What next? Behemoth Citigroup finally throws in the towel and undertakes a mammoth break-up

EVERYTHING WE believed to be true about banking for the past decade appears to be false. I mean everything.

Citigroup, the great hulking behemoth of a bank encompassing every aspect of financial services, from investment banking to asset management, brokerage services, insurance and high street banking, was supposed to be the model all others should aspire to.

It was formed in 1998 by Sandy Weill, who stayed to see his grand idea for the financial services superstore come into being but had the good sense to get out just as Citi’s decline began.

Yesterday Citi finally threw in the towel on Sandy’s model and resigned itself to a mammoth break-up. The new model for banks to follow, so Citi says, is called “good bank-bad bank”.

Into the good goes the bits of the bank that work – like taking deposits, making loans and such. Into the bad bank goes all the bits that have proven to be a massive drain on resources, like mortgages and bad debts (which are called troubled assets these days), along with the brokerage services and retail asset management divisions.

There is no guarantee however that this restructuring is going to do any good.

In the past four months, Citigroup has received more than $45 billion of government funds and has been given a further $306 billion or so of loan guarantees to help out with those “troubled assets” I mentioned.

Far from helping Citi to clear the decks and get business going again, things seem to have got worse and worse since the government started helping out.

The banking group has lost more than $28.5 billion in the last 15 months, including $8.29 billion in the fourth quarter alone. It has fired more than 50,000 people from all over the world and has agreed to hive off its Smith Barney retail brokerage unit.

And yet the rot continues.

Bank of America, meanwhile – anther of the great one-stop shop financial services giants – is in equally hot water.

B of A snapped up Merrill Lynch just a few weeks ago to save the troubled Wall Street investment bank from going the way of Lehman Brothers. But it now seems Merrill chief John Thain may have been less forthcoming than some at B of A would have liked when disclosing the extent of those “troubled assets” on his books.

As Citi was breaking itself into pieces, B of A was going cap in hand to the US government for a $20 billion cash injection and a guarantee on some $118 billion of bad loans. The plan sounds familiar, doesn’t it?

On Wall Street yesterday, usually unflappable and highly respected analysts – like Brad Hintz at Sanford Bernstein – told me in all seriousness that they did not know what to expect next from America’s banks. Such uncertainty is dangerous.

“The institutional investors I have spoken to today are fearful that what we are seeing is a slow- motion nationalisation of the US banking sector,” Hintz said.

Troubles in the mortgage- related debt market seem to be getting worse, not better, he added, and more banking failures and an even bigger sell-off of banking shares was almost certain to come in the weeks ahead.

“The banks are doing everything by the book, they are making all the right moves but it is not working,” Hintz said.

So the question remains: what will work? How will the banking sector right itself once more?

There used to be a very simple formula used by bankers the world over to ensure success. They called it three-six-three: you borrow at 3 per cent, you lend at 6 per cent and you make 3 per cent on the deal. Anything else is just smoke and mirrors and will catch up with you in the end.

That is why Citi has had the good sense to call its newly hived- off retail lending and borrowing arm the “good bank”. Everything else it tried to do turned out to be very bad indeed.