The Real Scandal at Citi

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The burning question on the Street is whether the alleged scandal was intentionally leaked to divert attention away from performance problems at Citi. The bank's fourth-quarter expenses shot up by 23%, while revenues increased just 15%. Full-year profits fell 12% from 2005. The operational successes during Prince's tenure—he took over for the legendary dealmaker Weill in October, 2003—have mostly been minor.

"Amateur Hour"

All of which has been reflected in Citi's share price. The stock soared 78% between the time Citicorp merged with Weill's Travelers Group in 1998 and the time he left, but it has gained only 14% during Prince's term. During that same period, the Standard & Poor's bank-stock index has risen 43%.

High-level sources within Citi categorically deny the notion that someone in the bank was responsible for the story's sensational details. Other observers aren't so sure. Says William B. Smith, senior portfolio manager of New York money management firm SAM Advisors and a Citi investor, who has been calling for Prince's head since last summer: "Thomson was a beautiful scapegoat. I think Citigroup leaked everything…to take the spotlight away from what is really going on. It's amateur hour over there."

Other sources inside and outside the bank attribute the Thomson ouster to Prince's desire to consolidate power. Thomson, who served as chief financial officer under Weill, once had been considered a contender for the CEO slot before Prince was named.

Says Richard Bove, an analyst at investment bank Punk, Ziegel & Co.: "He got rid of an irritant—and the last viable candidate for his job. I'm in the camp of believing that he is solidifying his position at the top and eliminating progressively each one of the people who might take over for him. There is no longer any obvious candidate to take his position." Hedge-fund manager Tom Brown, a longtime critic, says the scandal is a sideshow: "The operative word is desperate. Prince is devoid of a long-term strategy and…it will lead to his demise."

Tension at the Top

Despite the recent allegations of profligacy, Thomson cultivated an image of fiscal restraint while he was CFO from 2000 to 2004. At a conference in 2004, Thomson said Citigroup had "a real cost discipline around the place. That's something that I believe exists here perhaps like no other financial company. Roll up your sleeves, keep your costs in line, focus on it every day, every week, every month."

After being moved to the wealth-management group, however, Thomson alienated senior executives. He was at times openly defiant of Prince and sparred with him on decisions about investments and strategy, according to people who worked with both of them closely and declined to be named. Thomson is considered by current and former insiders to be "extremely smart," but also "arrogant" and "full of himself." He was combative with Krawcheck, herself viewed as a possible Prince successor. And Thomson didn't have a good rapport with Smith Barney brokers, many of whom bolted the bank.

A source familiar with Citi says Thomson was warned to curtail his contact with Bartiromo months before the Asia trip last fall. The use of corporate resources in connection with that relationship was the sole reason Thomson was asked to leave, this source maintains. Prince was happy with the performance of the wealth-management group, whose revenues were up 21% in the fourth quarter, one of the better-performing units within Citi.