Questions for Citigroup's Former Chief

BusinessWeek's Emily Thornton talks to Sandy Weill about his investment in a private offering at Citigroup

Since five of the world's largest banks first started going hat in hand to big investors for cash infusions last October, their stock prices have fallen by almost 13% on average, according to Thomson Financial (see table). Yet on Jan. 15, another group of investors stepped up and participated in a $12.5 billion private offering at Citigroup. The roster included some of the usual suspects, such as Citigroup's (C) major shareholder, Prince Alwaleed bin Talal, and foreign sovereign wealth funds. But several new names of investors picking up big stakes in financial-services companies also popped up, including Citigroup's architect and former chief, Sanford I. "Sandy" Weill.

Source: Thomson Financial

Senior Writer Emily Thornton spoke with Weill about his decision to invest in Citigroup. Weill wouldn't say how many more Citigroup shares he's bought. (He holds about 16.6 million shares, according to his most recent official filings made in April, 2006.) But he had plenty to say about Citigroup's new CEO, Vikram Pandit, and financial services in general. Below are excerpts from their conversation:

How did this investment come about?
Several weeks ago I spoke to Vikram [and said] that if part of Citigroup's plan turns out to be going for a second equity infusion to raise money, I would help introduce them to some people who are good relationships of mine and that I would be very interested in investing my own money. Last week they gave me a call and said they would be doing a deal and if I was interested in investing they'd love to have me. I said I'd be happy to be part of the group because I believe this company has a great future.

Why is that?
I believe in what they're doing to substantially strengthen the balance sheet. [All told] it's about $30 billion of new capital. That will give the company the ability to put their problems behind them and concentrate on building for the future. If you look at their report today, a lot of the businesses did very well, like the international consumer business, the wealth-management business, the transaction-services business. The losses were very concentrated in just a few segments of the business.

I feel good about what I did. And I feel good about Vikram's emphasis on strengthening the balance sheet. Second, I think they will focus on costs. I think he recognizes that one has to be a low-cost producer to be successful. And I think he's a team builder. He believes that teams win. By focusing on these three things, they'll be able to concentrate on growing the business in a very dynamic segment of the world economy as you see growth in the middle classes through emerging markets.

I've known Vikram for nearly 20 years. He knows what needs to be done. He knows we have to create a new team with the best management in the world. And that doesn't happen in one day. I know people are upset today that he didn't do everything the first minute. He'll get there.

So how much have you invested?
I'm not saying anything about those things. I don't have to.

Nope. You don't. But how big a shareholder do you hope to be? As big as the investors we're seeing from the Middle East?
I don't have any oil wells in my backyard.

What's your view of all of the money being accepted by banks from foreign investors?
I think it's positive. It shows what investors feel about the financial business and specifically Citigroup. If they end up having lots of dollars from products they sell to us, they should have the ability to invest those dollars. These are long-term shareholders. For Citigroup to have investors who go from New Jersey, to California, to the Middle East, to Asia is a very good thing. If you look at Prince Alwaleed, he invested in Citigroup in 1991. I met him in 1997. He's been a phenomenal shareholder and supporter of Citigroup for the last 10 years that I've known him.

As a private placement, you all got favorable terms on your investment. How should the general shareholder view Citigroup's stock price?
I'm a shareholder as well as a lot of my friends who work at Citigroup. No one should be happy with what has happened to the stock or with the cut in the dividend. Nobody likes to see their income go down. But when you look at the losses they've taken, it's only realistic to expect that they had to face that issue with the dividend. They've said they will do a public offering. The terms will be slightly different but not dramatically. So the public will have the opportunity. Over 200 million shares traded today [Jan. 15]. People have the opportunity to buy in at close to the lowest price the stock has traded in five years.

Of course, we may be headed into a recession. Is the bad news really over?
I think Citigroup had a lot of transparency in these numbers. You saw the good, the bad, and the ugly. Present shareholders should feel comfortable that this company was able to raise something near $35 billion, assuming a deal [to sell its interest in] Nikko [Cordial's Simplex Investment Advisors] closes in the next week or so. They're selling what's not strategic. If they have any more stumbles, they have other assets that are not strategic, like their Redecard [credit card] business in Brazil, which they said might be sold. They own 20% of the company.

There's talk that Citigroup should be completely broken up. Good idea?
That's pretty silly. One of the advantages of the company is that it is in 100-plus different countries and has diversity in income streams.

Do you think Citigroup got too far away from its one-time core consumer business?
I don't know what you mean by its one-time core business. Since the merger of Citi and Travelers in 1998, we've had a big corporate business and we've had a big consumer business. We've watched times when the consumer business did poorly and the corporate business did very well. Now, we're watching a time where the global consumer business has done well, whereas the U.S. consumer business has had to add to loan loss reserves. Over time, they balance out. My guess is we'll see more consolidation.

When it comes to financial services generally, would you say it's a good time to invest?
It's certainly a better time than six months ago.

So what's your theory for how this subprime mess became so severe in the first place?
If you look over the last 10 or 15 years, housing prices went up every year. But people's incomes didn't go up nearly as much as the prices of homes. So more people had to stretch to buy homes, which eventually created a problem. The only way out of some of these mortgages was prices continuing to increase.

How about accountability for all of this. Do you think some board members need to go?
I don't want to comment on that.