Chuck Prince Deserves To Go

St. Exupery wrote Le Petit Prince in 1943. Shortly thereafter, he disappeared. This story is not dissimilar from the Prince of today, Chuck Prince of Citigroup. Once he was here, wide-eyed and optimistic about the future. The confines of his planet did not worry him. His planet (Citigroup) could grow and expand, fighting against the relentless incursion of the detested baobob (Goldman, Morgan Stanley, UBS, B of A, etc.) trees. Money would be made, other less invasive trees could be planted. Problem is, the manner in which he went about it was all wrong. And today the Little Prince is gone. Gone to a place far, far away.

I've written about Chuck and his plight quite a bit. Sadly, my concerns dating back to 1998 have been borne out. I left Citi back in early 1999, after the Travelers/Salomon merger had settled and I was unhappy with the culture and organization that remained in the wake of the merger. There were great people on both sides, its just that the cultures didn't mesh well. And this strongly impacted the performance of complex, high performance businesses like derivatives that relied on teamwork, innovation and speed. Further, the combined firm was an unmanageable behemoth that had a hard time extracting synergies that were the rationale for the merger, placing pressure on the operating heads to make numbers that were not reasonable. And it is this kind of pressure that led to unfortunate behaviors, behaviors that rewarded short-term performance without regard for longer-term implications. This is Wall Street at its worst. Pay out value for short-term "performance" that is unrealized but attracts current compensation, yet results in performance that is ultimately poor but the dollars have already been shipped out the door. Stupid, stupid sh*t.

From the Wall Street Journal 11/03/2007:

Mr. Prince has been struggling for years to revitalize Citigroup, which is weighed down by bloated costs. Although the bank's international operations are growing quickly, its North American consumer business has been lethargic for years, while rivals Bank of America Corp. and J.P. Morgan Chase & Co. are pouring billions of dollars into the business.

The mess involving subprime mortgages to borrowers with poor credit has hit Citigroup hard. On Oct. 15, Mr. Prince acknowledged that the bank's risk-management operations had fallen short, and it reported that its third-quarter earnings dropped 57% from the year-earlier level. Mr. Prince shook up the leadership of Citigroup's investment bank, installing newcomer Vikram Pandit at the top. The move led to the departure of several senior traders.

Chuck deserves to go. He deserved to go some time ago, but it took the latest debacle to bring the Board to its senses. Not that Chuck is a bad guy, he just isn't the right guy to run Citigroup. The firm is too big, too unwieldy. Citicorp alone was massive, as was Travelers by itself. Jam the two together, and you get a big headache, not the synergies analysts love to bank on. Pressure is placed on business heads to hit numbers, and this leads to a set of perverse behaviors that take years to play out. Eventually, after billion of dollars in compensation has been paid out, these "little" land mines of bad credit decisions, aggressive balance sheet transactions and other unfortunate financial decisions come to light. And you know who bears the brunt of management's poor oversight? The shareholders. You. And me. And our kids. It sucks.

We have only witnessed the beginning of the accounting issues that will impact financial institutions, banks, investment banks and hedge funds alike. Realized vs. unrealized gains. Earnings quality. Risk transfer transactions. What does the true economic balance sheet really look like? These complexities will take years to unravel. The firms themselves can help, if they want to. And the impetus for full and clear disclosure will be to ameliorate a sagging stock price and investor demands for better information. And if such information is not forthcoming, what do you think this means for the firms' balance sheet and financial position? Nothing good.

My advice? Short the stocks. Because the truth will set you free. Unless the truth is simply too ugly to bear.