Posted on 11/05/2007 2:58:39 PM PST by bruinbirdman
The sprawling group created by ego as much as business sense seemed to chase deals for their own sake. Now the manic pursuit of elusive profits has hit the bottom line and is likely to topple its leader. Iain Dey reports
When the world's biggest bank gets in trouble, it's clear that things are serious. This weekend, Citigroup's chief executive, Charles Prince, is poised to become the latest casualty of a credit crunch that has spread panic through the City and crippled Wall Street.
Everyone wants to know where the bodies are buried. Although Citi has already unveiled $6.5bn of losses and write-downs from its exposures to sub-prime mortgages and other related securities, it seems that more losses are in the pipeline. Fears that this could lead to a cut in its dividend have hammered the bank's shares.
But Citi's problems have been a long time in the making. While it would be generous to describe Prince as a scapegoat, he was dealt a bum hand of cards by Sandy Weill, his deal-obsessed predecessor. Weill's creation of Citigroup has proven that bigger is not always better when it comes to banking. In fact, quite the opposite is the case.
Citi's share price has been poor. Its reputation has been hammered by a string of scandals, including the infamous Dr Evil bond trade that prompted the highest ever penalty levied by the Financial Services Authority, the UK financial watchdog. Operationally, the unwieldy beast Weill created has never been whipped into shape.
Chuck was always going to have it tough. Growing profits with a stodgy, disjointed business was no easy task. So it was no surprise that Prince followed the thundering Wall Street herd chasing big returns from complex structured credit vehicles and highly leveraged private equity deals. Only Merrill Lynch had bigger exposures to CDOs and CLOs – the complicated funds that lie at the heart of the global freeze in financial markets. Industry sources have placed its exposure to the investment vehicles at around $35bn (£17bn). Now it looks to have been his undoing.
"As long as the music is playing, you have got to get up and dance," Prince said in an interview over the summer, in reference to Citi's continued appetite for feeding finance to overheated markets. "We are still dancing."
Those words are now being carved on his corporate gravestone. The implications of Citi's busy dance-card became apparent with third-quarter figures a fortnight ago, which showed a 57 per cent drop in profits. Losses and write-downs stretched to $6.5bn. Even Prince described the performance as "surprising". After a comment like that, it seemed that it was only a matter of time before he would be ousted. But the pressure has been building on Prince for more than a year.
Over the past few days Prince has been branded a deal junkie, much like Weill before him. A note from CIBC analyst Meredith Whitney last week claimed that he had eroded the bank's capital base with acquisitions worth $26bn over the past two years. That's what set the hares running, stoking rumours of further write-downs.
Prince was not allowed to buy anything between 2004 and 2006, after Citi's regulatory scuffles led to the Federal Reserve barring it from doing deals.
To say that Citi was out of favour with the establishment was an understatement. Weill got into hot water over his relations with analysts, when New York attorney general Eliot Spitzer began to clean up Wall Street. It had also been caught on the fringes of everything from Enron to Worldcom to Parmalat – although as the world's biggest bank, it could be argued that this was always a risk. The main problem came when Citi was kicked out of Japan after issues in its private banking business.
"In 2006, after the Fed lifted its ban on [Citi] from making acquisitions, [it] made up for lost time and was one of the most aggressive acquirers over the past two years," CIBC's Whitney said in her note. The problem was, she said, that Citi was sending "dollars out the door" without seeing much immediate benefit, putting pressure on its earnings.
The acquisition spree was about one thing – expanding overseas. Prince has a stated objective of growing his share of revenues from outside the US to 60 per cent from its current level of 45 per cent. His US business is big, but stagnant. The need to diversify was behind his decision to buy Egg, the UK-based internet bank, from Prudential at the start of the year. His biggest deal was the $12bn takeover of Japan's Nikko, which took Citi back into a market it had been forced to leave.
But, on balance, Prince has been more focused on making Citigroup smaller. Chuck has chucked more businesses than he has bought. He's flogged all his insurance businesses, big chunks of asset management, mortgage portfolios, minority holdings in a string of joint ventures, specialist finance and leasing businesses – the list goes on. He's even shrank the name to an abbreviation – Citigroup's trading name was altered to Citi a few months ago, following an expensive rebranding exercise that raised eyebrows.
The world's biggest bank has been shrinking for a while. Citigroup was formed in 1998 when Weill reversed his Travelers Corp business into Citibank, to create a global banking behemoth with fingers in every pie. It marked the start of a deal binge that took the business everywhere from Chile to Hungary to China. The enlarged group made its first major move into the UK in 2000, with its acquisition of Schroders' investment banking business.
The deal that started it all off has already been unwound – Travelers was spun off by Citi in 2002 and has since struck a different merger. St Paul Travelers bought back the Travelers Corp umbrella logo earlier this year. The last symbol of the relationship disappeared a few weeks ago when the 30ft high red umbrella outside Citi's New York headquarters was dismantled and shipped to St Paul Travelers' headquarters in Hertford, Connecticut on flatbed trailers to be reassembled for its new, old owner.
Debate rages over whether the big bank model works. HSBC, the closest competitor to Citi in terms of its business model, is under fire from activist investor Eric Knight on this very point. Many of Knight's criticisms of HSBC fall more squarely at the feet of Citi. Both organisations have acknowledged that being big is not a merit in itself.
Prince has signalled that more disposals are on the way. But even the remaining businesses are poorly integrated, and often operate independently of the corporate brain. One investor in particular has been pushing Prince into a radical overhaul of his bloated business, with its sprawling stucture.
"We have to take draconian, and I [mean] draconian, measures to control the costs," said Prince Alwaleed Bin Talal, Citi's biggest shareholder, in the summer of 2006. With a 4 per cent holding, the Saudi Prince is more than entitled to his views. The other Prince batted back the comments, insisting that cutting spending on investment would be "fundamentally the wrong thing to do".
By December 2006, Prince had done a complete volte face. Analysts were beginning to scent blood.
The issue of costs came to a head again in January, thanks to a glamorous American television journalist, known as The Money Honey.
CNBC's Maria Bartiromo had apparently been flown back to New York from China on a Citi private jet, courtesy of Todd Thompson, the bank's head of wealth management. The trouble was that Thompson bumped several Citi executives off the flight to make way for Bartiromo – at a considerable cost to the company. Thompson already had a reputation for excess – his sumptuous office was nicknamed the Todd Mahal.
Given that Prince had spent much of his time at the helm of the bank trying to clear up Citi's image, this type of thing was bad anyway. The added pressure to cut costs ensured that Thompson's future at the bank was short-lived.
In April, Prince took his cost-cutting binge further, unveiling a radical plan to axe 17,000 jobs and shift hundreds more to lower-cost economies. Thousands of jobs in New York City were to be moved to a cheaper site upstate in Buffalo. The moves would cost $1.4bn now, but lead to savings of $4.6bn by 2009.
But Wall Street was unimpressed. Cutting costs was fine, but it was still unclear how Citi was going to grow. One analyst dubbed the exercise a "media event to reduce investor complaints" – a clear reference to Prince AlWaleed. Other stock pickers told Prince he had 12 months to improve returns.
It is no surprise, therefore, that Prince was tempted to keep "dancing" while other banks were getting cold feet. With the rest of his Wall Street rivals piling into high-yielding mortgage-backed securities, he had to do likewise to match the returns.
As the biggest beast in town, he had to take bigger positions. It may sound crass, but that's the way Wall Street works.
My mortgage is with Citibank. But it’s not a sub-prime. I wonder if they’ll be selling off their mortgages to make some capital?...........
I’m sure they will survive. The next two quarters may not be to rosy though.
If they still own it, it virtually can't be sold now. They may already have bundled it. In any case whoever holds it now will be glad to get your monthly check.
yitbos
I'm going to assume that it's the same way with Citibank credit cards.
Therefore Citibank is a buy, sell or hold? The first chart presented is worthless. The author mentioned some place a called “Hertford”. Bad spell check for Hartford. This article needs a picture of Todd and Maria getting whipped by Rubin and a sharria law trial by Prince Honobbah Winjabbi. Tabloidic trash. The CITI story is simply this:
Prince was a steward; A lawyer not a businessman. The wicked prince from the east retired the sorry prince of the west. Mr. Thaine will take over shortly and the stock will go up.
PS. If you default the loan, the bank will evict you.
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