Sandy Weill's Humiliation

Sandy Weill has been a star performer on the stage of American finance for decades. He has acted with many of the major players of the day--Arthur Levitt, James Robinson, John Reed, and Robert Rubin. He has built empires, merging companies into financial behemoths. Today, he stands astride Citigroup (C ), the ultimate universal bank, combining insurance and investment, commercial and corporate banking, in one synergistic stew. Weill's bank is enormously profitable--perhaps the most profitable company in the world. But Citigroup is built on conflicts of interest that have not been properly managed. Investors are suing, and Congress, the Securities & Exchange Commission, and New York State Attorney General Eliot Spitzer are investigating.

To his credit, Weill is responding by putting Citigroup in the forefront of Wall Street financial reform. Weill was one of the first CEOs to come out for expensing stock options. He replaced the head of Citigroup's scandal-ridden investment banking unit with his own general counsel. Most important, he moved to end the conflict of interest involving analysts being paid for generating investment banking business by hiving off global research and retail brokerage into a separate operation. Weill then hired Sallie L. Krawcheck, the former chief executive of Sanford C. Bernstein & Co., a leading independent stock research company, to head it. Krawcheck will report directly to Weill. Of all the proposals for financial reform circulating on Wall Street, Weill's idea makes the most sense.

But Weill may have lost the moral authority to make it happen. As CEO, he is expected to manage the conflicts of interest inherent in a universal bank, but his personal conflicts of interest, revealed by leaked memos, e-mails, and his own public admissions, severely undermine his position. It was unseemly at best for Weill as CEO to ask Jack Grubman, Citigroup's key telecom analyst, to review AT&T's (T ) rating while Citigroup was vying for a big AT&T offering and Weill was sitting on its board of directors. It was unseemly, at best, to personally help Grubman's children get into a private pre-school by calling the school's board and donating $1 million of Citigroup money as a contribution. In the end, Grubman did raise his rating on AT&T, Citigroup did get the business, and Grubman's children did get into the desirable school.

Quid pro quo? It's hard to believe otherwise. The doubt has undermined Spitzer's confidence that Weill will properly manage the conflicts inherent in his relationship with Krawcheck. Spitzer says that as a result, Weill's model for reform is not sufficient. This is a great pity and a huge knock for Citigroup. In effect, Weill's own behavior now stands in the way of implementing his own reforms. For all his star performance, it may very well be time for Weill and the board of directors to start seriously thinking about him taking his final bows.

    Before it's here, it's on the Bloomberg Terminal.