The Real Scandal at Citi


Is it using a high-level ouster and tabloid-style rumors to obscure the disarray and dismal returns of Chuck Prince's reign?

Did a fireplace, a fishtank, and a friendship with a business journalist really end Todd S. Thomson's tenure as head of global wealth management at Citigroup (C)? Or did other factors, just out of view, drive the ouster?

The question looms large as Citi struggles under the weight of poor financial performance and a disappointing stock price, and as CEO Charles O. Prince comes under increasing pressure to turn things around. Partly because of Citi's woes, many on Wall Street aren't taking the often-salacious press reports at face value. BusinessWeek has found that, indeed, some of the details don't stand up to scrutiny. And people familiar with the matter say that some Citi insiders bear responsibility for spreading inaccuracies.

To recap: On Jan. 22, Citigroup announced that Thomson, 45, and a onetime rival of Chief Executive Prince, was out. Chief Financial Officer Sallie L. Krawcheck, 42, would step in once a replacement CFO was found.

Nondescript Tank

Over the next several days, press reports citing unnamed sources offered details of Thomson's allegedly lavish spending. In particular, they described a luxurious office insiders called the "Todd Mahal," and as examples of his extravagance, they said he had installed a fish tank and a wood-burning fireplace. They also referred to a relationship between Thomson and CNBC anchor and BusinessWeek columnist Maria Bartiromo that seemed to go beyond the merely professional, citing a trip the two took from China to the U.S. aboard a company jet.

But how much of it was true? Some of the descriptions of Thomson's spending were provided anonymously by people in the upper ranks of Citi's management. Yet other sources close to Thomson have confirmed that while Thomson's office had a fireplace, there were several other fireplaces within Citi—including one in the conference room next to the office of Robert Druskin, the bank's chief operating officer and cost-cutting czar.

Moreover, Thomson's, like the others, was gas-burning (not wood-burning), and the connections for it were in place when Thomson moved in. The fish tank was nondescript and held goldfish—eight red and one black, a symbol of prosperity in Asian cultures and a cheap way to impress clients.

"Smear Campaign"

In general, say some Citi sources, the accusations seemed amped up. Other employees used Thomson's office to schmooze clients and even to host a recent book party for former Citi CEO Sanford I. Weill. "When you are in the high-net-worth business, you have to have people who relate to people worth $1 billion," says Peter E. "Tony" Guernsey Jr., president of Wilmington Trust FSB, a New York bank.

Thomson, who is negotiating a severance package, hasn't spoken publicly about the matter. He told BusinessWeek that he has "no comment on the smear campaign I've been reading in the media" and is proud of his accomplishments at Citi. "I think my record speaks for itself, and for now, I'm going to let it go at that." Citigroup declined to comment on the record, citing its press policy on personnel matters. Bartiromo has never spoken publicly about the issue. But sources say she has privately told friends and colleagues that everything she has done was completely proper and CNBC business.

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.

And the source says the cost to remodel Thomson's office was modest compared with what some other Citi executives have spent. Thomson's defiance of Prince's edict was the final breach, the executive maintains. Citi director Anne Mulcahy, the CEO of Xerox, says: "Chuck made the appropriate call."

Slicing the Budget

Whatever the cause of the firings—and the source of the leaks—the PR fiasco has hurt Prince's image among some shareholders, analysts, and employees.

In some ways, Prince, 57, has been his own worst enemy. He has promised since 2004 that revenue growth would exceed expense growth, but it hasn't happened. By contrast, from 1999 to 2004, the company boosted revenues by $22 billion, while expenses increased by $8 billion. Last year, earnings fell by 8.7%, well off the double-digit growth during the Weill era.

In December, Prince cut his promised $1 billion investment budget in half. He says credit worries are one reason to hang on to the purse strings a little tighter now. "A responsible manager spends the money when you have it and pulls in a little bit when you don't have it," he told BusinessWeek in January. "That's the right way to run the railroad."

But Prince's about-faces make it difficult for analysts and investors to know which way the trains are moving. "The problem is that the company has not kept its promises," says analyst Joseph Dickerson of Atlantic Equities in London.

The Clock Is Ticking

Prince has made some progress. In the last year, he has built 1,165 retail bank branches globally, one of the biggest expansions in the history of banking. That will allow Citi to draw more funds from deposits and rely less on the markets, lowering its cost of capital. He has reduced the number of data centers from 52 to 42, allowing for savings of up to $2 billion by 2009. And by the end of the first quarter, COO Druskin will present a plan for a major overhaul to wring still more savings out of Citi's bureaucracy.

But the clock is ticking. Given the poor track record and growing disarray, some Wall Street veterans think Prince himself will be out by the end of the year if conditions don't improve significantly. Others give him until his five-year anniversary in October, 2008. "Something's got to give," says a Wall Street veteran. "The status quo is untenable."

Such negative sentiment is not universal. If it were, Prince would be gone by now. "I'm very nervous about talking about the end of Chuck Prince," says Howard K. Mason, senior analyst at Sanford C. Bernstein & Co., a blue-chip research firm in New York. "I don't think the groundswell of resentment and disappointment is enough to shift the board."

Searching for a CFO

Indeed, Prince appears to have the support of the board, at least for now. "There have been a lot more judgments placed on superficial impressions than on the facts," says Mulcahy. But she also acknowledges "a level of impatience" among investors. Former board member and current Traveler's CEO Jay Fishman says: "To the extent [Prince] can get the organic engine growing, the opportunities are enormous."

With doubts about Prince's stewardship swirling, his choice of a CFO is critical. Citi's third financial chief in three years will have to bring stability to the operation immediately. "Hiring a visible, high-quality CFO who actually has some power to reevaluate if all these pieces belong together" would help, says Marc D. Stern, chief investment officer of Bessemer Trust, which has $46 billion under management.

Says director Mulcahy: "It's a moment of truth for bringing in additional talent." The names in circulation include Alvaro G. de Molina, the former CFO and head of the investment bank at Bank of America Corp. (BAC), and Goldman Sachs Group (GS) partner and Chief Financial Officer David A. Viniar. De Molina didn't return calls seeking comment; Viniar declined to comment.

Lingering Ugliness

Ultimately, Prince will be judged on his ability to create value for shareholders. Thus far he has been unsuccessful. Since January, 2004, Citi's shares have gained just 10%, much less than rival Bank of America's 32% and JPMorgan Chase & Co.'s (JPM) 37%. The comparisons with investment banking giants like Goldman and Morgan Stanley (MS) are less kind: Goldman is up 115%, Morgan Stanley, 40%.

At some point soon the Thomson scandal will die down. The bank will appoint a new CFO. But the current ugliness won't be forgotten.


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