Credit crisis puts Citigroup’s chief in the hot seat
NEW YORK: In late July, Charles Prince 3rd began daily meetings with about 10 of Citigroups highest-ranking executives in his cherry-paneled library to discuss financial threats looming over the worlds largest bank.
Prince had recently presided over Citigroups most profitable quarter since he became chief executive four years earlier, but the banks brain trust was worried.
To steel itself against potential losses, Citigroup had already squirreled away an extra $2.52 billion in reserves in the quarter.
Still, a housing and credit meltdown was ravaging the financial markets, and he wanted to know how bad the damage to Citigroup might be - and if there were opportunities to be seized.
Taking part in these meetings was Robert Rubin, a former U.S. Treasury secretary and the chairman of the banks executive committee, who was both an influential adviser and one of Princes strongest advocates on the Citigroup board. The banks finance and operations chiefs were also at the meetings, as were the co-heads of its investment bank.
“This was sudden and steep,” said Robert Druskin, Citigroups chief operating officer, referring to the market downturn. “We had to make sure that all the parts of the company were on the same page.”
As the weeks wore on, Citigroups problems grew more serious.
Prices of subprime mortgage bonds and other complex securities were deteriorating rapidly, sweeping up Citigroup and most of its competitors into a financial crisis.
On Aug. 8, a day after the U.S. Federal Reserve Board decided against lowering interest rates, Rubin made a phone call to Ben Bernanke, the Fed chairman, to compliment him on the decision, according to a person familiar with the call.
Although Rubins interactions with U.S. regulators have drawn scrutiny in the past, this person said that Rubin acted “on his own behalf and not on behalf of Citigroup.” This person also said Rubin made the call out of concern that a rate cut might encourage reckless behavior on Wall Street.
As Citigroups longtime bond-trading engine continued to sputter, its lending units faced swaths of souring mortgages. The bank was on the hook for billions of dollars worth of huge buyout loans that few investors wanted, and its core consumer banking business was strained.
It also became increasingly clear that Prince, for the fifth time since taking the reins as chief executive, would have to disclose a major problem to his board.
Last Monday, the dimensions of the bad news became public: Citigroup warned that it planned to take a $5.9 billion write-down in the third quarter, a move that would cause its profit to plunge about 60 percent.
Although investors bid up Citigroups stock price after the announcement, on the thinking that the worst might be over, the news drove Prince into yet another crisis during what has been an unusually tumultuous tenure. It has raised fresh doubts among analysts and shareholders about whether Prince, a well-regarded corporate lawyer with little previous operating experience as a banker, is dexterous enough to manage a complex global enterprise like Citigroup.
“The third quarter is penance for previous sins, but the sins happened under his watch,” said Meredith Whitney, a banking analyst at CIBC World Markets. “Under his watch, reserves got bled down to precarious levels. Under his watch, the firm made very aggressive loans. Under his watch, the firm delved into subprime mortgage assets.”
Of course, Prince does not fly solo at Citigroup. In addition to counting on Rubins steady hand, Prince gets advice from a stable of managers who are stewards of the banks risk-management practices.
The huge earnings hit also calls into question whether Citigroups vaunted diversified banking mode, which Prince inherited from his predecessor and mentor, Sanford Weill, can actually offset profit disruptions in one area with gains in another when unexpected financial crises emerge.
Even so, the hurdles at Citigroup are of the moment, and Prince is the man in charge. “I dont think there is a doubt where the accountability lies: with the boss,” Whitney said.
No one inside or outside Citigroup has suggested that he will step down immediately - although in the current, high-stakes environment on Wall Street, analysts say that an ouster cannot be ruled out. Although Prince declined to be interviewed, a prominent Citigroup director says that Princes job is entirely secure.
“Chuck is doing a good job, and I think he has been working in an extraordinarily complex situation through difficult markets,” said Richard Parsons, the chief executive of Time Warner and chairman of Citigroups personnel and compensation committee. “Now is not the time to be saying, Do we change course, or do we change captains? “
