Does Citi's Breakup Presage a Tougher Approach by Obama?

OK, fine. Citigroup’s “one-stop shopping” for financial services is being swept into the dust bin of history. The banking giant will downsize by at least one-third. What’s next?

That’s a key question as we sit on the cusp of two presidential admininistrations. What we could be seeing is a major change in recovery philosophy between George W. Bush’s people, notably Treasury Secretary Henry “Hank” Paulson, and Barack Obama’s incoming group.

Paulson is born of Wall Street and although that experience is useful in understanding the stakes of the financial crisis, so, too, is it a hindrance. Critics have accused Paulson of being inclined to think in a too insular way leading to concepts that some of his colleagues run shows that “are too big to fail,” such as AIG or Citi.

Paulson has played a game of political chicken to bail out his buddies.  Hence, the $700 billion bailout has jumped around like a grasshopper from buying toxic assets to shoring up banks’ capital, to buying bank shares, to creating brand new banks such as car-lender GMAC.

Although Obama’s group largely comes from Wall Street, too, it isn’t known yet  the group will do. But the Obama group “could come to the realization that the whole economy does not hinge on the banks,” says Octavio Marenzi, head of the consulting firm Celent. “Banking is important. The banks themselves are not.”

There are signs that this could be the new philosophy and Citi is the evidence. The feds actually provoked the supermarket’s breakup. CEO Vikram Pandit had as recently as November held ground that such a big change would not occur.

But Citi is so desperate for funds that it took $45 billion from the feds, plus more, giving up its own ability to navigate its future. Still badly short of funds, Shelia C. Blair, head of the FDIC, bluntly told the bank in late November that any more requests for cash would result in its breakup, according to news acounts. 

Not surprisingly, Pandit started changing his tune that the supermarket concept was inviolate. Blair, by the way, has been asked to stay in her job by Obama, so there’s evidence that the tougher, more bloodless approach may be Obama’s operating mode. The Obama people have such a mandate for change from the November election that they don’t have to worry about alientating their Wall Street friends. Those friendships are fast becoming irrelevant.

To be sure, we don’t know yet exactly how Obama will use the bailout, such as whether they will go back on promises not to use them to buy bad loans. And, Obama’s economic team has plenty of Wall Street-oriented folk such as proposed Treasury Secretary Tim F. Geithner, head of the New York Fed, and, of course, Robert Rubin, who is leaving his role as Citi’s top adviser and has a lot to answer for. 

It’s unlikely, however, that we’ll continue to be told that this bank or that company is “too big to fail.”