Scott Armiger has been a patient Citigroup (C) shareholder. For five years the money manager at Christiana Bank & Trust has owned the stock, and for five years he has lost money. But despite Citi's massive writedown and looming problems from exotic mortgage-related securities, he won't dump his holdings. "If we check out now, we worry that they'll get rid of [CEO] Chuck Prince, and you'll get an instant 20% pop," says Armiger. "We are just waiting."
The swift departure of Merrill Lynch CEO Stan O'Neal following the bank's $8.4billion loss has amplified the talk that Prince's days may be numbered. It's a cloud that has hung over Prince for months as Citi's stock has continued to underperform; shares have plunged 25% since January, compared with a 9% drop for similar financials. "[O'Neal's fate] indirectly puts pressure on the Citi board," says a financial-services veteran in mergers and acquisitions. "Everybody thinks there is more bad news to come." Adds Richard D. Steinberg of Steinberg Global Asset Management, a Citi investor: "I think that the board has shown more patience than I would have expected." Prince declined interview requests, as did several independent board members.
Even before the credit meltdown, Prince struggled to kick-start growth. Citi's U.S. consumer banking unit lags its peers, while the credit-card group remains flat. At the same time, expenses are growing faster than revenues.
That situation has been a sore point for Citi's top shareholder, Prince Alwaleed bin Talal of Saudi Arabia, who owns almost 4% of the company's shares and in 2006 was a vocal critic of Prince. But Alwaleed has been quiet since Citi's move at the start of the year to slash $2.1 billion in annual costs, an initiative the company has said recently is on track.
So why has Prince kept his post while O'Neal is out? In contrast to O'Neal, Prince has made some deft moves in recent weeks that observers say bought him some time. For one, he accurately forecast on Oct. 1 that third-quarter earnings would drop 60% from the previous year. By comparison, O'Neal braced his board for a $4.5 billion loss in September—billions less than the actual damage a month later—and tried to shop the company behind directors' backs. Prince also moved swiftly to make operational changes after Citi's third-quarter losses. On Oct. 11 he named Vikram S. Pandit as the head of the newly formed Institutional Clients Group, which combines investment banking, including the problematic mortgage-backed securities business, and alternative investments. It's a move that further bolsters the prominence of Pandit, believed to be an heir apparent to Prince since joining in April as a president.
Despite Prince's quick moves, the hasty retirement of O'Neal has emboldened some critics of Prince. Says Armiger: "At some point you say, Maybe it's not the players, it's the coach.'"
By Mara Der Hovanesian and Emily Thornton