Published March 2, 2009

breakingviews.com

Becoming UN of the global banking system

By ROB COX

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CITIGROUP has become the United Nations of the global banking system. Sure, Uncle Sam is almost certain to emerge from the New York conglomerate's massive recapitalisation with the biggest single shareholding. But this isn't a nationalisation along the lines of, say, Britain's takeover of Royal Bank of Scotland.

Fold in the stakes that will probably be held by funds linked to the governments of Singapore and Kuwait and a Saudi prince, and a quasi-sovereign group - a sort of coalition of the begrudgingly willing - will have a majority, effectively controlling stake in what was formerly the biggest US bank. Maintaining Citi in private hands would have been ideal - but this 'multinationalisation' may not be the worst alternative for Citi's business.

Of course, the US government's stake of up to 36 per cent does present complications. It may force the company to reconsider its footprint around the world. That's because many countries place restrictions on entities that are even partly owned by foreign governments. Mexico, for example, has a law that bars a company that is more than 10 per cent owned by a foreign government from operating a bank.

That raises vexing questions about Citi's ownership of Grupo Financiero Banamex, the second largest bank in the country. Citi might be forced to sell the business if it cannot reach an understanding with the Mexican government. Of course, given Citi's continuing need for fresh capital, a sale might be necessary anyway.

Limitations on Citi's size now or in the future don't, however, have to be a disaster. The bank is still too sprawling to be managed effectively. While Citi might not get great prices if forced to sell pieces of itself in Mexico, Poland or Korea right now, there may be benefits for shareholders and regulators in having a better managed Citi over the long haul.

In the meantime, having the governments of Singapore and Kuwait - not to mention Prince Alwaleed - more deeply enmeshed in its capital base may bring Citi's bankers greater sympathy from clients in the still-rich Middle East and Asia. It surely beats the alternative: a fully controlled subsidiary of the US government.