Revisiting the Journal’s TBTF Citi Story

Yves Smith of Naked Capitalism calls me out for swallowing a Wall Street Journal story showing the Citigroup side in the too-big-to-fail debate. I think she’s right.

I didn’t mean to imply that this was an excuse for not breaking up the too-big-to-fail institutions. Far from it.

But I did call the piece a “good story” that showed “some of the benefits of mega-huge banks—as well as the difficulties of extracting them from the global financial system.”

Smith thinks it’s not good at all and says this:

But as long as we have outlets like the Journal running scare stories on why we have to leave banks be, it’s unlikely we’ll see anyone in the officialdom explore radical enough actions to actually make a difference.

Here’s why she calls it a scare story:

The Journal argues that GTS is essential to Citi. This is rubbish. GTS is a sophisticated payments system and a source of low-cost deposits. It may provide a foot in the door, and help deepen some relationships, but let us face it, cash management and payments systems are at best assistant treasurer relationships at big companies. Proof of the pudding: it is a no-brainer that companies like Goldman, Morgan Stanley, Barclays, and UBS are doing complex, high margin transactions at companies that are also using GTS.

I don’t know enough about whether GTS is essential to Citi, but I’ll take Smith’s word for it, in part because I saw that argument as a flaw in the WSJ’s story:

One problem is that the Journal says as fact in the nutgraph that the “GTS unit is so deeply intertwined with the rest of Citigroup that splitting the unit off would leave some governments and companies in the lurch.” But it doesn’t really supports that last sentence in the rest of the text.

I should have been more attuned to why the Journal would write that and then not follow it up with reporting. I assumed it was just editorial sloppiness, but perhaps it just couldn’t be backed up.

What was most interesting about the WSJ story was the revelation that Citi’s too-big-to-fail status had resulted in the government doubling its business with the unit profiled, which is called Global Transaction Services, but that GTS itself was one of the reasons why the government considered Citi TBTF in the first place. Which would, of course, just make Citi all the more TBTF and difficult to deal with.

Smith says in the process of arguing that Citi must be broken up or have its risk-taking heavily regulated:

GTS is a big piece of what makes Citi a difficult to disarm bomb. One of the swords of Damocles that the big bank had over the officialdom is that, prior to the crisis, it had $500 billion of uninsured foreign deposits. If Citi looked wobbly, sensible depositors would withdraw funds, and that could quickly morph into a run.

To be clear this time: Just because a bomb’s wiring makes it hard to be disarmed doesn’t mean it shouldn’t be.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.