Citi Bailout Could Spur Longed-for Unwind

Updated from 2:07 p.m. EST

Citigroup's (C) bailout by the U.S. government means that the banking giant is going to have to be more aggressive in fixing its troubles -- and that's likely to mean deconstructing its financial supermarket model.

The bank announced early Monday that the U.S. government is taking an additional $20 billion stake in Citi through the Troubled Asset Relief Program, on top of the $25 billion it already received, and backstopping up to $306 billion of losses in various assets.

Industry observers say that the company has minimal choices at this point.

"I believe that some of these super large financial institutions are motivated by the, 'Too Big to Fail' [theory]," says Stuart Greenbaum, a finance professor and the former dean of the Olin Business School at Washington University in St. Louis. "They become too big to manage, so you have almost a contradiction here. They're too big to fail, but they're too big to succeed."

Greenbaum says Citi could "muck through just continuing doing what they're doing," including improve its risk profile and sell assets, or "tear this thing apart," by dramatically reducing its size and simplifying its operations.

"It may well be that the company is too complex and large to be well managed," Greenbaum says, adding that the government should reduce the number of institutions "for whom 'Too Big to Fail' is an umbrella."

A few shareholders have called for a breakup of Citi for years. Ex-CEO Sandy Weill built the financial supermarket a decade ago, but Citi shares have really taken a beating since the summer of 2007, when the global credit crunch first began. The credit crisis has forced Citi to most likely post a loss for 2008, due to billions in writedowns, loan loss provision expenses and cost-cutting initiatives. Citi's market cap is little more than $30 billion these days, about one-fifth of the bank's market cap from its 52-week-high on Dec. 11 of last year.