Citi's Leadership Challenge

Chairman Rubin has his work cut out for him as he sets out to find a permanent CEO up to the task of leading Citi back to prosperity

by Steve Rosenbush

Who should lead Citigroup? It's a tough question.

Even Robert Rubin, the newly appointed Citigroup (C) chairman and former Treasury Secretary, stumbled a bit during a conference call with analysts on Nov. 5 when asked what qualities the company's next chief executive should possess. "It's a bit intangible," said Rubin, who is leading the search for a permanent successor to CEO Charles Prince III. "It has to be somebody who can drive the vision, drive the execution."

Rubin, a former co-chairman of Goldman Sachs (GS), said Citi's next CEO must be able to lead a large organization effectively and relate to the globalization of the institution. "That takes a very special kind of leadership," Rubin said.

The Short List

One frequently mentioned candidate (BusinessWeek.com, 11/2/07) is John Thain, the chief executive of NYSE Euronext (NYX) and a former president of Goldman Sachs. Another possibility is Gary Crittenden, Citi's chief financial officer. He has the respect of many investors, including Charles Smith, lead manager at the Fort Pitt Capital Total Return Fund, who believes Crittenden would be "a stabilizing force." Win Bischoff is now interim CEO after succeeding Prince at an emergency board meeting on Nov. 4 (BusinessWeek.com, 11/5/07). But the 66-year-old head of Citi Europe is not considered a likely candidate for the permanent job.

There have even been calls for the return of Sanford Weill, the company's controversial former CEO and chairman. On Nov. 5, the largest individual investor in the company, Saudi Prince Alwaleed bin Talal, told CNBC (GE) Weill would be a good temporary choice to establish stability. And he's not the only one. "They should issue a recall on Sandy Weill" as chairman, says Mario Gabelli, the activist mutual fund manager of Gabelli Funds. "Challenges like this require someone with gray hair."

A Matter of Accounting

Any candidate would have to think long and hard about taking on the task of cleaning up Citi (BusinessWeek.com, 11/1/07). On Monday, Rubin and other top executives told investors about yet another recalculation of its third-quarter losses and a staggering charge for the upcoming quarter. The company said it will take writedowns of $8 billion to $11 billion in the fourth quarter, after the $6.5 billion in writedowns it took in the third quarter. Citi also said it is lowering its previously stated third-quarter profit of $2.38 billion by $166 million, to $2.21 billion. The change reflected a more up-to-date view of the declining value of fixed-income assets.

But the uncertainty may be more unsettling than the specific figures. Rubin and Crittenden presided over a call with analysts that made it clearer than ever that Citi doesn't know when or where the problems will end. Because the credit markets are illiquid, with some securities not trading at all, it's impossible to know the full extent of Citi's losses or whether more writedowns are on the way. Rubin and Crittenden made that point crystal clear: "There's no way, I think, anyone can give you assurance of how things are going to move," said Crittenden. "We've taken what I think is a reasonable stab."

So far, the losses are a matter of accounting. The company's troubled investment pools, with subprime debt exposure, have lost market value, forcing the writedowns. They are still generating cash, although the company warned cash losses are possible. That could happen if defaults in the residential mortgage market or other troubled areas rise from current levels. The company also warned that it faces an unnamed risk from certain "secondary and tertiary" exposures in the credit markets. The current losses are related to "direct exposures" only. The company declined to say how large the secondary and tertiary exposures could be.