John Reed on Citigroup: A Decade Long Disaster

Did you see John Reed’s take on the creation of Citigroup (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.

Comments

[Robert Burns:]

For openers, does Citi or any other bank have all of their dead wood on their books? What did Citi do with all its sub prime, eat it or sell it to some 17th world economy? According to them they have absolutely no commercial properties in default and all of their SFR's in default are being sold at retail. I'd love to know how they value it. What happens when their prime mortgages start to default, more retail sales? Oh yeah the sale price is 70 to 80% of the unpaid balance. Obviously you're buying the mortgage because the house's value decreases day by day. To manage you must be able to think and I don't see any of that going on in their Real Estate division.

As for their other divisions, ever hear of that place called Wal Mart?
Now there's a supermarket with full shelves that people buy from.

2008 Apr 06 08:04 AM

[User 46594:]

It's heartwarming to read that Reed and Weill and some of the other fats are beginning to acknowledge how BIG their mistakes were. But why are we still listening to them. Instead, we should demand their money back. They amassed a fortune for their grandiose plans. I get sick every time I read that Sandy Weill donated a few million $$$ to this or that cause. He ought to give that money back to all the employees who lost their jobs due to his reckless ambitions.

2008 Apr 06 08:18 AM

[citivet:]

I think we will see Mr.Pandit do more spinning off than Mr. Brown suggests. He is a clear thinker...like Mr. Reed and will execute....it takes a while to turn an aircraft carrier around.

In the meantime all (us) shareholders should voice their displeasure with the current board members who were on watch while this debacle unfolded. I suggest you all vote against ANY board member who was on the board prior to 2006 (and that includes Mr. Rubin)..Comments?

2008 Apr 06 09:09 AM

[BlackSwan:]

They must get rid of Rubin and the rest of the good-for-nothing board posthaste, stop listening to Sandy and Prince Al-Waleed-bin-Tal, and break the damn thing up-pronto, or else the stock will just languish for another decade. Memo to Sandy: Actuarially do you really think you have the necessary years left to see the stock return to last year's high? What about your charitable obligations? You'd better push for a break-up as the only realistic hope of equalling last year's high in the next couple of years.

2008 Apr 06 02:16 PM

[ResourceWise:]

When the Citicorp-Travelers merger was announced on 6th April 1998, the two CEOs of the merging companies articulated their reasons for creating Citigroup.
"Citicorp and Travelers Group bring together some of the best people in the financial services business, creating a resource for customers like no other — a diversified global consumer financial services company, a premier global bank, a leading global asset management company, a preeminent global investment banking and trading firm, and a broad-based insurance capability. Our ability to serve consumers, corporations, institutions, and government agencies, domestic and foreign, will be without parallel. This is a combination whose time has come."
Today 10 years later, despite current difficulties, the core rationale still holds true. Citi is a well known brand, with a global distribution network; product expertise across virtually all financial services products; customers ranging from individuals with a ‘sub-prime’ credit profile to ‘blue-chip’ global businesses – private and government owned; and employees numbering more than 300,000 representing a global store of intellectual capital that has been a rich source of leaders for financial services businesses and central banks around the world.

A global company needs leaders with a global mindset – not the “you’re either with us or against us” attitude. The opportunity for leveraging Citi’s considerable potential will go to the leadership team that understands and acts on a framework that takes into the account at least the following:

A global enterprise cannot be managed out of an ivory tower in New York, but by a judicious delegation of authority and responsibility to the many talented people who still work with Citi in a hundred countries.

Performance is not just top line or bottom line in any one accounting period, but also the longer lasting value created for all stakeholders: shareholders, customers, employees, regulators and the communities where the businesses operate.

Rewards are aligned to ‘performance’ that is understood by the business managers not just by the financial engineers and paid with the understanding that companies are supposed to last beyond individual careers.

Decisions on resource allocation are made based on a rigorous debate of facts – with power emanating from knowledge rather than hierarchy.

Controls are based on a more intelligent management and sharing of business information by shining a light on business activity, rather than on being blinded by the ability of a few to arbitrage information.

I would say to Citi: try this approach for a couple of years, if it doesn’t strengthen the organization, break it up and sell the pieces – at a better price than you will get from a ‘fire-sale’ today!

2008 Apr 06 02:26 PM

[johnboy:]

You don't hear any of the news media pointing fingers at Robert Rubin because he is being protected by Sen. Schumer of N.Y. and Sen. Hillary because I bet the Clinton's want Rubin to be the next Fed. Chairman if Hillary gets elected. Rubin is a worthless "adviser" and should be ousted. I believe all this subprime mess is due to Greenspan and Rubin. After all they had lunch every week during the Clinton administration which makes Rubin look like he knows all about running an economy. I bet Rubin is also selling out Citigroup to the Arab's. That's my view...

2008 Apr 06 02:57 PM

[jimsep:]

All this confirms an unanswered email i sent to Tom Brown a while ago. It is highly unlikely that any large bank with the exception of perhaps Chase, has the management to control what they are doing with all the businesses they went into after the repeal of Glass-Spiegel. That also extends to the Investment Banks. If the managements don't know, then analysts clearly don't either.

A voluntary-break up of CITI is problematical. Does anyone really believe that the pieces have any better management than the whole? They are almost certainly not worth what CITI paid for them.

The first step is that the dysfunctional board of directors should be identified and the hapless shareholder should vote them out.

2008 Apr 06 07:49 PM

[JPM:]

I was part of the original Travelers……Sandy et al made an investment (we all knew Sandy was really not an investor) right after Hurricane Andrew hit FL.
Travelers was in the tank and need capital (sound familiar).
The challenge with what happened was more a factor of poor execution on the integration side than anything else. The strategy was OK, execution very poor. Yes costs were cut….Bob Lipp and Jay Fishman saw to that and appropriately so but the big cost areas of trading floor consolidation and infrastructure reduction never happened. THAT was the failure. You can acquire and not consolidate for only so long….that is what imploded the firm.
Strategy without execution is nothing more than a hallucination……they were hallucinating at Citi.

2008 Apr 06 08:31 PM

[Shanghai Ad...:]

I joined Citibank in 1983 and worked in international banking during John Reed's tenure as Chairman. The above article mis-states history. John Reed's vision cannot be questioned - he brought global banking into the modern age. ATM's, online transactions, the development of international banking settlement (SWIFT), establishment of US banks in overseas markets, the beginning of dealing with investment banks as direct competitors to commercial banks, etc. All of this was largely due to John Reed's leadership. John Reed took the help of the NYSE after Grasso for a 1 dollar salary. I would encourage everyone to read between the lines of the Citicorp Travelers merger - John was dealt with harshly by Traveler's management. The fault lies predominantly on their shoulders. Mr. Reed is an intellectual leader and my guess is that the new management post-merger led by Travelers did not have the insight to follow his advice. We should all wish Mr. Reed well.

2008 Apr 07 12:16 AM

[Shanghai Ad...:]

John Reed is an innovator, gentleman, techno-revolutionary, and genius. Please please give him a bigger role advising Citi. It will be good for Citi and good for America. They don't make them like him anymore. We need him to have a bigger role in American business. Citicorp's culture was unquestionably aggressive, successful, and innovative when the rest of Wall St. was wondering what derivatives were. Citi was moving to tear down technology barriers and build a global brand. He can fix it - I would bet my house on it. By the way, Mr. Reed if you have time, it would be an honor to talk sometime.

2008 Apr 07 12:28 AM

[James Wilson:]

After the realized the Profits they were afraidto mess with the goose laying the Golden Eggs so they played along without and longterm vision only short sighted greed.

Nov 06 04:27 PM