Where Citigroup Went Wrong

Citigroup (C) is a mess.

From the moment Wells Fargo (WFC) snatched Wachovia from under Citi CEO Vikram Pandit back in October, Citi has stumbled.

Its stock price since then has plummeted from the low $20s to the mid-$3s today, as the market fears its decision to sell its Smith Barney business to Morgan Stanley (MS) will fail to quench its need for capital in the coming months.

So what caused this massive implosion? A lot of Citi watchers have assigned blame for the large drop in the bank's market cap, from $300 billion to $30 billion.

Pandit has been widely characterized as a weak and indecisive CEO in the press. The New York Times blamed Bob Rubin and risk management headed by Tom Maheras -- both are now gone. In a recent interview, major Citi shareholder Prince Alwaleed bin Talal pointed the finger at former CEO Chuck Prince. A few (including John Reed, the man who merged Citi with Travelers in 1998) have also pinned Citi's shortcomings on the "financial supermarket" model masterminded by Sandy Weill. (On Tuesday, Pandit announced Citi would dismantle that supermarket model, returning to its old Citicorp roots.)

It turns out that Citi's biggest mistake leading to its downfall did occur in 1998, but it wasn't the April super-merger of Citicorp and Travelers -- it was the November ousting of Jamie Dimon by then-Chair and CEO Sandy Weill over a disagreement with Weill's daughter.

Had Dimon stayed on, he -- not Chuck Prince -- would have succeeded Weill and Citi would have avoided many of its missteps. Instead, Dimon moved to Chicago to head up Bank One, later triumphantly returning to New York when Bank One merged with JPMorgan Chase (JPM). Dimon, who could now stare at his former employer down Park Avenue, now serves as CEO and chaiman of JPMorgan.

Wall Street has watched the spread in performance of the two banks ever since. JPMorgan's stock is down 30% since the merger with Bank One on Jan. 15, 2004, while Citi's stock is down 92%.

The reasons for corporate blow-ups are never simple; it's usually true that every employee is replaceable. However, Citi has never been the same company since Dimon was pushed out.

Even a decade ago, most knowledgeable observers knew Dimon was going to be a special CEO one day. Sallie Krawcheck (who was a Citi analyst at the time) said back then: "Investors are asking two questions: What should I do with my Citigroup shares and where is Jamie going next so that I can buy the stock?''

Dimon had been a longtime protégé of Sandy Weill's. After graduating from Harvard Business School in 1982, Dimon turned down a job offer from Goldman Sachs (GS) to go and work for Weill, whom he knew through his father. Over the next 15 years, the two built an empire: Commercial Credit, Primerica, Travelers and Citi.

But in late 1998, after announcing the biggest merger ever, Weill and Dimon sparred over Weill's daughter, Jessica Bibliowicz. Dimon refused to give Bibliowicz the job of chief asset manager of Travelers, as Weill demanded. What's more, Dimon also wouldn't agree to promote Weill's son, Marc, to head up Salomon's bond group. Weill demanded that Dimon resign.

Jessica went on to run National Financial Partners (NFP), a $100 million financial advisor that has seen its stock swoon by 93% in the past year as Barron's has written negatively about its future prospects. Having left Citi in 2000, Marc now heads a small money management firm in Greenwich, Conn., called City Light Capital.

All the World's a Stage

The Shakespearean similarities between what happened with Weill and Dimon are uncanny. Jamie Dimon was the Earl of Kent challenging King Lear and Weill sided with blood over an adopted son.

Weill now has had to watch the dismantling of everything he spent his career building. The Wall Street Journal quoted two friends who know Weill as characterizing his mood ranging from anger to despondence since hearing that Citi's "financial super-market" model was being disassembled.

Vikram Pandit was a poor choice as CEO in December 2007, as he's waited much too long to change Citi's status quo until forced by the government, but it's likely that neither John Thain, Ken Lewis nor Sandy Weill circa 1995 could have done much better given the circumstances the bank was facing prior to Pandit's hiring.

It's not 20-20 hindsight to say that Citi's greatest mistake was letting Dimon walk out the door. Many knew this at the time; when he said goodbye on the Salomon Smith Barney trading floor, 1,000 traders gave him a standing ovation.

One bad move does not usually cost a career or a company. Life has a way of giving us lots of "do-overs" to course-correct our mistakes. However, there are decisions that stick with us for the rest of our lives and we always look back on and regret. Weill's hubris in pushing Dimon out will always be looked back on as the beginning of the end of Citigroup.

Comments

[daweinee:]

This is a ridiculous oversimplification. Forget market and economic forces. No doubt that JP Morgan is in better shape than Citigroup at the moment, though they both have to water at the TARP trough, and even though JP Morgan actually lost money this quarter but for some accounting magic, but c'mon?. If Jamie Dimon stayed at Citi the events of the past 18 months wouldnt have impacted Citi? Next you'll tell us that the Jets shouldnt have traded Chad Pennington because he would have played better than Brett Favre over the last 5 games of the season..

Jan 15 03:20 PM

[Kevin Walmsley:]

I dunno. Jamie Dimon helped to assemble the financial supermarket model that is in such disrepute. Would he have helped Weill build it, only to tear it apart when left to his own devices?

Citigroup went wrong when it embarked on a strategy to become "too big to fail". By doing so, it became too big to succeed. The Titanic sank because no ship should have been sailing at full speed through iceberg-choked oceans. It did NOT sink because the wrong captain was sitting in the chair.

Jan 15 04:54 PM

[CautiousInv...:]

I don't follow banks closely but from casual reading I do know that Citi, when compared to its peers, achieves lower ROE and sales growth.

The NYT reported that its board is incredibly ineffective and worries about what law firm it should retain rather than reducing loan losses, reducing employment and integrating its far flung operations.

Jan 15 05:10 PM

[The Good Ne...:]

It continues to remain clear that it is the "elite" (top 10) banks including Citi that are getting bailed... and the majority of TARP funds are being used to clear their junk portfolios.

But take a step down-market and banks are saying "Thanks but no thanks to TARP... Glacier Bank for instance... from their Dec 30 press release:

"We greatly appreciate the federal government's recognition of our financial strength in approving Glacier's participation in the TARP Capital Purchase Program. However, with the $94 million in net proceeds from our successful common stock offering, we are already one of the most strongly capitalized banking companies in the country, with total risk-based capital of approximately 16%. Consequently, we do not believe that participation in TARP is in our shareholders' best interests."

Additionally they closed $94M additional placement in Nov, declared a dividend, and acquired another profitable bank in Colorado. In the midst of this crisis! (I don't see one for them)

Glacier is not alone. Additional strong second tier banks are shining right now,
mast-economy.blogspot....

How about we bring these management teams over to lead some of these "top" banks?

GNE

Jan 15 05:51 PM

[drone:]

A combination of supercomputers and dart throwing monkeys could do a better job of running our banks.

Jan 15 06:18 PM

[Bill Herbert:]

>>But in late 1998, after announcing the biggest merger ever, ***Weill and Dimon sparred over Weill's daughter, Jessica Bibliowicz. Dimon refused to give Bibliowicz the job of chief asset manager of Travelers***, as Weill demanded. What's more, Dimon also wouldn't agree to ***promote Weill's son, Marc, to head up Salomon's bond group.*** Weill demanded that Dimon resign.

Jessica went on to run National Financial Partners (NFP), a $100 million financial advisor that has seen its stock swoon by 93% in the past year as Barron's has written negatively about its future prospects. Having left Citi in 2000, Marc now heads a small money management firm in Greenwich, Conn., called City Light Capital.<<

Nepotism rears its ugly head once again.

Jessica B is skank, thoroughly unqualified to run anything important at Citi, or anywhere else. I don't know much about Marc, but it sounds like maybe he would be driving a cab or waiting tables if his Dad hadn't been a domineering dealmaker on Wall Street.

Look people, we absolutely MUST get nepotism out of our financial markets - and our politics - it is getting critical, to say the least, to address this problem ASAP.

George W. Bush is barely qualified to manage a Kroger store, yet due to family name he ends up as the POTUS!!! Just freakin' incredible! And the damage is HORRENDOUS.

And Weill, after getting to the top of the pack, whether deserved or not, tries to put his daughter and son into positions that they have neither the resume nor the talent to deserve. The result? An atrocity at Citi, a very large factor in the financial crisis, maybe the biggest of the problems, judging by recent actions. And again, the damage is HORRENDOUS.

Case closed.

Jan 15 07:22 PM

[citishark:]

I concur with Eric (take it from an insider..!) We all saw the exodus of top quality executives leaving Citi after Jamie left....some of them joined him at Banc One...some went to another outfit. But the BIG loser in all this was Citi...

That's probably the cause of some of the frustrated anger Sandy has knowing that he did NOT made a sound business decision by ousting Dimon...and the consequences are now more than obvious. On the other hand, Jamie must have a good feeling looking in the distance these facts as well as the outcomes for him, Citi, Jessica and Marc. Performance is everything!

One thing is for sure: Sandy did a good job in grooming Jamie for so long!

Jan 15 07:24 PM

[EW:]

Jamie would have provided a different kind of leadership at Citi. However, its not at all clear that Citi would have avoided its major mistakes. Mortgage lending, securitization and structuring were the growth engines for most banks in the last decade. Citi aggressively expanded its presence and earnings in all aspects of this business through increased leverage as margins steadily declined. JPM fell behind its competitors because the firm was focused on the the integration of Chase, Chemical, JPM and BankOne. Had the cycle persisted a bit longer Jamie would have led JPM down the same path to catch up with Citi, only to end up in place.

Jamie is very good and a far better CEO than Chuck Prince could have ever been, but the economic and market forces at work were more significant than either man.

Jan 15 07:33 PM

[keithpiccir...:]

Eric Englund had a good piece on how C was the leader in stock buybacks and stock options for management to the detriment of shareholders.
This was addressed by Warren Buffett in his 2005 address to shareholders how stock buybucks fritter away the balance sheet every time.

Jan 15 08:27 PM

[philipmax:]

I was lucky to be fired by Weill twice. Once. when he took over Hayden Stone the venerable brokerage firm that Joe Kennedy built. And again, in a Friday night mid-night raid that took Shearson Hammill down with the conniving aid of Citibank.

Shearson was the best of the best on Wall Street until Weill's goons ruined this jewel.

Good riddance to the bunch of them. They won't be missed.

Jan 15 08:41 PM

[ozcutty2:]

Businesses grown by aquisitions always seem to get too big and bloated. It always makes me laugh when CEO's say they are going to cut 40000 staff to "improve" efficiencies. What were those staff even doing being hired in the first place?
With my investing i am sticking with companies that generate loads of cash but never buy businesses in foreign countries they don't understand. IF you have spare cash, buy back shares, not some dodgey overseas company in a market you know nothing about.
Case in point, i live in Australia, every successful company in Australia that trys to expand to Europe or the US goes wrong; AMP, Fosters, NAB, etc. They don't understand the market, the customers and importantly underestimate the competition.
If citibank, simply stayed in the US, in the most profitable business in the most profitable part of the country and bought back shares with its cash it would be a highly valuable company, although the sad thing is, some other bank would probably buy it!

Jan 15 08:57 PM

[Gandalf:]

The end of Glass-Steagle was the end of the retail banks.

The retail banks have always been run by the less adventurous, more cautious and, less elite finance people. Very dull.

The hot-shots went into investment banking and did deals, took risks and ,mostly, made great fortunes. Their mistakes were covered by the ocean of money surrounding them or were born by the stockholders of the companies they took public. A piece of the action, Bonuses, kept them going through brick walls. Homo Economicus.

Along the way, "Due Dilligence" and "Fiduciary Responsibility" were forgotten.

When Glass-Steagall ended, the hot-shots took over the retail guys and raided their deposits in order to do more deals, with more risk and less "due diligence" and little "fiduciary responsibility". Ergo, no one looked inside the mortgage-backed security bundles. They just pushed raw sewage through the pipeline and collected bigger bonuses.

The conservative, risk averse retail guys were gone or neutered by the investment bankers. There was an orgy of risk with no one watching the cumulative impact.

You can blame it on integrity or blame it on the structure of the system but the real blame lies with the folks who killed Glass-Steagall and never watched over the chicken coop.

Jan 15 11:54 PM

[stockguru32:]

too many places to count where citi went wrong, but they could be a good pick up after tomorrow, see here crashmarketstocks.com

Jan 15 11:57 PM

[punk_ash:]

The day I saw this guy for the CEO, I knew it was a bad pick, the guy has yet to show any CEO like qualities. He is not a banker, some hedge fund guy and Citi is a bank

Jan 16 02:12 AM

[Anthony Alfidi:]

Pandit never had the right skill set. Running a hedge fund from inception to sale is not the same thing as running a large money-center bank with multiple business units and cultures that were never fully integrated.

Is losing Wachovia to Wells Fargo really a defeat in this context? Given Citi's already large losses, Wachovia's own losses would not have provided the tax benefits that they have to Wells. Citi might be insolvent by now if they had "won" that deal.

Jan 16 02:28 AM

[monday1929:]

Let's not forget that Jamie holds trillions in notional value derivatives which are close to worthless. The only reason JPM survives, if it does, is because the taxpayers are donating hundreds of billions to it. The Great Free Market elites now claim that the near worthless derivative holdings are "mis-priced" by the Market.
And JPM customer service reps, if asked, still wrongly state that "JPM has received no bailout funds".

Jan 16 08:52 AM

[rh13:]

Is this an oversimplification? Not necessarily. Leadership is important, and it could well be that with Dimon in charge the picture of Citi today would be quite different. It would not have taken a great many things done differently to change the results substantially. Some banks, like Wells Fargo, appear to be relatively sound even in the current circumstances because they were more careful about real estate loans.
You can't take it as a fact that the financial supermarket idea is untenable. That is an oversimplification. Although large, complex organizations do have many possibilities for error, they also have great resources to prevent error if they use them effectively.

Jan 16 10:01 AM

[E Thomas St.:]

I'd say that this personnel decision was more of a symptom of the disease rather than the disease itself.

Jan 16 12:16 PM

[morph366:]

In my humble opinion Citigroup was (is) too big to understand - nobody could manage it

Jan 16 04:17 PM

[Duude:]

Let's not forget that it was J.P. Morgan that first came up with credit default swaps, and they have more than any other corporation. But due to larger deposits and less leverage, they look relatively healthy. Truly, its all relative. They have problems too and like their banking brethren do not want to raise the Kimono for anyone. Citibank's largest mistake wasn't losing Dimon. Its not that Dimon is such a better banker. J.P. Morgan has an entirely different financial structure. Citibank also had board members like Robert Rubin who were clearly over their own heads, but still exerted too much influence. If Dimon had stayed with Citibank, its likely they would have leveraged up as Citibank did. Citibank's big mistake was leveraging up as much as they did. It was that leverage on assets that became very illiquid that forced what we are seeing today. No question.

Jan 16 04:20 PM