On the edge of oblivion, Citigroup finally gets serious

Even the vultures weren't showing too much interest in Citigroup's carcass this past week. In an unsettling resurgence of last fall's run on banks, Citigroup shares have imploded over the last five trading days. On Friday, 1/9 Citigroup closed at $6.75; one week later shares closed at $3.50.

The catalyst for the meltdown was Citigroup's announcement that it was going to split off its Smith Barney brokerage unit into a joint venture with Morgan Stanley. This announcement led to rumors that Citigroup was poised to take further drastic action. On Wednesday the lead story in the Wall Street Journal was that Citigroup would shrink itself by a third. Finally on Friday afternoon Vikram Pandit, Citigroup's CEO, announced the expected restructuring. Under the plan sketched during Citigroup's quarterly earnings call, Citigroup will create a separate unit called Citi Holdings to hold non-core businesses and assets.

In the old days this sort of restructuring was called "good bank/bad bank" and it is something we have been calling for for many months (see our post dated March 22, 2008 "10 Amazing Days"). The only way we are going to get out of this economic tailspin is to get the banks back into the banking business. And the only way that will happen is if we remove the toxic waste from their balance sheets.

It isn't pretty--toxic waste cleanups never are--but it has to be done and it needs to happen now. I, for one, am glad to see Citigroup's management finally waking up to the reality of the situation, even if they had to go to the edge of oblivion to see it clearly.