This Is the End


Markets, Risk and Human Interaction

June 12, 2009

Citi 2015

The most exciting times in my career have not been when money was rolling in and everyone around the trading desk was sharing high-fives. It was when we were fighting to survive, when we were huddled in a boat in the middle of the stormy sea. That was the world of Salomon in the mid-1990s, when we were one step away from becoming non-investment grade. It was us against the world.

I visited Citigroup a few times over recent weeks and it reminds me of those times. Granted, it is not the world in which you would want to have found yourself. People have lost much of their wealth, in some cases they have had to make painful shifts in their lifestyle. They are seeing their compensation potential capped while competitors are being unshackled. They would be justified in feeling bitter for taking the brunt of all but criminal behavior by past management, head traders and risk officers.

But there are the seeds of a vibrant risk-taking culture. Not risk taking in the trading sense, but in the sense of moving beyond the complacency that comes with success, of being able to reinvent and create because they have to, and pulling together because there is no other way to survive. Taking the compensation out of the equation, I would take that over the gilded world of a bank that is doing everything right but is entrenched and self-satisfied. (I know someone is going to make an ‘other than that, how did you like the play, Mrs. Lincoln’ comment).

What will Citi look like in 2015? Using the Thomas Friedman approach, extrapolating out from a few random conversations in one corner of the firm, it looks like management is forcing a business focus that Citi has not had in the past. We also might see those who have lived through this crisis and stayed on forge working relationships, communication and determination that will change the core of the firm in a way that can’t be done with big pay checks. (More comments coming).

Right now the world is looking at the tactical issues, on where Citi will be in the next quarter or next year – will Citi stay alive and retain talent, cope with the psychological effects of life-altering economic losses. But looking out five or six years, I see the potential for Citi to be transformed. And in the process have a stock price that will greatly outperform its competition. For anyone who wants to put this in their calendar to remind me six years hence, my bet is that the stock price will be up over six-fold.

The Citi of the Weill era brings to mind visions of Jabba the Hutt. Indeed, I devoted a chapter of A Demon of Our Own Design to the inevitability of crisis at Citigroup. And it could have stayed that way for years to come. Surrounded by a sycophantic Board, a stock price languishing and opportunities passed by. Until, maybe decades into the future it would have finally, somehow, sunk under its own weight.

But now Citi has the opportunity to reach back into its genetic pool and emerge with the scrappiness and focus that Salomon had in its heyday. And it has something Salomon never had: a tremendous reach and franchise.


  1. The stock will be up six-fold in six years? That will be $18. Still under water.

    Citi's genetic pool right now contains only investment bankers who know nothing about commercial banking. Sandy Weill purged all the real bankers.

  2. The stock will be under water for a long time to come -- you can't undo the destruction, only try to build on the base of the ruins. Given the dilution, moving above $50 a share would be a lot to ask. So you have to look at the stock given where it is now.

  3. I don't think they will be any different than the clowns (led by Stan O'Neil)of Merrill who purged the smart risk guys after LTCM and 9 years later blew up Merrill. Survival of cockroaches does not lead to genius.

  4. This is possible but not probable if we believe as you imply that leading financial firms are really comprised of leading people.

    The good folk were leaving long before the crisis. First, when Chuck Prince was appointed and took a mandate to nurse Citigroup before he and the board got infatuated with Goldman, the top senior managers left. This was in the midst of the LBO and hedge fund boom. Raise your hand if you truly believe the best senior people stayed after that.

    Second, for a moment, let’s forget about employee envy; it’s a huge mistake to appoint an outsider to run a behemoth financial firm cobbled together with acquisitions that hadn’t been even integrated and formerly run by an entrenched, stalwart, emperor CEO who followed “management-by-cock-fights” by establishing co-heads to see who survives. When you factor envy into this, fuggetaboutitt.

    Salomon and Goldman had Warren Buffett as their backer. Did either prince (“we’re still dancing” Chuck or Al Waleed) step in to do anything meaningful since 2007? No, but Uncle Sam did before the mess unraveled.

    Here’s a pop-quiz kids: Quick, name a financial institution (or any high intellectual property company) that thrived after the brains left? The Citigroup Phoenix rising from its ashes to soar anytime soon seems highly unlikely. I’m not in the prediction game but I can see some firm taking it over as or when the economy improves and breaking it up. Can’t happen? Too big? Think about all the ‘60s, ‘70s and ‘80s "too big" conglomerates that got broken up in the ‘90s. Remember, Citigroup’s still not integrated—especially in spirit.

  5. This is not 1991 at Citibank, or the late 1980's at Commercial Credit in Baltimore. This is ruins, being picked through by regulators, presided over by perhaps the only core management team on the planet that could have been more ineffective than the team it replaced.

    All the useful talent is gone. There never was any sense of "the firm", and no sense of that sort is going to emerge now. There is no one there to generate it.

    This is a runoff book. The best shareholders can hope for is a timely selloff of that book.

  6. Following the comments above that I and others wrote of Citigroup being left bereft of high quality talent, note this Bloomberg story on June 20, 2009:
    Citigroup Asia Executive Banga Leaves for Top MasterCard Role

    “This is huge,” said Bill Smith, founder of Smith Asset Management Inc. in New York, who holds about 200,000 Citigroup shares. “This guy was talent.”

    “The executives at the top that are not the top three have to really say to themselves, ‘How long is it going to take me to get to where I aspire to?’” said Jeanne Branthover, head of the global financial services practice at Boyden Global Executive Search Ltd. in New York. “They are definitely going to be recruited for the top or the second-to-the-top jobs at other firms.”

    I paraphrase my statement above: Salomon and Goldman had or has Buffett, Kidder Peabody had GE, Barclays has Mid-East oil funds and Morgan Stanley has Chinese FX reserves funds. What do Lehman Bros (1984 failed partnership and 2008 bankruptcy), Drexel Burnham, Baring Bros and EF Hutton have in common? In contrast to the former group, they had no backers and / or strong effective leaders once a crisis surfaced and thus their names are gone.

    Unless one believes that Wall Street culture has or will truly change so that managements and employees across the sector collectively have long-term foci, it's unlikely the woolly mammoth of Citigroup returns to its glory days anytime soon; 10 to 15 years from now, perhaps, but within five may be wishful thinking. The board should have force Sandy Weill to name a successor or otherwise rein him in after he fire Jamie Dimon. This isn't Monday morning quarterbacking; this was noted in Fortune and many on the Street said so as Dimon was Sandy's brains. Now look who's eating who's lunch.

    Here's a Jim Collins challenge to anyone: someone please name a financial firm that fell from grace, stayed intact (Lehman post-1984 did not) and then thrived after. Financial firms in crisis are not like J&J Tylenol scandals or Coca-Cola Cos failed reformulations. Citigroup's only saving grace is that the Fed is giving it effectively free money at negative real rates. The problem is that its competitors are getting the same. It looks like Citigroup will either be broken-up, stay a ward of the state or go nowhere. I imagine most equity investors looking at Citigroup will heavily lean on sum-of-the-parts valuation combined with a yield-to-event (i.e. break-up sale) analysis. Parsons did the same at Time Warner once the path became clearer. Anyone care to venture a guess when the event happens?

  7. I think these arguments about the loss of talent are off the mark.

    First, what defines talent? How do you identify it? Do you mean people who graduated from Yale and Harvard? People who pushed their way up to the top and garnered resources in a particular culture? If you have a firm with hundreds of thousands of people, there are inevitably going to be very talented people, however that is being defined. People who might have been passed over by other companies using standard measures. There is going to be someone who graduated with a 3.0 from Kansas State who will end up being a dynamic leader or a brilliant strategist.

    Second, when you are talking about a baseball team, or when you are a three-man shop, talent matters a lot. But when you are a 100,000-person company, the issue is not so much talent -- however that can be defined -- as it is harnessing the franchise in a coordinated way. It is the difference between fighting one-on-one versus phalanx against phalanx.

    No firm with 100,000 people is going to be much more than average compared to other companies with 100,000 people by the time you look across all the people. Some of those people will be very talented, but not have been noticed by other firms. If they are given the chance, they will suddenly come forward and shine.

    Finally, you can have a large company with all the talent in the world, and it might still falter compared to a similarly sized company with less "talent", but with the willingness to try new things, to shake things up, to react and even lead when disruptive changes occur. A firm filled with "talent" can be stymied by infighting, by lack of information flows.

  8. Leadership "talent" here is being defined as an ability to effectively and strategically lead an organization, reinvest capital to achieve a reasonable return and, accordingly, groom other "talented" colleagues partly in order to establish a viable succession plan. Wall Street firms are excellent at the first two and too often, like Citigroup, fail miserably at the last.

    In the words of Jon Corzine, the 80/20 rule applies as well in banking and every baseball team has its MVP. The baseball vs. banking contrast you posit has many merits. I tend to think a military analogy. Two armies of comparable sizes and budgets enter a conflict. We know that loyalty and training will account for much of either's success or failure but we also know either side may have the higher fealty and more discipline and still fail if the leadership makes one serious error or, more likely, a series of small ones. If we apply “budgets” in the context of Citigroup's balance sheet, as questioned below, it does not look good for Citigroup in the short-term.

    Your note that "talent" can stymie a firm is no doubt agreeable hence the reference to Lehman Bros 1984 partnership failure. That "talent" of egos as opposed to what is written herein is great for the short-term but leaves a void. It's tough to run an army of mavericks. Weill's management-by-cockfights strategy built a firm of strong-willed and "talented" people. It also left many of those "talented" people viewing paranoia as a rewarding attribute. Now let's imagine Pandit exiting Morgan Stanley and in 2007 walking into that cockpen. Some here may have known Pandit and his current associates while at Morgan Stanley. If someone however really knows Citigroup he'll know it was, and still is, no Morgan Stanley.

    The talent issue may be getting too much focus. We'll however watch the headlines for more departures which hopefully sooner rather than later will subside. The issue is the extent that leaves permanent damage to the franchise; not by large losses like Banga leaving for MasterCard but like a series of small losses.

  9. Rich - just now finding and mining your blog (HT BigPic and Barry) and felt compelled to comment on your Citi post. Here, here. Before the fecal matter hit the impeller generally it struck me that a) Pandit was beginning the kind of serious re-consideration of how to run the business, b)had translated that into the beginning outlines of blueprint that made sense to me (as a non-finance guy with some business expertise) AND c) was focused on a critical factor - management systems and controls.
    That's not quite a casual observation because I spent a bit of time going over some of their analyst presentations and translating that into a strategic assessment.

    My current take that top-down that assessment is still reasonable and consistent with yours. The caveat is will there be enough time and resources and will Pandit (or his successor) be allowed to continue making the necessary changes.
    If the answer is yes then in the long-run this is potentially a great franchise...potentially.

  10. Rich,

    I agree with you most of the times especially about the things your wrote in your book. However, on Citigroup I have a slightly different viewpoint.

    Citibank is a great consumer bank (probably the best there ever was) because John Reed focused on soending money on technology to improve productivity and provide a better though more expensive consumer service that the other banks.

    Citibank was also very good in areas like cash management, trade payments and services, again because of the technology focus.

    However, in investmentbanking and in trading, with the exception of foeign exchange trading, Citibank never was the market leader and is unlikely to be one. The management at Citibank has always been geared towards consumer and commercial banking. Infact, John Reed said that Citibank has not made any money in the investment banking and prop trading business if you add its performance over the years.

    I have worked with Citibank twice - once in India as a currency prop trader and then many years later in London in Alternative Investments. It was a great bank and it was a matter of pride to be a Citibanker when I worked for the bank in India. In London, there were several other banks in the top tier and Citibank did not always figure in the bulge bracket.

    Citibank today has a market cap of just 14 billion dollars down from being the world's largest bank in terms of market cap just a few years ago. The bank is essentially on a life support system and continues on because the tax payer funded TARP money keeps it alive. To expect the bank to come back to its heydays of glory is a bit far fetched. The stock price may rise six fold, but at the same time Goldman Sachs and JP Morgan Chase will also see their stock prices rise atleast three fold in the same period. If that happens, I cannot imagine how Citibank will be a bulge bracket firm again.

  11. Okay, now that Uncle Sam owns a chunk of Citigroup, Inc. it may be an opportune time to check whether this is still a profit-seeking private enterprise.

    Lest we forget, I and perhaps others wrote above that one of the key errors Citigroup, like many of its competitors, their execs and boards made was becoming infatuated with Goldman Sachs, Inc (and the former LP) and, worse, trying to emulate it without the same quality personnel. Well, Goldman surprised the market with a highly profitable recent quarter. So guess what Citi figured it “had” to do? It also “had to have” a profitable quarter, too. As has been pointed out elsewhere however, it really was another losing quarter for Citi excluding sales of its family jewels.

    Why on Earth is Citi holding Crazy Eddie “Christmas in July” sales during a bad market for financials? It’s undergoing a slow partial-liquidation; a process as noted above that Dick Parson has plenty of experience with at Time Warner, Inc. and, it is suspected, to appease its benevolent Uncle Sam. reported July 10: “Citigroup Shakes Up Leaders to Pacify U.S.”

    “Some Citigroup executives say the turmoil at their bank is hurting morale and recruitment”

    “Top officials at the FDIC and other regulatory agencies recently have told Citigroup's board that they are concerned Mr. Pandit's team isn't moving quickly enough to stabilize the company and that it lacks enough senior executives with experience in commercial banking”

    “Citigroup has seen a string of departures of top executives…Gary Crittenden, Citigroup's former CFO…said he is joining a…private-equity firm.”

    “A number of high-level executives in Citigroup's investment bank have told the company they plan to resign, partly due to frustrations with Mr. Pandit and his deputies, say several people knowledgeable about that situation.”

    Bloomberg had this story today: “Citigroup Sells Nikko Asset to Sumitomo Trust for $795 Million”

    Citi CEO Pandit is quoted: “We created and set targets for Citi in terms of asset reductions…we’re actually moving extremely fast.” Only $795mn? With a corpus of about $2tn and assets atrophying to feasting cancer cells, why is time being spent on piker transactions? Keeping face for the government and investors.

    Who knows whether this trade will work for US taxpayers? Either way, it doesn’t seem to work for shareholders as these asset sales prices are INSANE.

  12. It wasn't long ago that Citigroup was the largest financial institution on this planet in terms of assets. It now is third—in the US alone. Investors looking at Citigroup's former glory and expecting a "reversion to its mean" for guidance are possibly investing with their wallets glued to the past.

    Needless to say, the US-domestic and global financial services industry’s competitive landscape has significantly changed since the Great Recession. Since Citi’s glory days, it has gone through five leaders (Reed, Weill, Prince, Bischoff, and Pandit excluding Jamie Dimon’s exit or Rubin) in about a decade; it has become a controlled entity of the US government; and its competitors, both in the past and new ones, sensing its weakness are biting it on nearly every front while it tries to figure out what it wants to be.

    Pandit came to Citigroup in July 2007 via sale to Citigroup of his hedge fund investment management business, Old Lane Partners, for a figure over $800mn; a business then with a few years of life. Now Pandit is agreeing to accept only $1.00 per year in compensation until Citi stabilizes. Lloyd Blankfein must have been chuckling at the farce of a PR stunt. “Let’s see, I’ll work charity at Citigroup for one dollar a year…but first I get $800mn from Citigroup.” Right! Oh yeah, 12 months after the purchase Citi shut down Old Lane Partners because its investors’ assets shrunk to nearly zero. Pandit and his former team should owe Chuck Prince, Citi’s board and their progeny birthday steak dinners for the rest of their lives

    The US government is using Citi as its tool to push policy changes adverse to the industry. From mortgage modifications to credit card regulation reform, we can say that Citigroup is in the vanguard in at least one way—assisting the government. But we can’t entirely fault Citi—it’s a 20%-owned ward of the state.

    How many of us really believed in 2007 that a dowdy super-regional retail bank like Wells Fargo would go head-to-head with, let alone defeat, Citigroup? That’s exactly what happened. Despite the US government giving Wachovia for free to Citigroup and supporting the transaction—yes, free—Wells Fargo was still able to walk away with the prize. To recap, when the dust settled over the 2008-2009 financial crisis, JP Morgan got Bear Stearns and WaMu; Bank of America got Countrywide and Merrill; Wells Fargo got Wachovia; Barclays and Nomura got Lehman and Citigroup got…a bailout. That was probably a foregone opportunity of a lifetime.

    It’s logical to conclude that if your home competitors and government are unfriendly than, like a spurned lover, you should seek love elsewhere perhaps where your home reputation doesn’t precede you. And thus Citi is now pointing to its great footprint in emerging markets from its once-forgotten Citibank unit. The problem is that Citi let that franchise fall as it was heralding its securities salesmen (aka investment bankers) in developed markets. Meanwhile, Citi’s Asia head left to become CEO of MasterCard and its Japanese business is about finished. More recently China’s AgriBank held the largest IPO ever, for which Citi, unlike JPM and GS, got no tombstone. Can we look at how much capital was raised by emerging markets financial institutions in the last decade and still conclude Citi has a feared and respected emerging markets franchise like it used to? Some investors may do so but others in those markets may have better insight.

    What will be left of this Citigroup, Inc. is uncertain. There’s little doubt however that this franchise is impaired. With its largest shareholder selling (which happens to be both an insider and regulator of the firm), a buyer or owner of Citi’s common shares may reasonably ask where the information asymmetry lies before deciding next steps.

    This was penned in the spirit of Carol Loomis of Fortune who, more than merely reporting the news, offered insights that seemed so obvious but only after reading her scribe. If only today’s Twitters and I could match HER glory.


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