C Rivals Lobby Government to Curb its Operations if it is Nationalized

Rivals want limits on its business model

Citigroup’s rivals are lobbying the government to shackle its investment banking business and international operations if the authorities nationalise or take a large stake in the troubled financial group.

The increasing likelihood that the US Treasury will end up with a big holding in return for throwing Citi its third lifeline in under four months has prompted other Wall Street groups to go on the offensive in Washington.

Citi insiders dismiss calls to limit its activities in areas such as proprietary trading, prime brokerage and derivatives, and its vast international business, as the self-serving desires of rivals.

Yet the prospect that one of the world’s largest banks could be taken over by the government revives questions about the shape of the financial sector and rules for banks that are nationalised.

A senior executive at a Citi rival said: “What cannot happen is that a government-controlled Citi does better than healthier institutions because it has access to cheap funding and it is effectively backstopped by the US.”

The crucial question for the administration and Wall Street is whether a new wave of government help would end a decade of aggressive deregulation.

Ever since 1999, when the Glass-Steagall Act, passed in 1933 to curb the excesses that led to the 1929 stock market crash, was repealed, regulators have encouraged banks to spread their wings.

By removing the barriers Glass-Steagall had erected between retail banking and the securities businesses, the Gramm-Leach-Bliley Act enabled commercial banks and investment groups to invade each other’s turf. Indeed, the creation of Citi – the product of the 1998 merger of Citicorp, a commercial and retail bank, with Travelers, a securities and insurance group – was predicated on, and a big factor in, the repeal of Glass-Steagall.

Analysts and rivals argued that Citi’s failure to manage its sprawling business and keep adequate controls over its investment bank’s risk-takers stem directly from that deregulatory spree.

“It is time to ask whether we should not reinstate Glass-Steagall-like barriers,” said a Wall Street executive. “You could argue the repeal caused the current problems by allowing commercial banks with their big balance sheets and willingness to lend to enter the investment banking game”.

But even if Congress and the administration decide against such a radical change, they will have to decide what a government-controlled entity could do.