Citi Dumps Dead Weight

The following post first appeared on Minyanville.

Citigroup's (C) new CEO, Vikrim Pandit, inherited a mess. Once the world's largest bank by market capitilization, Citi is still reeling from its vast exposure to the credit markets.

According to The Wall Street Journal, since the start of the credit crisis last year, the company has taken more than $40 billion in writedowns and raised capital to match. Professor Sedacca believes Citi and other banks like Morgan Stanley (MS), Merrill Lynch (MER) and Lehman Brothers (LEH) have only begun the process of repairing their tattered balance sheets.

At its annual investor conference, The Journal reports, Citi's CEO will call for the jettisoning of more than $400 billion in what he calls ''legacy assets. '' Heavily concentrated in its consumer banking division, these assets generate low returns and prop up the bank's stubbornly swollen cost structure.

Pandit will also lay out a three-phased plan to return the bank to profitability: house cleaning to shed underperforming units, streamlining operations and seeking to maximize profits in each business segment. Some analysts have been calling for Pandit to break up the big bank, but his strategy evidences his desire to try restructuring first.

Earlier this year, when it announced a fourth quarter 2007 loss of almost $10 billion, I wrote that Citigroup is representative of the American consumer, lulled to sleep by years of unprecedented prosperity and loathe to acknowledge a ballooning balance sheet supported by fewer and fewer dollars of real income.

Good economic times create excesses. Tough decisions are put off as fat bottom lines reduce the need for painful tradeoffs. Hard times and recessions force banks and consumers alike to slim down, cut costs and rethink priorities.

Lax lending and the resulting asset inflation created simply unsustainable levels of debt. The mortgage boom was the last dying gasp of the great debt expiriment.