Citigroup Turns to Robert Rubin
Former Treasury Secretary Robert Rubin will attempt to steady the ship at Citigroup (C) while it seeks a replacement for Charles Prince III, who was ousted as CEO after the nation's largest bank disclosed that its losses in the credit markets may reach $17 billion—nearly three times more than the company estimated just weeks ago.
Prince stepped down at an emergency board meeting on Nov. 4, joining Merrill Lynch CEO Stanley O'Neal as the second top Wall Street executive in a week to lose his job amid stunning losses in the subprime lending debacle.
Rubin, a Citi board member and former co-chairman of Goldman Sachs (GS), will succeed Prince as chairman. The board named Win Bischoff, the head of Citi Europe and former chief of the investment bank Schroeders, as interim CEO. Speculation in recent days about Prince's possible successors has included NYSE Euronext (NYX) CEO John Thain, a former president of Goldman Sachs (BusinessWeek.com, 11/2/07). On Nov. 5, Citi's largest individual shareholder, Saudi Prince Alwaleed bin Talal, said on CNBC (GE) that he favors bringing back Sanford Weill, the firm's longtime chairman and CEO, to lead Citi on a temporary basis.
He's not the only one raising the possibility. Last week, as speculation of Prince's resignation flared, Mario Gabelli, the activist mutual fund manager, voiced a similar opinion. "They should issue a recall on Sandy Weill [as chairman]," he said. "Challenges like this require someone with gray hair."
The Subprime Losses Mount
Prince was undone by the mounting losses on securities backed by risky mortgages (BusinessWeek.com, 11/1/07) and loans to borrowers with poor credit histories or little collateral. Citi disclosed in mid-October that it suffered a $6.5 billion loss on the value of those subprime-related securities during the third quarter (BusinessWeek.com, 10/15/07).
The company now estimates its subprime portfolio has suffered an additional $8 billion to $11 billion in losses that will need to be recorded in the fourth quarter. The writedowns involve "direct exposures" to subprime debt valued at $55 billion on Sept. 30. The value of those securities has fallen because of rising foreclosure rates, declining market prices, and downgrades by ratings agencies. On an after-tax basis, the falling value of the securities will reduce Citi's fourth-quarter net income by $5 billion to $7 billion.
The question is whether Rubin can lead the company through a credit crisis that's by no means over and may get worse before it gets better. Some experts believe the mess could bring down a major bank or create systemic problems for the financial markets. It already has caused huge losses at Merrill Lynch (MER), which forced out former CEO O'Neal on Oct. 30 (BusinessWeek.com, 11/3/07).
Unclear Future for Rubin
Some would argue Rubin himself is at least partly responsible for Citi's dire straits. As chairman of Citi's executive committee, he was in a position to advise the company on strategy and execution. He was paid $17 million last year, but had no operating responsibility, according to financial adviser and former Federal Reserve economist Ed Yardeni, of Yardeni Research. It's also not clear whether Rubin will remain with Citi very long or even stay in the private sector. There's speculation he could join Senator Hillary Clinton's (D-N.Y.) Presidential campaign or serve in her administration if she wins the 2008 Presidential election.
Rubin's statements gave no indication the company was planning a strategic shift. "The Board and I have tremendous respect for Chuck's leadership and his accomplishments over the years in helping to develop the Company's culture and direction and honing its formidable competitive advantages. I intend to work closely with the Board, Win, and the operating and executive leadership to maintain the momentum of our business," Rubin said in a prepared statement.
Rubin, 69, said the company is establishing a new unit that will focus solely on managing assets related to subprime mortgage securities and their "resultant exposures." He said the unit will be separate from other parts of the capital markets and banking businesses.
Citi's Fallen Prince
While Prince accepted responsibility for the fiasco, he tried to paint a positive outlook for the bank. "We have made strong progress in our strategy for building for the future, evidenced in the momentum we have achieved in most of our businesses," he said in a statement. "Nevertheless, it is my judgment that given the size of the recent losses in our mortgage-backed securities business, the only honorable course for me to take as Chief Executive Officer is to step down."
Investors said Prince's departure was fitting. "It's…what one would have expected," says Adam Compton, an analyst with RCM Capital, which owned 800,000 shares of Citi as of June.
Even before the subprime crisis began to snowball a few months ago, Prince had faced calls for his resignation from investors unhappy with the decline in the price of Citi's shares. But Prince had shown himself able to confront those attacks with assurance until just a few weeks ago. In October, he said during a conference call that, by any fair assessment, Citi's strategy of being a global financial supermarket was working. And he told the Financial Times in July that the company would continue to make loans to leveraged buyout firms. "As long as the music is playing, you've got to get up and dance…. We're still dancing," he told the FT.
The tone of Prince's recent statements were in sharp contrast to the gravity of problem unfolding in the credit markets and within the company. Prince, 57, a lawyer and confidant of former Citigroup CEO Sandy Weill, never convinced investors he had the right skills for the job.
The First Step on the Road to Recovery
Rubin will focus on finding a new, permanent CEO. He will lead a search committee that includes directors Time Warner (TWX) CEO Richard Parsons, Alcoa (AA) CEO Alain Belda, and Franklin Thomas, a former CEO of the Ford Foundation and the TFF Study Group, a nonprofit organization focusing on South Africa.
The drama at Citi isn't over. The bank's stock is now down more than 40% from its 52-week high in early January. And the ratings downgrades on mortgage-related assets held by Citi, JPMorgan Chase (JPM), Bank of America (BAC), and other major banks could complicate their joint effort to establish an $80 billion fund to stabilize the market for structured investment vehicles. These SIVs have been shut out of the commercial paper market, leading to several SIV defaults. The fund, an initiative the U.S. Treasury has endorsed, is geared toward higher-rated assets, and if the rating on Citi's assets falls too far, it could have trouble selling them to the fund.
If anything, Prince's forced retirement is a belated sign the company is mired in a financial crisis that could take years to clean up and the scope of which isn't yet fully understood.