At Citi, More Heat On Chuck Prince

New questions after he fires one executive, moves another, and searches for a CFO

Citigroup Chief Executive Charles O. Prince III faced a difficult decision in late January: move now to announce his plan to replace Chief Financial Officer Sallie L. Krawcheck or wait until he had lined up a successor. For better and for worse, Prince chose to act now.

Analysts and investors had long complained that Krawcheck, 42, wasn't suited for the CFO job. Big commercial banks have struggled with profit margin squeezes lately as long-term interest rates dipped below short-term rates, making it difficult to borrow cheaply and lend for profit. But Citi has done a particularly poor job of managing those fluctuations, analysts say. "The bank's profit margin issues weren't just a function of the macroeconomic environment; management could have made better balance-sheet decisions," says Michael W. Holton, portfolio manager for the T. Rowe Price Financial Services Fund (PRISX ), which owns shares of Citigroup.

What's more, critics say, communication from the CFO office has been poor. "The CFO should connect the numbers to the fundamental and strategic story that the CEO is telling," says John E. McDonald, analyst at Banc of America Securities (BAC ). "That communication effort has been disappointing."

Prince's chance to act came this week, when allegations of lavish spending in Citi's wealth management group prompted a management shakeup. On Jan. 22, Prince ousted 45-year-old wealth management head Todd S. Thomson and replaced him with Krawcheck. Two years ago, Thomson had been CFO until he was replaced by Krawcheck, who had been running wealth management. Her move is widely perceived as a demotion. Krawcheck says she was unhappy in the CFO role during two years of "messy quarters" in which "it was difficult to deliver a clean, crisp story in the face of enormous skepticism." Adds Krawcheck: "I was brought in to help them make tough decisions and not to enhance my reputation on the outside." Prince says he's "very happy with the job that she did," and the move "without qualification was a promotion." Thomson declined to comment.

By making the announcement, however, Prince created a whole new set of concerns. He says he expects to name a replacement within 60 days, and has hired executive search firm Prince Goldsmith to review internal and external candidates. Meantime, the uncertainty is likely to weigh on staffers, investors, and analysts alike. And the latest executive shuffle leads naysayers to the unavoidable conclusion that Citi lacks a deep bench of talent. Tom Brown, a hedge fund manager with Second Curve Capital in New York and a longtime Prince skeptic, wrote on his blog that "Citi's top management is made up almost entirely of B players who simply aren't up to the job."

Prince seemed to be gaining momentum of late. Investors pushed up Citi's shares by 10% since December--the first meaningful uptick in the three years that Prince has been at the helm. But recent about-faces on strategy are once again raising doubts about his stewardship over the behemoth bank, which has $1.8 trillion in assets and a stock that continues to lag badly that of peers such as Bank of America and Goldman Sachs (GS ).

For months, Prince has vociferously defended his decisions to invest in overseas operations as well as new branches in Philadelphia and Boston, and he vowed not to bow to investor pressure to produce short-term results. But by December, he had slashed 2007 investment projections by half. Prince also made a public show of support for his managers and recently assured analysts and investors that the executive team would remain intact, and recently singled out Krawcheck by name. "The last six weeks have not been well orchestrated, and the buck stops with Prince," says David A. Hendler, an analyst with CreditSights, a bond research shop in New York.

Prince's toughest challenge, though, is a familiar one: growth. Citi generated earnings per share of 98 cents in the fourth quarter of 2005; by the fourth quarter of 2006, they clocked in at just $1.03. During that same period, competitor Bank of America's earnings jumped from 89 cents to $1.19. It doesn't take a Wall Street CFO to spot the problem there.

By Mara Der Hovanesian

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