Citi, Merrill: The Discord in Similarity

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Includes: C, GS, MER, MS
by: Dear John Thain

Here’s an interesting Alphaville post that ran recently, pointing to an article in the FT. From FT’s Alphaville:

Recently installed chief executives at Merrill Lynch and Citigroup are raiding the ranks of their former employers, Goldman Sachs and Morgan Stanley, as they seek to transform the culture and management of banks shaken by the credit crisis.

The article actually has a bit of a glaring error, Vikram didn’t raid Morgan Stanley for the people they mention (John Havens, Don Callahan, and Brian Leach), but rather they came with Old Lane (except for Callahan, who came over from Credit Suisse). Other than this, there are some differences that should be highlighted:

1. At Citi, the team was brought in and given jobs for which they were ill suited. These people had all run businesses, but none had been focused on or solely in the alternative asset management business. That’s why the Old Lane acquisition has been such a disaster in the context of adding to the alternative asset management platform. One need look no further than the man that was heavily involved in the deal:

But the point, [Lewis] Kaden told Fortune this past March, was not for Citi to secure a hedge fund business but rather to capture the talent of Pandit and his team. That was like acquiring Morgan Stanley’s trading establishment, Kaden said, without paying billions to do it.

So, now what do we find? Pandit running the whole of Citi, including a massive and mediocre consumer bank, a large investment bank, an alternative asset management business, and a huge brokerage firm. John Havens, who only ever ran equities at Morgan Stanley, now also has an investment bank, fixed income division, corporate banking, and alternative asset management business under him. I’m sure it’s all the same… Also, the Citi executives have made it a point to bring in Morgan Stanley people at every possible juncture, mainly through acquiring middling (or completely new and not yet open for business) firms staffed by ex-coworkers (although never promoting these acquired people to positions with more responsibility, making it look like they are merely being made rich with Citi money). I’ve documented a fair amount of them in this post. At Merrill, however, Thain is filling positions with people that held those same positions elsewhere. Thomas Montag is running a sales and trading operation after … wait for it … running a sales and trading operation. Noel Donohoe spent eleven years running risk management at Goldman and will now be … well … running risk management at Merrill. Much more symmetry.

2. At Merrill, John Thain is flattening the organizational structure. This is a point the FT piece makes. Mr. Montag, for example, will report to Mr. Thain–This takes a major business unit and un-layers it. It shortens lines of communications and allows one of the C.E.O.’s trusted deputies direct more authority than if a middle ma were involved. At Citi, Vikram Pandit is creating a more complex structure. Now there are regional reporting lines and product reporting lines, resulting in many senior executives with two bosses. When you have the potential for a very opportunistic but very time sensitive investment, and you have two bosses, how many people do you need to get on the phone to make a decision? How many people are pulled in? How conducive is all of this extra work to getting decisions made and promoting a centralization of authority to make and enforce those decisions? As a matter of fact, it’s acknowledged that regional decisions have to travel to the central authority. From the horse’s mouth:

“It’s going to take some time because we have to be diligent,” Pandit said to a questioner in Turkey who asked when decisions can be made without New York’s stamp of approval. Translation: Don’t hold your breath.

At least they know it’s a problem.

3. Merrill’s talent and past leaders were harvested long before John Thain arrived. John Thain even brought back a popular Merrill figure, Jeffrey Kronthal, to help rebuild after Stan O’Neil churned many senior positions. Citi, on the other hand, had all but the most senior executives intact and has taken almost no one from their internal bench and promoted them during Mr. Pandit’s reign. Michael Klein was moved into a new role after threatening to resign (surprising that the C.E.O. would bend to the will of a subordinate who is known for being hard to deal with, but I’m not making the decision). When Tom Maheras and Randy Barker left, Maheras’ old job was filled (and then later demoted) and no one else was named (instead, they reorganized fixed income and equities entirely). The consumer bank, however? The top people are still there (with Ms. Dial augmenting the lineup). Indeed the only people that seems to have changed in senior management are the ones that were between Vikram and the C.E.O. spot (and his subordinates following him up the chain).

4. John Thain was hand picked for the top spot at Merrill and part of the job is being able to hire your direct reports and other key personnel. Indeed it was well documented in the financial press that there were many suitors for the C.E.O. spot at “Mother Merrill” and Thain was selected out of a field of candidates. Vikram, on the other hand, as I stated just above, fell into a power vacuum. It was even reported that most qualified contenders decided they didn’t want to be considered for the job. Clearly this is much less of a mandate to fill the ranks as one sees. There are the egos of the people that were passed over to consider as well as various internal problems that arise from such a sudden shift in power.

It seems pretty clear that once one looks deeper than the surface, there are some subtle but pervasive differences in how the two executives are choosing to fill the ranks at their new firms. These differences will make a massive difference in things like morale, talent retention, and tearing down internal silos. I guess we’ll have to see how all this plays out…