Weill's Profit Machine Breaks Down on Citi Writedowns

Nov. 5 -- 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 O. ``Chuck'' Prince III, 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 the company's 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 oversee $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.''

Search Committee

Citigroup declined $1.08 to $36.65 in early stock trading, and credit default swaps on the bank rose 8 basis points to a record 80 basis points. The contracts, which rise as perceptions of credit quality worsen, were as low as 10 basis points in June.

Analysts at Bank of America and UBS AG said Prince's departure is good news for investors, though they said the increase in writedowns means the company's risks from the credit markets exceeded their estimates.

David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, downgraded the shares to ``in line'' from ``outperform,'' and Deutsche Bank AG analyst Michael Mayo cut his price target by $3.73 to $34, maintaining his sell rating. Goldman Sachs Group Inc.'s William Tanona cut his price estimate by $3 to $48. He didn't change his neutral rating on the stock.

Citigroup's quarterly profit has sunk to the lowest in three years and the stock has plunged 32 percent in 2007, twice as much as Bank of America and JPMorgan Chase. Citigroup today reduced its reported third-quarter earnings per share by 3 cents to correct the value of $43 billion in asset-backed collateralized debt obligations, securities backed by pools of bonds.

Fitch Downgrade

The company's credit rating was cut today by Fitch Ratings because of the writedowns and Standard & Poor's said the bank's AA long-term rating may be reduced.

Prince, 57, said in yesterday's statement ``that given the size of the recent losses in our mortgage-backed securities business, the only honorable course for me to take as chief executive officer is to step down.''

The search for a permanent CEO who might redeem Weill's legacy is under way. Rubin, 69, a former co-chairman of Goldman Sachs Group Inc., will sit on a 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.

Fourth-Quarter Loss

Citigroup said credit-market upheaval impaired $8 billion to $11 billion of its $55 billion book of subprime mortgages and related bonds during October. The writedowns, 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 from the third quarter.

Of the $55 billion, about $11.7 billion was related to the ``lending and structuring business,'' and the rest was in the highest-rated securities that are the last to take losses in a default, Citigroup said.

Rubin said yesterday that Citigroup has created a new unit to manage subprime-related assets that will be separate from the capital markets and banking business.

The moves follow last month's departures of Thomas Maheras, 44, who ran trading, and Randy Barker, 48, a senior fixed-income executive. Vikram Pandit, 50, was promoted to run trading, investment banking and alternative investments.

Dividend Threat

Citigroup may report a fourth-quarter loss of 26 cents a share, Punk Ziegel & Co. analyst Dick Bove wrote in a Nov. 5 report. Bank of America analyst John McDonald, who has a ``buy'' rating on Citigroup, estimates the loss will be 30 cents a share. It would be the bank's first quarterly loss since the company was formed in 1998, data compiled by Bloomberg show.

Before the announcement, analysts estimated Citigroup would earn $5.32 billion in the fourth quarter, according to a survey by Bloomberg.

``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's dividend yield is 5.7 percent.

Citigroup's return on equity, a gauge of how effectively the company reinvests earnings, fell to 7.4 percent in the third quarter from 18.9 percent a year earlier, making it the second- lowest among Wall Street firms after Bear Stearns Cos.' 5.3 percent.

SIV Review

Citigroup is participating in an $80 billion fund being set up to draw investors back into the market for short-term debt. The fund, also backed by Bank of America of Charlotte, North Carolina, and New York-based JPMorgan, would buy assets from structured investment vehicles, known as SIVs. The proposal was announced last month with the support of Treasury Secretary and former Goldman CEO Henry Paulson.

The U.S. Securities and Exchange Commission is scrutinizing the company's accounting for SIVs that hold bank bonds, mortgage- backed securities and collateralized debt obligations. The company has said its SIV accounting complies with ``all applicable rules and regulations.''

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

`Financial Behemoth'

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's Mayo said last month that Prince should be replaced.

``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.

Citigroup reported lower third-quarter earnings from consumer banking, corporate banking, investment banking and credit cards, and the company's stock market value has fallen below that of Bank of America. Net income slumped 57 percent to $2.38 billion in the three months ended Sept. 30.

O'Neal's Departure

Prince is the third CEO to lose his job 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.

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.

Rubin, who hasn't had any day-to-day management responsibilities, was elevated to chairman eight years after Weill recruited him as an adviser. As chairman of Citigroup's executive committee, Rubin was paid almost $15.2 million last year after spending a career that included helping build New York-based Goldman into the world's biggest securities firm and arranging the financial rescue of Mexico when he worked as Treasury secretary for former President Bill Clinton.

Weill's Performance

The 66-year-old Bischoff joined Citigroup in 2000 following the acquisition of Schroders Plc's investment-banking business. Bischoff had been chairman of London-based Schroders and then became chairman of Citigroup's European business.

Prince has been under pressure for more than a year 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 about $2 trillion of assets. Profit climbed to $17.9 billion in 2003, the year Weill left, triple the amount in 1998.

Housecleaning Citigroup

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 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.

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 Alwaleed

Prince 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.

Alwaleed said last month that he supported Prince's pledge to cut costs. CNBC reported today that Alwaleed wants Weill to return as chief. Weill traveled to Riyadh on Oct. 29 to meet with the Saudi billionaire, CNBC anchor Maria Bartiromo reported, without citing anyone.

``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.''