The government lifeline announced Sunday night gave Citigroup Inc. a critical reprieve after a week in which investors pummeled the New York company's stock.
But observers say funneling another chunk of taxpayer-backed capital to Citi does not alter its fundamental issues, like the need to revamp itself, possibly through rapid growth in domestic deposits or a foreign downsizing.
The consensus is that the government stepped in because it viewed Citi as "too big to fail." But its size may become less of an issue if, as some observers predict, the government requires the divesting of certain operations, as it did in its recent American International Group Inc. rescue.
"If I were in charge there, I'd be breaking up that company," Bart Narter, senior vice president of the banking group at Celent, a consulting unit of Marsh & McLennan Cos., said in an interview Monday. "I think it's clear now that has to be done."
Thomas Jenkins, a Royal Bank of Scotland Group PLC analyst, wrote in a note: "There will surely be ongoing chatter about a breakup of Citi once the dust settles."
Citi did not make executives available for interviews before press time Monday.
David Hendler, a CreditSights Inc. analyst, wrote in a note that the intervention announced late Sunday — $20 billion of new capital and a package that guarantees $306 billion of troubled assets — will "immunize the company against extensive credit shocks."
Citi desperately needed some cushion after its shares hit a 15-year low of $3.77 on Friday. They bounced back 58% Monday.
Vikram Pandit, its chief executive, has repeatedly affirmed his commitment to the global universal model. In a conference call Friday, he assured senior managers that breaking up the company was not on his agenda, a person familiar with the matter said.
Citi's finance chief, Gary Crittendon, said in a televised interview Monday with CNBC that, despite its vulnerability to a global economic downturn, Citi's foreign operations focus on wealthy customers who are less susceptible to recession.
"I think those upscale customers likely will allow the impact of deterioration outside the U.S. to be somewhat muted for us," he said.
But analysts say several markets where Citi operates are falling into recession. As this happens, analysts say, it needs to strengthen and expand its U.S. operations to shield itself from international struggles, and it is equally important to act soon — before the company falls too far behind its competitors.
The problem, according to several observers, is that even if Citi can forge ahead with acquisitions — federal authorities may curb its dealmaking, as they have done with the company in recent years — it most likely missed its window of opportunity when it lost its bid for Wachovia Corp.'s banking operation.
Citi had tentatively agreed to acquire the operation — a deal that would have tripled its U.S. deposits — but last month Wells Fargo & Co. swooped in with an offer more favorable to Wachovia shareholders. Now analysts say shareholders of would-be Citi targets are likely to resist buyout offers, fearing that the value of their stakes would dwindle, because Citi does not have a clear plan to return to profitability.
When Wells closes its deal with Wachovia next month, it would join Bank of America Corp. and JPMorgan Chase & Co. as the only banking companies with more than $600 billion of U.S. deposits. Citi has about $200 billion of U.S. deposits.
"Pandit missed his opportunity. He should have stepped in, found a way to insist that the Wachovia deal happen" for Citi, Ken Thomas, the Miami consultant who operates the Web site Branchlocation.com, said in an interview Monday. "Any chairman or CEO who allowed that to slip away, I think, might have to go. I wouldn't be surprised to see a change in short order."
Even with acquisitions, Christopher Whalen, managing director at Lord, Whalen LLC's Institutional Risk Analytics, said in an interview that domestic growth alone will not be enough to return Citi to profitability. The company, which has divested about $100 billion of the $400 billion it has pledged to divest by 2012, needs to sell off vast chunks of its foreign business, from Asia to Europe, and start over as "a domestic bank" that is "about half its current size."
The pressing issue for Citi is not simply toxic legacy assets, Mr. Whalen said; it's also a matter of why Citi delved so deep into risky investments and lending in the first place. The global model has been too vast to manage all the various parts effectively, he said, forcing Citi in recent years to take big risks on exotic mortgages and securities to prop up its bottom line.
"The model is broken," Mr. Whalen said. "The only way to bring to the Street what investors thought they were entitled to was to do a range of stupid things."
Jim Gardner, the chairman of the investment banking company Commerce Street Capital in Dallas, said in an interview Monday: "It has proven awfully hard for anybody to manage Citi from a risk point of view."
Though untangling Citi's massive operation without creating more losses poses a vexing challenge, Mr. Whalen said he envisions the company trying to do just that while operating in an extended period of government support, one that might require a third infusion next year. (Citi received $25 billion from the Treasury Department last month.)
Still, the current model has supporters.
Brian Sterling, principal and co-head of investment banking at Sandler O'Neill & Partners LP, said in an interview that many of Citi's woes are rooted in bad U.S. mortgages, and that its foreign businesses are generally on solid ground.
"So why would you divest strong international businesses?"
The government package should help Citi absorb losses on its toxic assets without requiring a divestiture acceleration, he said. Mr. Pandit has suggested that his company would prefer to beef up its U.S. business by acquiring one large or several small depository institutions, though doing so is not paramount.
Citi is reportedly one of several companies mulling a bid for the $14 billion-asset Chevy Chase Bank in Maryland, and Citi insiders have said it might pursue larger targets.
But Mr. Thomas said it is most likely that regulators will expect a new strategy.
The latest capital infusion was about buying Citi time, he said, and it likely had plenty to do with politicians from both parties wanting to avoid the perception that they allowed a devastating collapse during the transfer of power to President-elect Barack Obama.
"Nobody wants Citi's blood on their hands," he said.