Goldman-Citi

The landscape of financial institutions has been changing rapidly over the past year. The use of leverage is yesterday's game and underwritten toxic waste has been an albatross on most balance sheets. Whether it is sub prime mortgages, CDO's, leveraged loans, or consumer credit, losses have appeared everywhere and promise to dent balance sheets for the remainder of 2009. This reality is finally forcing Citigroup to dismantle its financial supermarket created by Sandy Weill.



On November 24th, 2008 we discussed some of the details of the Citigroup government bailout. We viewed the transaction as a stabilization deal until Citi sold more assets to reduce its balance sheet. The government deal was great for Citi but not the taxpayers as much of the balance sheet risk was now being assumed by the Government. It seems like Citi's new focus will be to rid itself of many assets until it looks like a commercial bank focusing on corporations and wealthy individuals.

Here comes Goldman Sachs. The Goldman business model is also in transition. It needs to transform its business and do so with less leverage and more prudent risk taking. We believe Goldman is looking to do a transformational deal to jump start its future growth. Goldman management is the brightest on Wall Street and they will be patient until they figure out the correct path and seize upon the right opportunity.

A slimmed down Citi who caters to wealthy individuals and corporations with a global reach and a consumer deposit base could be the match Goldman management may be waiting for. It could take some time for this type of transaction to develop but Citi could become a distressed entity as it tries to sell assets quickly and Goldman will be on the sidelines watching.

A joint Goldman-Citi entity could be the bank of the future which dominates global commerical banking and advisoryservices but also has a consumer deposit base. There would be plenty of management overlap which could be eliminated and the sales and trading operations would also need to be rationalized.

Goldman needs a large deal to take them to the next level in its move to once again be a dominant force. It appears to us that Citi is one of the few obvious candidates who could help them achieve those goals.