Time to Break up Citi

It must be frustrating in some ways for Citigroup's board to watch J.P. Morgan Chase take advantage of the credit crunch to scoop up Bear Stearns. But rather than take it as a sign that bigger is better, Citigroup's new chief executive, Vikram Pandit, should zig while J.P. Morgan zags. Citigroup's recent troubles have highlighted what investors have been telegraphing for years: The scale of the bank makes it unmanageable. Many investors believe Citigroup will have to visit the trough for a third time to raise fresh capital. If so, Mr. Pandit will need to offer something in return. As a quid pro quo, investors should demand that he separate the company's retail and consumer bank from its corporate and investment-banking arm. The arguments for keeping them together have always been wobbly. For most of his tenure, Chuck Prince, Mr. Pandit's immediate predecessor, fought against suggestions the bank should be broken up. But the company's sprawl almost certainly contributed to executives' inability to manage exposure on so many toxic fronts. Citigroup's board appeared equally stumped. From leveraged-buyout loans to credit-card receivables and subprime-mortgage securities to structured credit, no financial institution has taken punches in as many places as has Citigroup. Citigroup's managers and directors used to argue that sheer size gave it an advantage in absorbing hits in one market without torpedoing the overall bottom line. This hasn't been borne out. Last year, write-downs and allocations to reserves totaled an eye-popping $32.5 billion -- reducing profit by $18 billion from 2006. These woes have shaken confidence in the U.S. megabank; more than $165 billion has been wiped off Citigroup's market capitalization from the high of January 2007. The market now places a higher value on both Bank of America and J.P. Morgan, and Wells Fargo is nipping at Citigroup's heels. Dividing in half won't raise new money. Citigroup has only two options for that: sell assets or ask investors to pitch in. The problem is that divesting businesses in today's horrific market risks destroying even more shareholder value. No one wants the bad assets. And the good ones, such as Mexico's Banamex, which could perhaps fetch $20 billion on a good day, or Citi's retail banks in Korea and Poland, might fetch less-than-stellar prices. That leaves going back to shareholders, who should demand a promise of partition from Mr. Pandit in exchange for their support.