Why Won't Sandy Weill Fight Back?

Every time regulators criticize Citigroup, its hard-charging boss knuckles under. Is he placating probers -- or encouraging them?

By Amey Stone

Sandy Weill has turned the merging of financial-services companies into an art form over the course of a long and profitable career. Now, he's mastering a new skill, the art of appeasement, in hopes of keeping his greatest creation, Citigroup (C ), intact.

Since allegations of improper business practices at Citigroup's investment bank, Salomon Smith Barney, began to mount last summer, Weill's defensive strategy has become clear: When a complaint or criticism is lobbed at Citigroup, he quickly responds and readily agrees to change (without admitting guilt, of course). Here are some recent examples:

• New York Attorney General Eliot Spitzer doesn't like the way research analysts are so chummy with investment bankers at the firm. So, Citigroup voluntarily adopts the reforms Spitzer carved out with Merrill Lynch in May, designed to limit conflicts of interest in Wall Street research.

• When news broke in July that Congress was looking into whether Citigroup helped Enron hide debt from investors in complex structured-finance deals, Citi quickly announced that it would do such deals only for companies that agreed to record the debt on their balance sheets.

• As it became increasingly apparent that Salomon Smith Barney telecom analyst Jack Grubman was more interested in attracting investment-banking deals than providing investment advice to retail investors, he was sent packing in August (with a $30 million parachute to ease him out the door).

• Not long after Grubman's ouster, Citi's corporate and investment bank started to look like a hotbed of scandal. Out went Michael Carpenter, former head of that division. In came a lawyer, Charles Prince, an even more steadfast and loyal Weill lieutenant than was Carpenter. His biggest job will be to resolve more regulatory issues as they come up.


  Although Weill's strategy of appeasement is pragmatic, it entails risks. Probably the biggest is that Weill is essentially rewarding the regulators, perhaps giving them more incentive to keep turning over additional rocks. The end result may be even more investigations aimed in his direction.

"Prosecutors need to bring cases" and will turn to the cases where they feel they can get judgments, says Guy Lander, a securities lawyer with Davies Ward Phillips & Vineberg in New York and chair of the New York State Bar Assn.'s Business Law Section. In that sense, he says, "they're like barnacles attaching themselves to a ship."

Perhaps the most significant danger to Weill is simply that the list of concessions he has made is getting rather long. "The impression it creates is that wolves are coming at him, and he's throwing them a little bit of meat to keep them from eating him," says Peter Cohan, a management consultant and author based in Marlborough, Mass.


  What can really save Weill's legacy are an improved economic environment and stronger financial performance at the business, says Cohan. But as long as the economic recovery ebbs, and with regulators still hot on Citi's trail, Weill is likely to keep making concessions. The challenge for him now is to make sure he doesn't go too far in his efforts to make sure Citi and/or himself aren't prosecuted for breaking the law.

Now on Weill's plate: Spitzer and the Securities & Exchange Commission have teamed up to probe the way Wall Street doles out lucrative shares in hot initial public offerings as a way to win future investment-banking business. Citigroup will no doubt agree to whatever changes they come up with in the coming weeks. Citi and Weill declined to comment for this article.

Weill's efforts at appeasement don't stop at the investment bank. As a member of the Augusta National Golf Club, which is facing criticism from women's groups for exclusionary practices, Weill is said to be doing his best to prod the club out of the dark ages. On another front, in mid-September Citi settled suits with the Federal Trade Commission regarding former predatory lending practices at a division it acquired in late 2000.


  More examples? When the investment community started calling for companies to expense stock options, Citi lined up to do so in August. Corporate governance has been another recent area of change. Faced with complaints that he sat on the boards of clients like AT&T, in late September Weill agreed to step down. Citi's board also announced that it has formed an independent committee to look at corporate-governance matters at the firm.

Some observers say Weill is making the best of a bad situation. "It's in their interest to dispose of these inquiries as quickly and as favorably as possible," says Lander. After all, brokerages and banks are surprisingly fragile when faced with government prosecution.

Also, he says, "If you do fight with regulators, they often get their backs up and put more resources into the effort and find more violations." In Lander's experience, firms that settle early get much better deals than those that try to fight it out and settle late.


  Given Citigroup's size and position in the financial world, Weill has little choice but to be out front on issues affecting Corporate America, says Robert Burgoyne, an independent money manager and Citigroup shareholder. "He really needs to be in the leadership position. And as a shareholder, I want him to be setting the lead on this. It's just too bad he didn't do it before he was forced to do it."

At 69, Weill is a tough and experienced leader who, to his credit, comes across as willing to change. His legacy has been stained by the lower standards of business practice that proliferated during the boom years of the late 1990s. But now in his efforts to repair the damage, Weill needs to make sure he doesn't become too willing to be the guy the feds always turn to in their concerted efforts to convince the investing public that they've gotten tough on Wall Street misdeeds.

It's a fine line that Weill walks, and if anyone is up to the task, it's probably him. But it won't be easy.

Stone is an associate editor of BusinessWeek Online and co-author of King of Capital: Sandy Weill and the Making of Citigroup

Edited by Beth Belton

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