Did you see John Reed’s take on the creation of Citigroup (NYSE:C), ten years on? Let’s just say it’s not a rave. “The specific merger transaction clearly has to be seen to have been a mistake,” he tells the Financial Times. “The stockholders have not benefited, the employees certainly have not benefited and I don’t think the customers have benefited because our franchises are weaker than they have been.”
That’s 0 for 3 among the company’s key stakeholders, by my count. No, wait, there are the regulators, too. Citigroup has been, ahem, something of a disappointment to them, as well. So it’s 0 for 4. A clean sweep.
Reed may have been wrong in hindsight to agree to merge Citicorp with Travelers back in 1998. But to his credit, he’s clear-eyed enough now to admit how badly the whole thing turned out. He understands why, too. “The core of what was happening was a lack of supervision and structure at the managerial level. . . . Once we got the benefits from the merger in the first two years after the deal, we were not able to sustain a business model that gained traction.”
Well, duh. Banking industry policymakers long ago embraced the regulatory concept of “too big to fail.” The creation of Citigroup brought about a parallel notion that’s not completely coincidental: too big to manage. Reed all but admits (and Sandy Weill also says, in a self-serving bit of puffery I’ll get to in a minute) the problem with Citigroup is that the darn company got to be so humongous it outran the ability of top management to keep track of even the basics of what was going on. So you ended up with decaying retail branches in New York, Dr. Evil trades over in London, and government-bond salesmen around the world who insist on answering their phones “Salomon!” Oh, and have you seen how the company has come through the subprime unpleasantness?
The irony, of course, is that the vast size and complexity that’s undone Citi are the very attributes that were supposed to constitute its world-beating competitive advantage. Do you remember? Citi was going to be a financial supermarket so huge no prospective customer could resist the breadth of its product offerings. Housewives in New Jersey would open up Citi checking accounts because the company has a consumer finance business in Asia. European institutions would do more volume with Citi’s forex unit in London because of the company’s card unit in the U.S. It all sounds crazy now, I know. But it seemed to make sense to a lot of people at the time. The resulting company has turned out instead to be a huge, unmanageable mess.
Anyway, Vik Pandit has embarked on yet another stem-to-stern review of Citigroup’ operations (either the company’s second or third in the past year; I can’t recall) as a prelude to the new “strategy” he concocts.
News flash to Vik: there is no strategy for Citi that has much hope of working. Depending on how you’re counting, four men have already had a crack at running the company since it was created. None has emerged from the experience with his reputation enhanced. And, tellingly, the first two blame their successors for the mess. As noted already, Reed says the problems began “in the first two years after the deal” closed—which is to say, right around the time he left and Sandy Weill took over. Oh, maybe. Then again, what was Reed thinking doing the deal in the first place?
For his part, Weill says that “what didn’t work was that we had very poor management and management decisions over the past couple of years,” after he retired. Arguable, I guess. But the problems surely started long before then. After Citicorp and Travelers hooked up and became the mega-institution it is, there were no deals left to do that would have been big enough to keep the rollup rolling in a meaningful way. So the place had to actually be managed, for a change. It didn’t go well. One of the reasons Chuck Prince succeeded Weill, after all, was that he’s a lawyer and was thought best equipped to deal with all the regulatory issues that had beset Citi by the time Weill stepped down.
And now it falls to Vikram Pandit. I somehow think he won’t be able to come up with a plan for Citi that one of those other three guys hasn’t thought of already. And the reason is simple: there is no plan that can reasonably be expected to get Citigroup out of the hole it’s in. John Reed at last seems to finally realize that. The FT reports he has been advising Pandit, and has suggested he consider spinning off some Citigroup businesses. Good idea. (In fact, Citi should break itself up completely by spinning off all of its businesses).
If anyone understands Citi’s problems, John Reed does. The guy seems to have something of an awakening. Vik Pandit would do well to listen to what he has to say.
Tom Brown is head of BankStocks.com.