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Get Four
|  | SEPTEMBER 23, 2004
Can Chuck Prince Clean Up Citi? Despite the CEO's ethics push, the aggressive culture he inherited from Sandy Weill is again hurting the megabank's reputation Traders on Citigroup's (C ) London bond desk were jubilant. On the morning of Aug. 2 they had just executed a daring coup: They dumped at least $13.3 billion worth of European government bonds onto the market, then bought a third of them back at lower prices within about a half-hour -- scooping profits that rivals say could be up to $24 million. As Citi traders high-fived each other in triumph, pandemonium broke out in the market. Citi's actions weren't illegal, but they broke an unwritten understanding not to whipsaw markets or take advantage of the thin summer trading. When a rival trader called to ask what was up, the Citi crew laughed and hung up. NEGATIVE HEADLINES GALORE. No one is laughing now, least of all Charles O. "Chuck" Prince III. Since becoming Citigroup chief executive a year ago, he has been telling his 275,000 troops worldwide in a welter of visits and messages that he doesn't want any more bad publicity. In fact, he wants the world's biggest bank, with $1.3 trillion in assets, off the front pages altogether. "We [won't] say we are never going to make a mistake, but we have a keen focus on not being in the headlines," he told money managers at a June 2 conference. "We're going to be judged on whether we meet that standard or not." By Prince's own measure, he is failing. The bank is harvesting negative headlines galore and has regulators on its back on three continents. On Aug. 18, the British Financial Services Authority launched a formal investigation into the London bond coup. And Citi -- though it won't say who authorized the trades -- apologized for what had happened and promised not to repeat the behavior. "This is exactly what Chuck Prince said wasn't going to happen," says Howard K. Mason, senior financial analyst with Sanford C. Bernstein & Co. BANNED IN JAPAN. Within weeks, Citi was back in the news. On Sept. 17, Japanese authorities ordered it to shut down its local private bank by next September. Regulators said an investigation, begun in August, 2001, had revealed extensive legal violations over seven years, including lax governance and money laundering controls and "numerous instances of unfair transactions...in which large profits were obtained through unsound means." Citi issued an apology, "with deep regret for its failure to comply with regulatory requirements," fired six bankers, slashed the salaries of eight other employees, and promised to improve its internal controls for all of Citi's operations in the country. Before the week was up, Japan's Finance Ministry banned Citi from participating in its government bond auctions. Now BusinessWeek has learned that top Citi officials are among those the Securities & Exchange Commission and the National Association of Securities Dealers are investigating for failing to supervise analysts and investment bankers during the tech-stock boom -- and thus prevent conflicts of interest that harmed investors. The investigation follows the April, 2003, $1.4 billion global settlement between federal and state securities regulators and 10 Wall Street firms. Administrative charges could be brought within weeks, a source close to the matter says, but most likely before yearend. Citi declined to comment. Prince declined to be interviewed. "CLAWS AND FANGS." Rules and regulations are one thing. Getting people to follow them is quite another. And as CEO, Prince seems unable to drive a sense of universal integrity very deep into the bank. Some critics wonder whether this is even possible. "Every time you turn around, there's some other embarrassing thing that has happened," says Kathleen Shanley, senior credit analyst at Gimme Credit Finance in Chicago. "It raises a question of whether Citi is reaching the limits of its growth." Adds Bernstein's Mason: "Citi has become so large that it is simply not possible to mandate behavior. The challenge now is to create a culture, to inculcate a shared set of values that guide employee behavior." On occasion Prince sends mixed signals. He regularly jawbones staff about the need for higher ethical standards, but at other times he also seems to underestimate the full extent of Citi's problems. For example, in a Sept. 20 message to employees, he said no matter how tight the bank's controls and how clearly the behavior in London and Tokyo deviates from its standards, "there will always be a small minority of people who will cross the line." Prince's critics argue that the problems run deep and spring from the way Citi does business. "It's one of the most aggressive corporate cultures in banking, no doubt about it," says one Wall Street analyst. "These people grow up with claws and fangs." In a Sept. 20 report in which he downgraded the bank's shares to neutral from a buy, Merrill Lynch (MER ) bank analyst Guy Moszkowski charged that Citi's "aggressive profit incentives [are] overriding judgment."
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