Goliath may be too big to save

/ WASHINGTON — Of all the rescues mounted by the government so far this year, none carries with it more symbolism or irony than that of Citigroup.

Until recently, Citi was not only the largest U.S. financial institution, but the very embodiment of the new financial order.

Under the relentless empire building of former CEO Sanford Weill, Citi brought down the old regulatory wall that had separated commercial banking from investment banking and insurance.

The combination of Citibank with Solomon Smith Barney under the bright-red umbrella of Travelers Insurance was accepted with a wink and nod by the Federal Reserve a decade ago while then-Fed Chairman Alan Greenspan worked to persuade Congress to make it legal by repealing the Glass-Steagall Act.

Glass-Steagall was put in place during the Great Depression to prevent another market crash like that of 1929. Now that another market crash has required the government to rescue Citi, there will certainly be those who wonder whether the New Dealers didn't have it right all along.

The rationale for saving Citi is that with $2 trillion in assets, more than 300,000 employees and operations in 100 countries, this was a bank too big and too interconnected with the rest of the financial system to be allowed to fail.

The question now, however, is whether an institution of that size and scope is also too big to succeed.

For no sooner had Weill stitched together his empire than it began to unravel as a result of soured investments and embarrassing ethical scandals that cost shareholders tens of billions of dollars.

In the several years since Weill's departure, as various pieces of the company have been sold off or closed down, it has become obvious that the promised economies of scale had been overhyped, the synergies across business lines had never developed and the cultures and systems of the various parts had never meshed.

The whole thing was simply too big and too complex to be managed.

It has also proved too big to be regulated. Over the past 20 years, the Federal Reserve, Citi's chief regulator, has been unable to get a handle on the bank's excessive risk-taking and incessant corner-cutting.

Time after time, Citi rushed to jump aboard the latest gravy train — developing-country loans, commercial real estate, Internet stocks, subprime lending and securitization — and time after time, regulators failed to see a problem until it was too late.

The Fed undertook what amounted to a rescue of Citi back in the early '90s, opening its lending window and lowering interest rates.

This time the problem is even bigger and the rescue more explicit, with the Fed itself having to put its own balance sheet at risk to fix a problem that could have been prevented or contained if its own regulators had only been more vigilant.

While it was Weill who created the modern Citi and the business model on which it is based, it was his hand-picked and hapless successor, Charles Prince, who steered the company into the ditch.

It didn't have to be that way.

In John Reed, the former CEO of Citibank, Weill had a co-chief executive who was an MIT-trained engineer deeply skeptical of Wall Street financial engineering and committed to consumer banking and sound commercial underwriting — until Weill ousted him in a boardroom coup.

And in Jamie Dimon, Weill had a lieutenant who was a brilliant strategist and leader who could have saved Citi from following the Wall Street herd over the cliff — as he later did at JPMorgan Chase — if Weill had been willing to name him heir apparent.

Surely neither Reed nor Dimon would have been as clueless as Prince about the risks taken by his subordinates. Nor would either have been so determined to run with the herd, as Prince clearly was when he told the Financial Times in 2007 that while it was obvious a huge credit bubble had developed, Citi had to keep dancing as long as the music was playing.

There is one top Citi executive, however, who has managed to serve alongside Weill, Prince and current Chief Executive Vikram Pandit with surprisingly little damage to his own reputation.

As Treasury secretary, Robert Rubin joined with Greenspan in supporting Citi's campaign to repeal Glass-Steagall. And when he resigned from Treasury in 1998, Rubin accepted Weill's offer to become vice chairman of Citi, where he has quietly worked the back channel to Washington and other international capitals and served as strategic counselor to the CE) and the board of directors.

Although Rubin has been cagey about his role at Citigroup, what is indisputable is that all of the decisions that have led to the recent troubles were taken while he was chairman of the executive committee and were made by executives whom he supported and with whom he worked closely day to day.

He supported them when they were criticized. As a director, he approved compensation packages that rewarded them (and himself) handsomely for judgments that turned out to have been disastrous for the shareholders.

Yet even as the government has been forced to step in to save Citi by investing $45 billion in new capital and putting a floor under its losses, Rubin and the other directors and top executives have been allowed to remain at the helm.

You have to wonder how much more of the shareholders' and the taxpayers' money they would have to lose — $100 billion? $200 billion? $1 trillion? — before the Treasury and the Fed would demand their resignations.

The ultimate irony, of course, is that just as Rubin & Co. at Citi were being bailed out by the Bush administration, President-elect Barack Obama was getting set to announce a new economic team drawn almost entirely from Rubin acolytes.

That's not to take anything away from the qualifications of Timothy Geithner, Obama's pick to be Treasury secretary, who owes his current position as president of the Federal Reserve Bank of New York to Rubin's aggressive lobbying; or soon-to-be White House senior economic adviser Lawrence Summers, who was Rubin's deputy secretary at the Treasury and whose appointment as president of Harvard was championed by Rubin as a member of the university's government board; or Peter Orszag, Obama's choice to be budget director, who was hired by Rubin to head a Democratic think tank on economic policy that he founded.

They make a great team.

But perhaps the next time Obama thinks about assembling a group of wise men to advise him on the economic crisis, he might consider leaving Rubin out of the mix. The accountability Obama has promised to bring to economic policy should start at home.