Sunday, 14 September 2008

Citi and BofA: Will History Repeat Itself?

Citibank was a large commercial bank which started to develop its own investment banking capability. Then a large capital markets broker/dealer, Salomon Brothers, got into trouble, so Citi bought them. And it snapped up Smith Barney too, so it had retail brokerage. The resulting behemoth tried to do too much and got into big trouble in the credit crunch with one of the largest write-offs of any bank. Using cheap funding from the commercial bank to fund credit assets in the broker/dealer was not a good idea.

Bank of America was a large commercial bank which started to develop its own investment banking capability but then more or less gave up. Merrill Lynch, a large capital markets and retail broker/dealer got into trouble and BofA have just bought them. Can we guess what might happen next readers? Are Universal Banks really the answer to every problem in the financial system?

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