, the damned thing ain't dead yet. Because even as Citi retreats from retail brokerage, Morgan Stanley is upping its bet. A few years back, when John Mack toppled Phil Purcell, the usual punditry declared that Morgan Stanley would have to break down its supermarket, particularly credit cards and brokerage. Now, in the midst of the greatest financial crisis since the '30s, Morgan Stanley has not only become a commercial bank holding company (the one big component it previously lacked) but it's building a brokerage operation bigger than Merrill Lynch & Co.'s.
At the same time, Bank of America Corp. now owns Merrill Lynch, which is like merging Costco Wholesale Corp. and Whole Foods Market Inc. If BofA is not a financial supermarket, I don't know what is.
Now the fact is the financial supermarket concept, which Weill certainly trumpeted but didn't invent, looks like it has more a future today than just a few years ago. Morgan Stanley, Goldman, Sachs & Co., BofA and Citi may well deleverage some of the trading operations in this new more highly regulated world. But those business will still exist, waiting for their moments, just not at so high a level of risk. And the real lesson of this crisis continues to be that taking refuge in great size, diversification and grind-em-out commodity type businesses is the safest way ahead -- which was Weill's original rationale for the merger back in 1998 and seems to be the deepest desire of regulators.
With Smith Barney dumped into a JV, Citi remains a huge and diverse institution. Smith Barney may be big, but for Citi, which has retail banking assets all over the world, it's clearly expendable. And brokerage is not exactly a perfect business, particularly right now. Commissions are at rock bottom, and the money to be made requires access to the high-net-worth crowd, which isn't easy, particularly in these Madoffian times. It makes sense for Morgan Stanley to add the capability, particularly in the form of a JV, which limits its exposure. It also makes sense for Citi to give the business over to someone else to run. But it's not the death knell of the financial supermarket, and, unless the losses continue, it's probably not a sign that Citi is about to fragment into a dozen pieces. - Robert Teitelman
Robert Teitelman is the editor in chief of The Deal.
