Ten years ago this Sunday, on 6 April 1998, Sanford I. Weill rewrote the rules of Wall Street. That day, at 7:41am, Weill unveiled the megamerger that created Citigroup Inc., the biggest financial services company the world had seen. The deal—as daring and brazen as the man himself—tore up a crucial chapter of the legal canon that had guided American banking since the Depression.
The rest is history—but not the history that Citigroup had hoped for. A decade later, Weill’s watershed deal is regarded by some as one of the worst mergers of all time.
Today, the behemoth formed by the union of Citicorp and Travelers seems to lumber from one crisis to another. Bloated costs, outmoded technology and political infighting have hobbled the giant company, which employs 374,000 people in more than 100 countries.
Even within Citigroup, many have rejected Weill’s grand vision of a globe-spanning financial supermarket, an agglomeration of investment and commercial banking, insurance and fund management that could prosper in both good times and bad. The company has even abandoned its famous Weill-era Travelers logo, the red umbrella, in favour of an emblematic red arc.
The stock market has rendered the harshest judgement of all. Citigroup’s shares closed at $24.02 (Rs960.8) on Wednesday, nearly $10 lower than they were on that hopeful April day a decade ago. Citi, once the country’s most valuable financial company, has fallen to third place, behind Bank of America NA and JPMorgan Chase and Co.
“I cannot think of one positive thing that developed as a result of the mergers of these two companies,” said Richard X. Bove, a financial services analyst at Punk Ziegel.
Vikram S. Pandit, the new chief executive of Citigroup, is struggling to steer the company through the most turbulent period in its decade-long history. Just more than 100 days into the job, he must reckon with the legacy of Weill, who retired as Citigroup’s chairman in 2006, and his immediate predecessor as chief executive, Charles O. Prince III.
Pandit, like Prince before him, is shying away from Weill’s strategy of providing one-stop shopping for financial services. Instead, he is focusing on businesses and markets that generate higher investment returns.
To help, Pandit has brought in several outsiders, as well as old confidantes from his time at Morgan Stanley, to strengthen Citigroup’s management. His decision to go outside is a crushing blow to Citigroup executives, who have long prided themselves on grooming the best and brightest in the industry. Recent hires include new heads of investment banking, alternative investments and consumer banking, as well as a new risk chief.
Earlier this week, Pandit announced the bank’s 10th major management shake-up since 2002 and its latest reorganization, moves that underscore Citigroup’s failure to integrate and invest in its operations over the past decade. Executives caution that the road ahead will be rough. For example, it may take at least five years before the company’s technology systems catch up with those of its main rivals.
Don Callahan, the chief administrative officer of Citigroup, said the company’s original model has evolved over time. “Vikram Pandit is now taking the bold steps essential to ensure proper execution across all businesses and geographies, for the benefit of our clients, employees and shareholders,” he said in a statement.
Pandit must move quickly. Citigroup is being battered by the meltdown in the credit markets. So far, the company has taken more than $20 billion in write-offs, and in recent months it has raised billions of dollars from cash-rich foreign investors.
Wall Street analysts expect Citigroup to disclose billions of dollars of new losses when it reports earnings later this month. Whatever happens at Citigroup, the aftershocks of the 1998 Citicorp-Travelers merger are still reverberating through the financial system. The deal paved the way for the repeal of the Glass-Steagall Act of 1933, the law that separated investment banks, which underwrite securities, and commercial banks, which accept deposits and make loans.
The end of Glass-Steagall ushered in an era of consolidation and integration within financial services industry, with mixed results. Mergers between Wall Street and Main Street banks helped American institutions compete with foreign rivals. But the deals also fostered some of the financial innovations that many say contributed to the subprime mortgage crisis.
The Bush administration’s plan to remodel the system regulating the financial industry has rekindled the debate over the government’s role in the markets.
In a brief interview last month after JPMorgan’s bid to buy Bear Stearns Companies Inc., the troubled investment bank, Weill said Citigroup, as a diversified company, could weather the storm better than old-fashioned Wall Street banks. Citigroup’s ability to raise capital “says a heck of a lot about the diversified model,” he said.
But even Weill seemed to back away from his once-vaunted notion of the financial supermarket. Citigroup has “got to determine what are the core assets and what are the assets that are going to get the returns they want,” Weill said.
Whatever the case, Weill’s appetite for profits, rather than an orthodox belief in the diversified banking model, always drove his deal-making. The “financial supermarket” was part of the Wall Street sales pitch. Over the years, Weill built his empire by making big acquisitions and then wringing costs. He pressed his business heads to maximize profits every quarter to fund his next deal.
But Weill, reluctant to sacrifice those earnings, failed to connect Citi’s sprawling operations. Instead, Citigroup stuck businesses together but ran them independently.
“It was like they were painting the house without making sure the plumbing was as strong as it needed to be,” said one longtime Citi follower who was not authorized to speak by his company. “After a while, that catches up.”
Under Weill, each part of Citigroup was run like a separate fiefdom, leaving the company without a single, cohesive culture. Even now, some Citigroup bankers recount the glory days of Citicorp, while old hands on its bond trading desk answer their phones “Salomon Brothers!”
Weill also struggled to retain his best managers. He and John S. Reed, the head of Citicorp, clashed from the start. Many of Weill’s lieutenants eventually left. Among those to go was James Dimon, Weill’s operational whiz and one-time heir apparent, who now runs JPMorgan.
Weill finally chose Prince, his chief lawyer, to run the company and extricate Citigroup from several regulatory messes. But with little operating experience, Prince was ill-equipped for the top job. He cut jobs and sold several business, but was eventually forced out last fall after Citigroup ran up steep losses.
The question now is whether Pandit can make a leaner Citigroup work. He recently announced plans to give more authority to four regional heads and to centralize areas like legal affairs, technology and risk management.
Guy Moszkowski, a longtime financial services analyst, said the idea behind Citigroup—that one company could do it all—was sound.
“I do actually think the premise is one that makes sense,” Moszkowski said. “The problem Citi has had is in executing it. It has been deeply flawed and much more difficult than they imagined.”
© 2008/THE NEW YORK TIMES