Charles Prince couldn't unite the pieces of Citigroup Inc.'s sprawling empire, and his successor will face many of the same challenges that have stymied the outgoing CEO.
Mr. Prince's four-year tenure as Sanford Weill's successor ended yesterday with the bank engulfed in problems stemming from massive write-offs due to the turmoil in credit markets. The bank's board named Sir Win Bischoff, chairman of Citi's European operations, as interim chief executive. Senior adviser Robert Rubin will become chairman. Citigroup also said it will write off between $8 billion and $11 billion to reflect the declining value of subprime-mortgage-related securities since Sept. 30.
A special committee, including Mr. Rubin and board member Richard Parsons, chief executive of Time Warner, will conduct a search for a permanent CEO. That could be a tall order: A decade after Mr. Weill built the insurance-to-banking-to-stockbroking behemoth through a run of acquisitions, his creation remains an often-dysfunctional collection of businesses whose employees sometimes ignore or even compete against each other.
Citigroup remains the largest bank in the country, and among the largest in the world, as measured by its assets of $2.35 trillion. But despite years of trying, Mr. Prince failed to realize his goal of forging the bank's disparate parts into "One Citi," as his centerpiece internal campaign put it.
Defiant Citigroup bond traders still cling to their corporate roots, sometimes answering phones "Salomon" even though Citigroup a few years ago dropped the Salomon Brothers name it had acquired and instructed employees not to use it. The bank's retail network isn't hooked into other parts of the company — meaning branch tellers can't see whether a customer in front of them has been preapproved for a credit card so they can offer it. Until recently, capital markets and consumer businesses within the bank's European operations duplicated basic office functions because each had its own legal and human-resources staffs.
Citibank's new, expanded losses come on top of $2.2 billion in trading losses and mortgage-related write-downs that the bank announced on Oct. 15, when it reported third-quarter earnings were down 57% from a year earlier. A similar revision in write-downs shattered confidence in Merrill Lynch & Co.'s chief executive Stan O'Neal, who stepped down just last week.
Citi's core problem — and Mr. Prince's core failure — isn't just the recent market losses. It's also the conspicuous lack of successes elsewhere to compensate for them. That potential was the big strategic idea behind the "universal bank model" created by Mr. Weill a decade ago. The universal bank could generate more revenue from clients by offering a slew of related financial services. Meanwhile, the collection of varied businesses is supposed to provide a cushion, with downturns in some areas balanced by upturns in others. It's a model that banks in Europe have relied on for years.
Some Wall Street analysts and investors question the theory, suggesting that Citigroup would be better off breaking itself up. But the strategy is meeting with some success at one of Citigroup's main rivals, J.P. Morgan Chase & Co., which operates in many of the same U.S. businesses as Citigroup.
J.P. Morgan Chase — led by James Dimon, Mr. Prince's former Citigroup colleague and one-time front-runner for Citigroup's top job — also was whacked by credit losses in the third quarter. But it made up for those losses in areas such as credit cards, wealth-management and commercial banking, partly thanks to its investment in technology to help unite some of those businesses. "Many of the cylinders are firing quite nicely around here," said Michael Cavanagh, J.P. Morgan's chief financial officer, in a conference call last month.
Last of the Old Breed
Sir Win's appointment as temporary leader of the company was unexpected. As chairman of Schroders PLC when it was an investment bank and asset-management firm, he is one of the last of the old breed of London bankers whose operations were subsumed into much bigger banks. His presence at Citigroup has given it cachet in forging alliances in London and Europe, where the bank has established itself as a leading mergers-and-acquisitions adviser. Sir Win, 66 years old, who was knighted in 2000, joined Citi's hierarchy after Citigroup acquired Schroders' investment-banking operation that same year and merged it with its Salomon Smith Barney unit. He is a member of Citigroup's management and operations committees.
With the backing of Mr. Rubin, he'll take a large role in steadying the company's businesses while a new candidate is sought to wrangle with many of the same problems Mr. Prince faced.
Mr. Prince sometimes managed to erase the disparate cultures of Citi's parts. Yet he cultivated little to take their place, according to many critics. "We don't have any culture and that's definitely the problem," says one longtime employee who asked not to be identified. That represents a big change from the 1970s and 1980s, when the bank had such a strong culture that other firms routinely raided Citi for top talent.
With his departure, Mr. Prince, 57 years old, becomes the second Wall Street chief executive within a week to lose his job amid a credit crunch and collapse in the subprime-mortgage industry that has already cost firms billions of dollars in write-offs. Merrill's Mr. O'Neal was forced out after alerting his board that the company's third-quarter write-down would be $8.4 billion, rather than the previously estimated $4.5 billion.
Citigroup's big write-off represents the latest in a string of bad news for the company. Its stock price fell nearly 9% last week to the lowest level in Mr. Prince's tenure as CEO. Already grappling with costs that are rising faster than revenue, Citigroup has suffered billions of dollars in credit losses in recent weeks. The bank's capital cushion has deteriorated, prompting one analyst to suggest that it might have to cut its dividend or sell assets. The bank said last night it has no plans to cut the dividend.
Causing Headaches
The credit-market turmoil also is causing headaches for Citigroup in a sophisticated business that it has long boasted about. The bank is a leading player in the $350 billion market for structured investment vehicles. These off-balance-sheet funds typically profit by issuing short-term commercial paper and medium-term notes to investors and then using the proceeds to buy higher-yielding assets, some of which are tied to mortgages. In recent months, nervous investors have backed away from the commercial-paper market, squeezing the investment funds.
Citigroup manages seven of these funds, with a total of $80 billion in assets. The bank, along with J.P. Morgan and Bank of America, is assembling a rescue fund that would buy assets from the SIVs. In the meantime, however, the Securities and Exchange Commission is examining how Citigroup has accounted for the vehicles.
A string of veteran executives have walked out Citibank's door in the past couple of years, leaving the bank without a strong bench of seasoned leaders in its core businesses. Thomas Maheras, a well-regarded Citigroup veteran who oversaw the capital-markets and trading operations, left last month. Last week, the bank let go Michael Raynes just a year after it wooed him from Deutsche Bank to pump up the credit derivatives business. Even Mr. Weill, who had stuck by Mr. Prince as Citigroup sold off some of its businesses, began expressing dissatisfaction with his successor in recent weeks, according to a person familiar with the situation.
Over the weekend, speculation grew about Mr. Prince's successor. One of the likely candidates is John Thain, CEO of NYSE Euronext and a former president of Goldman Sachs Group Inc. Also on the list is Robert Willumstad, the former chief operating officer of Citigroup who was in the running for the top job when Mr. Weill gave it to Mr. Prince. Mr. Willumstad is now chairman of American International Group Inc.
Last night, Mr. Rubin and Sir Win said Mr. Prince made significant strides at Citigroup and that internal competition is a byproduct of the business.
"This institution is a hell of a lot better in thinking as one today than before Chuck was appointed," Sir Win said.
In stepping down, Mr. Prince sought to accept responsibility for the bank's upheaval, including widespread criticism about its risk management during a turbulent time in the credit markets. "It is my judgment that given the size of the recent losses in our mortgage-backed-securities business, the only honorable course for me to take as chief executive officer is to step down,'' Mr. Prince said in a statement yesterday. The company said yesterday it formed a new unit to focus solely on managing its exposure to subprime-mortgage securities.
Over the past week, people familiar with the matter say, Mr. Prince strongly pushed to update the value of the subprime mortgage-related securities on its books to reflect continued deterioration in financial markets. The matter took on urgency because Citigroup was preparing to file its quarterly report with the Securities and Exchange Commission today. Companies typically file these reports within two or three weeks of announcing quarterly earnings.
Mr. Prince was supported on the issue by Gary Crittenden, chief financial officer, and Vikram Pandit, the former Morgan Stanley executive who recently was tapped to oversee Citigroup's traditional Wall Street and alternative-investments business, said people familiar with the situation.
At the same time, Mr. Prince began to acknowledge that his embattled leadership couldn't survive another big hit to the balance sheet. By the end of last week, he began telling directors that he was prepared to leave if they would accept his resignation, according to people familiar with the situation. "The decision was not forced on him by the board," said a person familiar with the situation.
Mr. Prince, the son of a construction worker, landed in what was to become Citigroup in 1986, when Mr. Weill bought a little-known Baltimore-based consumer-finance company where Mr. Prince was an in-house lawyer.
He soon became Mr. Weill's primary legal adviser on a string of acquisitions. Mr. Weill's team of young and hungry executives helped create a so-called financial supermarket that could provide investment-, consumer- and commercial-banking services to Wall Street and Main Street. Also in the group was Mr. Dimon, widely viewed as Mr. Weill's protégé until Mr. Weill fired him after the two fell out over Mr. Dimon's role.
After a series of scandals involving the bank's role in financing and advising Enron Corp. and questions about its stock-research practices, Mr. Weill named Mr. Prince to be head of Citigroup's global corporate and investment bank in 2002. The appointment surprised insiders because Mr. Prince didn't have any experience in the day-to-day operations of businesses like trading and investment-banking. He warned the firm's top bankers that they wouldn't be seeing much of him as he concentrated on cleaning up the regulatory messes. The bank soon spent billions of dollars to settle litigation.
Skeptical Investors
The following year, Mr. Weill chose Mr. Prince to succeed him as CEO over Mr. Willumstad, another longtime lieutenant who ran the bank's consumer businesses. Investors were skeptical; Citigroup's stock fell 2.8% on the day of the announcement.
At first, Mr. Prince concentrated on cleaning up Citigroup's messes around the world. When regulators in Japan ousted the company's private bank after an inquiry revealed violations in the way it dealt with customers, Mr. Prince apologized. He did the same after the bank's London bond desk angered rivals by dumping more than $13 billion of European government bonds onto the market, then buying a chunk back at a profit within the hour. The bond traders had named their plot "Dr. Evil." Urging Citigroup to clean up its act, the Federal Reserve in 2005 barred it from doing any more deals; the Fed lifted the ban a year later.
The fixes were costly. Citigroup took a $4.95 billion after-tax charge in 2004 to settle a lawsuit brought by investors in the former WorldCom, and to increase reserves because of other pending litigation. That wiped out one quarter's worth of earnings. But even Mr. Prince's skeptics placed much of the blame for these problems on Mr. Weill.
Although he continued to shun the spotlight after becoming CEO, Mr. Prince, a talented amateur musician, would sometimes let his private persona peek through at public events. In May, he was honored by the American Turkish Society for Citigroup's investment in Turkey's third-biggest bank. At one point during the evening, the tall and burly Mr. Prince stepped away from business chatter and nimbly whirled his wife around on the dance floor. Citigroup employees watched with their mouths agape.
Mr. Prince has spent much of his time trying to break down the walls that divide the massive bank. Those efforts intensified in the last year or so with the campaign that Mr. Prince calls "One Citi." He sold off the famous Travelers umbrella logo and started installing Smith Barney brokers in Citibank retail branches. And he began providing financial incentives to wealth-management bankers in Boston to provide more services to their clients by tapping the skills of their investment-banking colleagues in New York. Those changes didn't sit well with some insiders, who grumbled that Mr. Prince's approach was hurting morale without helping to merge businesses.
Bogged Down
Meanwhile, despite widespread cost-cutting, the bank remains bogged down in bureaucracy. Mr. Prince has griped that some paperwork bears the signatures of more than a dozen managers when it reaches his desk. Sometimes he refused to add his name to the list, just to prove a point about delays caused by red tape. Desperate to improve the bank's customer service in its retail branches, he resorted to taking complaint letters home at night and calling the customers himself, beseeching them, "Tell me what happened."
Mr. Prince took Citigroup in some new directions. During his tenure, the bank tapped outsiders for big jobs. In addition to Mr. Pandit, it wooed Raymond McGuire away from Morgan Stanley to become Citi's global co-head of investment banking, and Stephen Volk, a former chairman of Credit Suisse First Boston, as a senior advisor and vice chairman. Mr. Prince also embraced technological advances in traditional Wall Street businesses, buying up small shops like Lava Trading Inc., which provided stock-trading technology. In July, Citigroup bought Automated Trading Desk, an electronic trading firm, for $680 million.
Mr. Prince's frustration with Citigroup's problems occasionally broke through his normally calm exterior. "I'm pissed," he said in opening remarks in a conference call last month with managers, according to several people who were on the call. But tough talk also has come back to bite him. Last year, for example, Mr. Prince vowed that 2007 would be a "year of no excuses," echoing the words on a wood-and-brass nameplate on his office desk. Unhappy employees and shareholders now use the phrase derisively.
Rivals on the Move
As Mr. Prince labored to clean house, his rivals were on the move. J.P. Morgan Chase extended its westward reach in 2004, buying Chicago-based Bank One Corp. for $58 billion. The deal also gave J.P. Morgan a new CEO in Mr. Dimon, who had gone to run Bank One after leaving Citigroup. Since arriving at J.P. Morgan, Mr. Dimon has slashed costs and poured billions of dollars into long-ignored computer systems. As a result, the company this year has gotten significant growth from its existing businesses. Bank of America snapped up credit-card maverick MBNA Corp. in a $35 billion deal in 2005, instantly transforming the Charlotte bank into a consumer-banking behemoth and creating a fierce new competitor for Citi's massive card business.
Even in deal-making, a longstanding strength, Citigroup's has floundered recently. In the U.S., Mr. Prince has eschewed big transactions, favoring what he calls a "string of pearls" approach. But the bank's domestic retail presence has been falling farther behind rivals: Citigroup has about 1,000 retail branches in the U.S.; Bank of America, more than 5,000. For the first time in years, however, Citigroup has started building new branches, adding roughly 100 in 2006.
Overseas, Citigroup this year agreed to pay $1.13 billion to buy online banking company Egg Banking PLC. The deal was viewed as being expensive, and it now appears that Egg's customers include subprime borrowers that have saddled Citigroup's European operations with losses.
Some acquisitions have been viewed more positively. Last year, Citigroup led a consortium that bought an 85.6% stake in China's Guangdong Development Bank for $3.1 billion. As part of its strategy to derive more revenue from fast-growing overseas markets, Citigroup is buying Nikko Cordial Corp., Japan's third-largest brokerage. The bank hopes to pull in more customers through the brokerage by doing things like potentially putting its ATMs in Nikko Cordial branches. Citigroup is testing a similar strategy in the U.S. with its CitiFinancial consumer-lending business.
Still, those efforts aren't likely to pay off soon enough to offset Citigroup's larger problems. As Mr. Prince's corporate cheerleading has rung hollow, employees have in recent months openly discussed the need for new leadership.
The bank made some progress earlier this year in its long-running battle to get revenues rising faster than expenses. In April, Mr. Prince unveiled a cost-reduction plan that cut 17,000 jobs, or about 5% of its 327,000 world-wide head count. But fear is building that those savings will be wiped out by the big write-offs in the investment bank and other credit woes.
—Carrick Mollenkamp, Monica Langley, and Andrew Morse contributed to this article.
source: p.A1 5nov2007
When the market for mortgage securities entered a meltdown over the summer, financial firms holding billions of dollars of hard-to-trade assets used mathematical pricing models that were heavily dependent on credit ratings. When the credit-rating firms began a massive downgrade campaign last month, firms such as Citigroup Inc. and Merrill Lynch & Co. saw the value of their holdings plummet.
Citigroup's struggles to put an exact number on its losses demonstrate just how fallible the models can be, and how serious the consequences. Last night, Citigroup said that the downgrades will result in a reduction of fourth-quarter net income of $5 billion to $7 billion. That follows a third quarter when Citigroup recorded mortgage-related write-downs of $2.2 billion, including losses on subprime securities and fixed-income trading.
The latest update, much of it involving securities linked to subprime mortgages, follows a revision made late last month by Merrill Lynch that increased third-quarter write-downs to $7.9 billion from an earlier estimate of about $4.5 billion for exposure to debt pools and subprime loans. As a result, analysts are beginning to see Merrill's big hit as less of an anomaly than originally thought.
"We estimate that there's over $10 billion of write-downs in the fourth quarter for the industry for banks and brokers," said analyst Mike Mayo, who covers financial firms for Deutsche Bank. Mr. Mayo said his estimate is based on exposure to debt pools and mortgage securities and includes Citigroup, Bear Stearns Cos., Morgan Stanley and Bank of America Corp. Citi's updated write-downs could be included in its coming quarterly filing with U.S. securities regulators.
The source of Citigroup's write-down is at least as significant as its size. The bank's estimate of its losses has changed so rapidly in large part because the models it used to value hard-to-trade securities relied heavily on credit ratings, according to people familiar with the models.
That made the bank highly vulnerable when, in October, ratings firms Moody's Investors Service and Standard & Poor's slashed, or put on watch for downgrade, the ratings on tens of billions of dollars in securities.
It is unlikely that Citigroup is alone. Ratings play a big role in valuation models used by many banks, investment funds and insurance companies. Meanwhile, the market for securities linked to subprime loans has deteriorated in recent weeks as defaults have confirmed some of analysts' most dire forecasts, increasing the likelihood of further ratings downgrades.
Citigroup's subprime exposure -- and source of its problems -- is found in two big buckets that together total $55 billion in its securities and banking unit, the bank said. The first bucket totals $11.7 billion, including securities tied to subprime loans that were being held, or warehoused, until they could be added to debt pools for investors. The second, totaling $43 billion, covers so-called super-senior securities.
These highly rated super-senior securities are portions of collateralized debt obligations, or CDOs. CDOs are repackaged pools of lower-rated securities backed by subprime loans into pieces with different levels of risk and return. Analysts estimate that $60 billion in such super-senior tranches are sitting on the books of banks, insurers and investment funds.
The troubles stem back to the heyday of the U.S. housing boom, when Citi became one of the biggest players in the lucrative world of CDOs backed by subprime-linked bonds. Overall, Citi was the second-largest underwriter of CDOs in 2006, doing $34 billion in deals, according to data provider Dealogic.
As a result, Citi's holdings of subprime exposures varies from the actual loans to the most highly rated slices of CDOs, the bank said. They include securities the bank had warehoused to later package into CDOs, extended to the super-senior tranches of CDOs that Citi helped create. Banks often kept the super-senior pieces of CDOs, because their low returns made them unattractive to investors despite their extremely high ratings.
In a statement, Citigroup said the declines in the value of the bank's subprime exposure "followed a series of rating-agency downgrades of subprime U.S. mortgage-related assets and other market developments which occurred after the end of the third quarter."
When trading in the subprime-linked securities all but dried up amid this summer's credit-market turmoil, Citigroup and other banks suddenly faced the difficult task of putting a value on securities that investors no longer wanted to trade.
For lack of any market pricing, Citigroup used credit ratings as a key input in figuring out the value of the future payments it expected to receive on the securities, according to a person familiar with the bank's valuation models. For example, in valuing the payments on pieces of subprime-backed CDOs with the highest triple-A rating, the bank would look to how the market was valuing payments on corporate bonds with the same rating.
"In general, the industry-standard model for pricing CDOs is not adequate in my view, which means that there's a lot of uncertainty about what they are worth," says Darrell Duffie, a finance professor at Stanford University's business school. "They can get better models but that's not something they can do overnight."
The problem with the ratings-based approach was that it ignored a key difference between corporate bonds and subprime-backed bonds: Defaults on the latter were growing at a fast rate, which would likely lead to ratings downgrades.
The downgrades began in earnest Oct. 11 when, in a little-noticed announcement, Moody's Investors Service said it had slashed credit ratings on about 2,000 bonds backed by subprime home loans that originally carried a total value of $33.4 billion. It also flagged bigger problems ahead, saying that 502 CDOs had direct exposure to the mortgage securities that had been downgraded.
source: p.C1 5nov2007
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