Posted on 08/11/2002 9:08:17 PM PDT by Libloather
Citigroup focus may bring banking spin-off
Sunday August 11, 9:31 pm Eastern Time
FT.com
By Gary Silverman in New York and Charles Pretzlik in London
Within Citigroup and without, a debate is raging about how big the world's biggest bank should be. Company officials and Wall Street analysts alike are confronting the question of whether Citigroup should be restructured.
Citigroup's dilemma is that it is succeeding as a business, but failing as a stock - an embarrassing development for a management team that has encouraged its employees to take more of their compensation in shares.
Citigroup reported a record $4.1bn profit last quarter and a healthy return on equity of 19.5 per cent. But it commands a lower price-earnings multiple than nearly any competitor, apart from the similarly beleaguered JP Morgan Chase.
Not only does this hit the pockets of Sandy Weill, chairman and chief executive, and his staff, it also forces Mr Weill to curb his appetite for acquisitions at a time when many potential targets are vulnerable.
Investors are worried about Citigroup's susceptibility to financial accident and scandal. Its headaches range from its involvement in the Enron and WorldCom collapses to the furore over its telecommunications analyst, Jack Grubman, and its losses in the Argentine crisis.
Analysts are trying to determine whether parts of Citigroup would be valued more highly if the company were broken up.
Such calculations are tricky because the company operates in so many markets and because it changed its way of reporting results last quarter.
But Citigroup is taking such concerns seriously, moving to sharpen its focus. The question analysts are asking is whether it might move dramatically - for example, by separating its consumer operations from the corporate and investment bankers.
"There is little question that the management of Citigroup is looking to simplify the story," says Henry McVey, analyst at Morgan Stanley, adding that management is examing business operations, management structure and how it presents its case to investors.
In March, Citigroup spun off its Travelers Property Casualty unit in the biggest public offering of the year. Three months later, it disbanded its giant emerging markets unit following the Argentine debacle.
Last week, Mr Weill responded to criticism of Citigroup's role in financing Enron by pledging to turn down deals that disguise debts. That could lead to a scaling back of structured finance activities.
Furthermore, Mr Weill's appetite for expansion in Europe is believed to have been damped by how heavy-going Citigroup has found expanding investment banking on the continent.
Some executives within Schroder Salomon Smith Barney, the investment bank's European arm, would like Citigroup to buy the struggling Dresdner Kleinwort Wasserstein from Allianz, the German insurer, or Credit Suisse. However, it is understood that Mr Weill is keen to see his executives make the most of what they have before investing in another European acquisition.
The desire for focus comes as Citigroup wrestles with the question of whether any management team could run so many complex operations. Mr Weill has acknowledged that Citigroup's risk models failed in Argentina. Asked about the help his bankers gave to Enron, Mr Weill maintained that he was unfamiliar with their work, raising the question of who in senior management was.
Questions about the quality of oversight have fuelled speculation about the future of Michael Carpenter, who heads Citigroup's Salomon Smith Barney investment bank. Citigroup had dismissed this as "nonsense".
The debate within Citigroup over restructuring remains at an early stage and Mr Weill told the Financial Times in a recent interview that he still sees merit in combining retail and corporate banking.
However, signs of restiveness have emerged among Citigroup's management. Recent major defections included Jay Fishman, chief operating officer, and Jay Mandelbaum, head of brokerage operations. The group has always been hard pressed to say who would succeed Mr Weill, 69. This only fuels the questions of how long Citigroup will remain in its current form.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.