Weill's Earnings Machine Stalls as Citigroup Writedowns Deepen

- Citigroup Inc., the profit engine built by Sanford ``Sandy'' Weill, has seized up.

The biggest U.S. bank by assets said yesterday that subprime mortgages and related securities lost as much as $11 billion of their value in the past month, a decline that may wipe out half of the company's profit so far this year. The New York-based company also said in a statement that Charles Prince, Weill's hand-picked successor, stepped down. Former Treasury Secretary Robert Rubin will become chairman, and Citigroup's most senior executive in Europe, Win Bischoff, will be interim CEO.

Prince never gained the confidence of investors, as Citigroup shares fell 17 percent during his four-year tenure and profit trailed those of its biggest competitors, JPMorgan Chase & Co. and Bank of America Corp. He was unable to emerge from the shadow of Weill, who tripled the stock price in five years after merging Travelers Group Inc. with Citicorp in 1998 and assembling the world's largest financial institution.

``Chuck Prince took over with all the tools,'' said Peter Sorrentino, who helps manage $13 billion at Cincinnati-based Huntington Asset Management, including Citigroup shares. ``Citigroup hasn't delivered. They didn't knock it out of the park when things were good and now they find themselves staring at the barrel of some of the more onerous losses that this whole episode will deal out.''

The company now begins a search for a permanent CEO who might redeem Weill's legacy. Rubin, 69, a former co-chairman of Goldman Sachs Group Inc., will sit on a search committee that includes lead director Alain Belda and board members Richard Parsons and Franklin Thomas. Belda is chairman of Alcoa Inc., Parsons is CEO of Time Warner Inc. and Thomas is the former chairman of the Ford Foundation.

Potential Loss

The company said credit-market upheaval in October impaired by as much as a fifth its $55 billion book of subprime mortgages and related bonds. The writedown costs, which will be recorded in the fourth quarter if markets don't recover, add to the almost $7 billion of costs for bad debt, bond and loan losses recorded in the third quarter.

The fourth-quarter charges may leave the company with a loss of 26 cents a share, Punk Ziegel & Co. analyst Dick Bove wrote in a Nov. 5 report. It would be Citigroup's first quarterly loss since at least 1998, according to data compiled by Bloomberg.

Before the announcement, the company was expected to report $5.32 billion of profit in the fourth quarter, the average estimate of six analysts surveyed by Bloomberg.

Capital Ratios

``Significant uncertainty continues to prevail in financial markets,'' Citigroup said in the statement. The company said its capital ratios ``will return within the range of targeted levels by the end of the second quarter of 2008,'' allowing it to maintain the current dividend, the company said.

Citigroup is participating in an $80 billion fund being set up by banks to draw investors back into the market for short- term debt. The fund, also backed by Bank of America and JPMorgan, was announced last month with the encouragement of Treasury Secretary and former Goldman Sachs CEO Henry Paulson.

The performance of remaining subprime investments, which totaled $55 billion as of Sept. 30, is partly dependent on ``the underlying performance of the economy,'' Chief Financial Officer Gary Crittenden said in an interview yesterday.

Analysts at CIBC World Markets and Morgan Stanley told clients last week to get rid of Citigroup shares. CIBC's Meredith Whitney said Citigroup may have to sell assets because it needs to raise $30 billion of capital. The combination of $25 billion of acquisitions in the past 19 months and the lowest cushion for losses ``in decades'' increases the risk of owning the stock, she said. Deutsche Bank AG analyst Michael Mayo said last month that Prince should be replaced.

`Behemoth'

``There's a great deal of irony here because it was Prince who helped Sandy Weill build this financial behemoth, which lost tons of money, and he's now out of a job,'' said Charles Geisst, finance professor at Manhattan College in Riverdale, New York, and author of ``100 Years of Wall Street, in an Oct. 26 interview.

Prince, 57, is the third banking chief ousted amid a credit contraction that has saddled the world's biggest lenders and securities firms with more than $40 billion of writedowns during the past four months. The worst housing slump in 16 years has led to record U.S. foreclosures and losses in the market for home loans to borrowers with poor credit histories or heavy debts.

Merrill Lynch & Co., the world's biggest brokerage, ousted Stan O'Neal last week, after the New York-based firm disclosed $8.4 billion of writedowns. UBS AG, the largest Swiss bank, fired CEO Peter Wuffli in July.

Weill's Performance

While the writedowns at Citigroup finally brought Prince down, he had been under pressure for years because Citigroup's performance under his leadership didn't match what investors came to expect from Weill, who demanded 15 percent annual profit increases during his 17 years as CEO of Citigroup, Travelers Group and their predecessors. Powered by a series of blockbuster deals, climaxing with Travelers' $36 billion acquisition of Citicorp in 1998, Weill delivered a 160 percent stock gain during his last five years as CEO.

Weill, 74, fused together an investment bank, commercial bank, insurance company, asset management firm and consumer finance-company into a firm that now has more than 300,000 employees, offices in more than 100 countries and more than $2 trillion of assets. Profit climbed to $17.9 billion in 2003, the year he left, triple the amount in 1998.

The Cleaner

Prince became one of Weill's top deputies in 1986. An attorney with a law degree from the University of Southern California, Prince spent most of his career as Weill's top lawyer, advising on the acquisitions that made Citigroup the nation's biggest financial-services company.

It was Prince who untangled Citigroup and Weill from the federal and state probes of analysts who allegedly talked up stocks to win underwriting business. As part of an April 2003 Wall Street settlement, Weill and other senior executives were barred from talking to analysts without a company lawyer present.

Prince's housecleaning continued during his first few years as CEO. He spent $4.7 billion to settle lawsuits alleging Citigroup helped defraud investors of Enron Corp. and WorldCom Inc.; Citigroup denied wrongdoing. In Japan, he bowed in apology before regulators after authorities shut Citigroup's private bank for failing to prevent customers from laundering money. In Europe, he settled investigations into suspicious bond trades his employees had dubbed ``Dr. Evil.''

The Red Umbrella

After spending three decades helping Weill build Citigroup, Prince dismantled parts of it. He sold Travelers Life & Annuity Co. to MetLife Inc. for $11.5 billion in 2005. Prince also swapped Citigroup's asset management business, which had about 80 funds and $160 billion in assets, for 1,400 stockbrokers from Baltimore-based Legg Mason Inc., who joined Citigroup's Smith Barney brokerage unit.

Prince even dispensed with Weill's trademark red umbrella. Last March, Citigroup sold the 137-year-old company emblem to St. Paul Travelers Cos. for an undisclosed sum. The St. Paul, Minnesota-based insurance company now calls itself Travelers Cos.

In his first 13 months, Prince ousted three high-ranking Weill loyalists, Thomas Jones, who ran the investment management unit; Deryck Maughan, a vice chairman of Citigroup International; and Peter Scaturro, head of Citigroup's private bank.

26,500 Job Cuts

Since then, other senior executives have exited, among them Robert Willumstad, president of Citigroup; Marjorie Magner, head of consumer banking; and Michael Carpenter, a former investment banking chief who had been exiled to the alternative investments arm after the Enron, WorldCom and Wall Street research fiascoes.

Prince also vowed this year to eliminate or reassign more than 26,500 jobs, in an effort to placate the company's largest individual shareholder, Saudi billionaire Prince Alwaleed bin Talal, who had complained of unrestrained spending.

Citigroup's quarterly profit meanwhile has sunk to its lowest level in three years and the stock has plunged 32 percent in 2007, twice as much as Bank of America and JPMorgan Chase.

``I don't think that all of a sudden, because of the credit crisis, the Citigroup model is broken,'' said Tim Ghriskey, co- founder of Solaris Asset Management in New York, which oversees $1 billion including Citigroup shares. ``This isn't a broken machine at all. It just needs some leadership that really understands the business.''