Where Does The Buck Stop At Citi?

Sandy Weill fired his heir apparent. And that's only part of the management disarray

It was in late October that long-simmering tensions came to a boil--on the dance floor. Some 150 executives of Citigroup were attending a corporate retreat at the Greenbrier resort in White Sulphur Springs, West Virginia--the first time they had all come together since the Oct. 8 merger of Citicorp and Travelers Group. It wasn't any secret to the assembled that relations between James Dimon and Deryck C. Maughan, co-chief executives of Salomon Smith Barney, Citigroup's investment bank, were rocky.

To help heal the rift, one of Dimon's top lieutenants asked Maughan's wife, Va, to dance, says one witness and other sources. Maughan, however, did not return the gesture. Dimon's lieutenant, who thought that Maughan had insulted his wife by not inviting her to dance, confronted him. After the two men began arguing, Va Maughan and Dimon got involved, exacerbating the argument. A Citi spokesman disputes the incident, and Dimon and Maughan won't comment.

Whatever the exact details, tensions between various factions have been wracking Citigroup for months. Just days after the retreat, the bickering exploded into public view. John S. Reed, 59, and Sanford I. Weill, 65, the co-CEOs of Citigroup, asked for Dimon's resignation on Nov. 1. Sources in the Dimon camp say Weill decided to fire him, while Weill loyalists insist that it was Reed who made the call.

SHOCK. In the ensuing shake-up, Maughan was kicked upstairs: He's now a vice-chairman. No one was named to fill Dimon's place as president. And a surprising team was installed to run Salomon Smith Barney and Citicorp's corporate businesses: Michael A. Carpenter, a Travelers executive best remembered for being blindsided by a $350 million trading scandal when he ran Kidder, Peabody & Co., and Victor J. Menezes, a careful Citicorp veteran who is known as a survivor of Citibank's fierce political warfare.

The rapid-fire moves left everyone from Citigroup shareholders to Salomon Smith Barney employees in a state of shock. The latter were especially perturbed by the decision to replace Dimon and Maughan with Carpenter. In fact, Citigroup's shares have lost $9 billion in value since the announcement (chart, page 181). Says Sanford C. Bernstein analyst Sallie Krawcheck, "Investors are asking two questions: What should I do with my Citigroup shares and where is Jamie going next so that I can buy the stock?"

Beyond the executive shuffle, the events help reveal that the so-called "deal of the century" is in trouble--plagued by turf battles, culture clashes, unsettled decisions on strategies, and general malaise. It looks as though Weill is testing the limits of his highly successful and personal management style. The question is whether that style is appropriate for running a global financial-services behemoth.

Despite Dimon's popularity with employees and investors, Weill believes he wasn't being effective. He says efforts to combine the corporate businesses of Citicorp and Travelers, for which Dimon was responsible, had stalled. "It wasn't coming together," Weill told BUSINESS WEEK. "We weren't where we wanted to be."

According to the Dimon camp, there was another side to the story. Weill simply didn't want his protege around any more. Something had gone terribly wrong in a close, personal relationship that had flourished for the better part of 16 years--and that Weill once described as filled with "a lot of love."

But there were serious tensions. Last year, for instance, Dimon eased out Weill's daughter, Jessica Bibliowicz, who ran Smith Barney's mutual-fund business. That, apparently, was an important factor in Dimon's undoing. "It is such a colossal error in judgment to have a dispute with anyone's kid, especially Sandy's kid," says someone close to the Weill family.

Weill, who spoke from his new Citigroup Manhattan office, which is dominated by a photo of his boyhood home in the Bensonhurst section of Brooklyn, is confronting what may be the toughest challenge of his professional life. The Citigroup deal, Weill's brainchild, was supposed to herald a new era in global finance by melding together a U.S. brokerage and insurance giant with an international banking powerhouse. Instead, Citigroup looks like a corporate soap opera that may be three to five years away from fulfilling its promise. "Sandy, for the first time, perhaps ever, appears to be at sea," says one longtime Weill watcher.

Weill has made himself and his investors enormously wealthy by managing a sprawling U.S. conglomerate as if it were a small family business. Like an old-fashioned Wall Street partnership, he meets regularly and socializes with his team of top lieutenants. "He's always run it like his own mom-and-pop candy store," says one ex-insider.

"RUBE GOLDBERG." Several management consultants, a breed Weill has always shunned, say it may be hard to run Citigroup in such a personal way. Adds Peter C. Davis, a consultant at Booz, Allen & Hamilton Inc.: "You have an existing organization which is by definition a Rube Goldberg contraption at this stage. You've got to detangle the organization to sort out what services get delivered to what client when."

In the past, shareholders have turned a blind eye to Weill's belief in nepotism (his son is chief investment officer at Citigroup) and his practice of hiring industry outcasts. Why? Simply because everything he has touched has turned to gold. But Weill may have a harder time sticking to his management style because of his partnership with Reed.

To the Street, Carpenter is inexperienced and ill-equipped to run such a huge operation. He has "a little bit of an iffy sort of background," says James K. Schmidt, portfolio manager of the John Hancock Financial Industries Fund. But Weill is convinced that Carpenter is a talented executive who can fill both Dimon's and Maughan's shoes. Weill also says that he and Reed will play a much more active role in running Citigroup day-to-day.

Carpenter will now oversee all of Salomon Smith Barney, as well as Citigroup's private bank that serves wealthy customers around the world. In addition, five major business lines, some of which used to be at Citibank, report to Carpenter: equities, fixed-income, foreign exchange, derivatives, and structured finance. "When I joined Travelers Group this was not something I had in mind," says an elated Carpenter. "It wasn't something I had in mind a week ago."

To many, though, the real winner is Reed. With Dimon in place, the conventional wisdom was that Reed would leave in a few years and Dimon would run the show. Now, however, insiders believe that Reed, six years younger than Weill, will run Citigroup next.

The irony of the shake-up is that it might indicate Weill and Reed can work together. "This was a decision we made together, that was very hard," says Weill. A fund manager who owns shares in Citigroup says the shake-up shows that Weill is sending a message that he is "going to be just as harsh with the people who work for him as the people who work for John."

But some wonder whether Reed will trump Weill. Says one management consultant who knows both men: "If it came down to one of them, I'd bet on Reed. He is the cleverest, canniest streetfighter in the known world."

For now, the turmoil at Citigroup is far from over. Employees at Salomon Smith Barney were stunned by the changes, since many considered Dimon their leader. Some senior Dimon loyalists may follow him out the door, Weill says. "This is an organization of dukes and earls. If your liege goes, unless you can quickly find a line of authority and loyalty to someone else, you're gone too," says one insider.

Nor will all the departures at Citigroup be voluntary. "There will be layoffs, but don't look for any cataclysmic kind of thing," says Menezes. Maughan adds that the eventual number of people to be let go will probably be most dependent on the economic environment.

DEAL-WEARY. Dimon has his detractors. Salomon Smith Barney suffered huge trading losses in the third quarter. "I'm not a subscriber to the `colossal loss' theory," says one Salomon Smith Barney insider, noting that Dimon lacked international experience, as well as a conceptual strategy for the big thorny issues such as globalization and technology. A consultant adds: "He has lots and lots of years to learn before he'll be ready," to run a large company. "I'd say it would take eight years."

The broader question is whether Weill and Reed can succeed in fashioning two very different cultures and businesses into one cohesive organization. It's possible that Weill may have bitten off more than he can chew. In less than a year, he has spent $9 billion acquiring Salomon Inc., announced a $70 billion merger with Citicorp, and spent $1.6 billion to buy 25% of Japan's Nikko Securities Co. The result: Deal-weary Travelers managers have been completing several mergers simultaneously,all when world financial markets are tanking. "The real issue is the rate of speed at which this stuff was put together," says Carole S. Berger, a partner at Berger Jackson CapItal Management. "For Travelers to buy Salomon and then do the merger with Citicorp within the same year is a very tough thing."

In the meantime, the buck doesn't stop anywhere in particular at the biggest financial company known to man. It's not at all clear who's running the show. "It's still a Noah's Ark structure--they brought along two of everyone," says Michael L. Mayo, bank analyst at Credit Suisse First Boston. "You still have co-heads of consumer banking, co-heads of corporate banking, co-heads over the entire company. It doesn't make sense to have that many chiefs."

Dimon's departure disappointed investors looking for signs that Citigroup management was taking a cohesive shape. Schmidt, a portfolio manager who owns Citigroup shares, says he was hoping Weill's team would take clear control because of Travelers' reputation for aggressive cost-cutting. But he says he would settle for any clear chain of command and is disappointed one has yet to emerge. "We are at a stage we should have been six months ago," he says.

It was hardly surprising that the problems should develop on the investment-banking side. In conception, the retail operations of Travelers and Citicorp fit together better. The premise in consumer banking is that Citigroup can offer more products to existing customers. It could be as simple as mailing Citicorp credit cards to Travelers policyholders. However, Weill said, "When it came to the corporate side, we were talking more about who was going to be in what position rather than how do we get this thing together."

In firing Dimon, Citigroup officials maintained they were speeding up the integration of corporate-banking operations. But that's going to be tricky. There will be different brand names for corporate-banking products--including Citi and Salomon Smith Barney. Salomon Smith Barney will remain a separate entity. And, in Citigroup's Noah's Ark fashion, Carpenter and Menezes will have different areas of responsibility. "We are operating as co-chief executives, each one of which has primary areas of responsibility," says Menezes.

Ultimately, cost-cutting may be the name of the game. Investment analysts are pinning their near-term hopes on Weill's old-fashioned reputation for prudence. Raphael Soifer, banking analyst at Brown Brothers Harriman, expects Citigroup will trim enough expenses to increase earnings by $1 billion in two years. "You will have a company that spends more than $40 billion a year, and if Sandy Weill can't take a billion aftertax out of that, he's not Sandy Weill," says Soifer. Indeed, for all the big ideas that went into forming Citigroup, the success of the deal could hinge simply on making the whole operation smaller.

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