Commentary: Citi: Time for a Succession Plan

Citigroup (C ) Chairman and CEO Sanford I. "Sandy" Weill is scrambling to keep his reputation intact. The 69-year-old created a respected financial behemoth by buying the right companies at low prices, ruthlessly cutting costs, and delivering outsize profits.

But investigations into Wall Street's conflicted research practices by New York State Attorney General Eliot Spitzer and others have cast Weill in a new and unfavorable light. He has had to admit he asked Salomon Smith Barney analyst Jack Grubman to "take a fresh look" at AT&T (T ), a company that later gave Citi its investment banking business. Weill has also conceded that a $1 million donation--from corporate funds, not Citi's charitable foundation--to New York's 92nd Street Y was related to Grubman's request for help in gaining his twins' admission to its preschool. Grubman, meanwhile, had to explain e-mail in which that he bragged he raised his rating on AT&T stock to help Weill get AT&T CEO and Citi board member C. Michael Armstrong's vote to oust Citi's then co-CEO John Reed. Grubman said his claims were "baseless" and "silly." Weill says that he never told any analyst what to write and that any notion he did so to get Armstrong's vote is "sheer nonsense."

Unless further serious allegations are revealed as the probe winds down, few think that Spitzer can make a case against Weill or that the scandal will cost Weill his job. Still, the mess has analysts, investors, and governance experts asking if the board should put in place a clear succession plan--and announce it as Merrill Lynch & Co. did. Weill has maintained he does not want to set up a horse race. But not having a visible plan is a luxury Citi can no longer afford. Weill's retirement is within sight if the same rules apply to him as the rest of the board. Kenneth J. Bialkin, a partner at law firm Skadden, Arps, Slate, Meagher & Flom LLP, left Citi's board in September, when he turned 72, the age limit. Unless Weill, who turns 70 in March, gets an exception, he has just 28 months to go.

Citi has been working on a succession plan since April, 2000. But its conclusions are shrouded in mystery. The process hasn't been speeded up in light of recent events, says Charles O. Prince III, a Weill loyalist and head of Citi's corporate and investment bank. "You don't change horses in midstream," he says. Despite the opacity, Prince insists several insiders could step into Weill's shoes--including Michael T. Masin, ex-president of Verizon Communications, who became Citi's chief operating officer in October; longtime retail banking chief Robert B. Willumstad, promoted to president in January; and Prince himself. Also on hand: Robert Rubin, chairman of Citi's executive committee, who was co-chair of Goldman Sachs Group Inc.

Weill's critics argue that the Citi money machine is flawed and that its creator and manager is compromised, too. Citi still makes a mint--nearly $13 billion of net income in the first nine months of 2002. But controversy surrounds most of the bank's major operations except those of the old Citibank, which Weill's Travelers Group took over in 1998. Weill spun off the Travelers insurance business; Salomon Smith Barney, which he brought to the party, is the focus of investigations; and Associates Corp., a consumer-lending outfit Weill bought in 2000, has cost $220 million in fines for predatory lending violations that pre-dated the acquisition. In short, Weill's logic in building a supermarket looks faulty. Worse, the business model has proved a fertile source of potential conflicts. Citi collects fees from both sides when it underwrites bonds, equities, and loans--and then sells them to institutional investors and its 7 million retail clients. "Conflicts of interest seem to permeate the bank from top to bottom," says D. Quinn Mills, professor of business at Harvard University.

Weill tried to distance Citi from the scandals by revamping its practices. The structured-finance group--implicated in Enron's fall--no longer works with companies that conceal off-balance-sheet deals. Citi now expenses options. Grubman is gone, and Weill quit the AT&T board. Most recently, Citi separated its research arm from its investment bank and hired respected analyst-turned-CEO Sallie Krawcheck to run it.

But that still doesn't satisfy Spitzer. He told BusinessWeek that, in light of what went on between Grubman and Weill, Citi's latest move doesn't guarantee impartial research. Citi is the same company, he says. Spitzer and others are still negotiating a global settlement with banks designed to ensure that retail investors get research that isn't tainted by links to investment banking.

Regulators say they'll wrap up their investigation of Wall Street by yearend. Citi hopes the slow drip of revelations will dry up. "This is something that is about to come to an end," says Prince.

He may be whistling in the dark. Investigators say they have more evidence of conflicts--and of how poorly Citi managed them. They're still investigating Weill's role in Grubman's upgrade of AT&T. Furthermore, they say that once a settlement is reached, they will release further internal Citi e-mail.

More mud is also headed Citi's way in the next two or three years as it battles in court with investors over its dealings with bankrupt telecom WorldCom Inc. And Citi is named in dozens of suits involving Grubman's stock picks and Enron. The litigation could prove costly if Citi loses. Analysts say that in the worst case, the price tag could be as high as $10 billion--or about $1.30 per share, after taxes, more than a third of 2003's estimated earnings. Citi says the number is without foundation.

On top of that, Citigroup faces a tough climate in its ordinary business. It still has huge exposure in Latin America. Share and bond issues--a core part of Salomon's business--are not expected to pick up through at least the first half of the year. And as one of the largest banks in lending to people with poor credit, Citi could be hard hit if consumers start to default in droves. Citi says it has boosted reserves and its performance remains strong.

For now, Citigroup still has fans on Wall Street. "Despite all the horrible things that are going on, Citigroup has been able to maintain double-digit returns on equity," says Anton V. Schutz, a fund manager at Burnham Financial Services Fund. That support extends to Weill--but it's by no means inexhaustible. "I hate to throw in the towel, but maybe it's time to say `management is culpable,"' adds Schutz. Should that day come, Citi's board had best be ready with a plan.

By Heather Timmons

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