The wisdom of allowing banking giants to get into funds management has
been challenged overnight as Citigroup, the world’s biggest bank, quit
its asset management business, partly to avoid too many conflicts of
interest.

Citigroup and Legg Mason
have just announced an asset-swap deal valued at about $US3.7 billion under
which Citigroup will give up nearly all of its asset-management
business in exchange for Legg’s brokerage network, according to The Wall Street Journal.

Legg Mason will become a major “pure play” fund
manager in equities and bonds, with total assets under management of
$US830 billion, including $US437 billion acquired from Citigroup. These lines from The WSJ are very interesting in light of Australia’s huge financial conglomerates:

For Citigroup, the asset swap with Legg Mason will set
the stage for the banking giant to focus its brokerage operations on
offering “independent financial advice” to clients, according to a
person familiar with Citigroup’s plans. The asset-swap will enable both
companies to separate the “production” of financial products from their
“distribution.” As such, it would unwind one strand of the “financial
supermarket” model that drove the creation of Citigroup and other big
financial-services firms.

Let’s hope Peter Costello and the RBA take notice. Australia’s big six
banks (including St George and Macquarie) have huge conflicts of
interest which should not be tolerated. They dominate financial
services like no other modern market, choking the rest of the
stockmarket and the economy as their gouging is so lucrative.

Peter Fray

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