Latest Fed Rescue Doesn't Ease Citigroup Bust-Up Fever

(MoneyWatch)  Even after getting a massive rescue from the U.S. government, Citigroup may prove to be bailout-proof and headed for a break-up.

The U.S. Treasury's agreement to shield Citi from losses on toxic assets and its plan to inject $20 billion of fresh capital is not the first lifeline tossed in recent weeks to the New York-based megabank. Citi is among the group of large U.S. banks to recently get up to $25 billion in government aid in return for an ownership cut. And last week, Citi shareholder Saudi Prince Alwaleed bin Talal agreed to invest an additional $350 million, raising his ownership stake to five percent of the company.
Despite such rescue efforts, investor confidence in Citi has dropped. For years, dissident shareholders and investment gurus advocated busting up the financial services giant, which holds nearly $2 trillion in assets. But in recent weeks that cry has grown louder as questions surround the bank's troubled assets and flagging stock price. Last week, Citi shares tumbled nearly 60 percent to about $4 per share -- a precipitous decline that forced the latest government rescue effort.

Citi CEO Vikram S. Pandit strongly dismissed any possibility of dismantling his megabank even before this last bailout.

Nevertheless, break-up advocates -- including many who owned Citi stock a year ago when the bank was trading at $30 per share -- contend that if Citi's franchise and stock price can't rebound after two mammoth rescue plays, it's probably better to cut up the place and sell the slices.

What can Citi unload?

The break-up chorus is clamoring for the financial supermarket company to spin off its brokerage units Citigroup Global Markets and Smith Barney and other related business lines to foreign investors. Moreover, Citi's traditional global banking unit could attract overseas investors.

And there's talk that Citi's domestic deposits would be tantalizing to Goldman Sachs, which recently converted to a bank holding company and is on the prowl for low-cost funding. There has even been speculation that Citi's US deposits could be split among stronger US commercial banks such as US Bancorp, PNC or Wells Fargo.

None of these deals, however, will occur without the involvement of Citi's newest investor -- the U.S. taxpayer. Indeed, it's unlikely that any major asset transaction gets made without more U.S. government assistance and, of course, more back-up.