Citigroup Hires McKinsey’s Chubak to Help Corbat Pare Costs

Citigroup Inc., the bank that’s cutting 11,000 workers and shutting branches, hired David Chubak from McKinsey & Co. to help oversee cost-cutting.

Chubak, 32, will be head of productivity and report to Chief Executive Officer Michael Corbat, according to an internal memo obtained by Bloomberg News. He previously was a partner in the global bank and securities practice at McKinsey, a New York-based consulting firm, according to the memo, which was signed by Corbat. Mark Costiglio, a Citigroup spokesman, confirmed the memo’s contents.

Corbat, 52, who took over as CEO in October after the ouster of Vikram Pandit, has pledged to make Citigroup more efficient. Last month, he said the New York-based lender may exit or pull back from businesses in countries where results are “unsustainable,” which could mean more branch closings and dismissals beyond those already announced by the third-biggest U.S. bank.

“David will work closely with senior management and their teams to redesign processes, eliminate redundancies and drive efficiencies,” Corbat said in the memo. “He will also help to set challenging productivity goals for all of our products, geographies and functions.”

Management Change

Corbat already has moved to change how Citigroup manages expenses. In January, he reduced the duties of then-Chief Administrative Officer Don Callahan, shifting his responsibility for “expense management” and the operations and technology for some of the bank’s biggest businesses to other executives. Mark Rufeh, head of expense management and re-engineering who reported to Callahan, left the company.

At McKinsey, Chubak was part of teams that worked on projects for Citigroup, according to one person familiar with the matter. Costiglio and Yolande Daeninck, a McKinsey spokeswoman, declined to provide further details about Chubak’s time at the consulting firm.

Chubak has contributed to McKinsey reports since 2010 on challenges for credit-card lenders, how payment networks can cut their technology costs and how banks can improve branches.

In June 2007, Chubak co-wrote a report for McKinsey entitled “Surviving -- and prevailing -- in the U.S. subprime-mortgage market,” which addressed the “dramatic shakeout” in the market that provided home loans to borrowers with riskier credit histories.

Subprime Recommendation

Chubak and two other McKinsey consultants proposed that even amid a steep slump, the market for the mortgages was “unlikely to disappear.” The report cited as evidence comments by Angelo Mozilo, CEO of Countrywide Financial Corp., about how most subprime borrowers were still current on their repayments while Fannie Mae and Freddie Mac, the government-sponsored enterprises, planned to increase their investments in the mortgages by tens of billions of dollars.

“Despite recent dramatic downturns and the threat of increased regulation, subprime-mortgage opportunities still abound for players that are willing to wait for an upturn and can stomach the risks,” Chubak helped to write.

The U.S. seized Fannie Mae and Freddie Mac in 2008 as subprime mortgages soured amid the worst financial crisis since the Great Depression. Taxpayers had to provide about $188 billion of bailout funds to the two firms, and Countrywide’s practices were blamed by regulators and lawmakers for fueling the downward spiral.

Citigroup Bailout

Citigroup took more bailout assistance from U.S. taxpayers than any other lender, including a $45 billion capital injection and a government guarantee of more than $300 billion of its riskiest assets. The bank lost $29.3 billion in 2008 and 2009 combined. The bailout funds have since been repaid.

Chubak’s report encouraged firms to consider “vertical integration” in the subprime mortgage market, which is when a company has operations across multiple parts of the industry such as mortgage origination and the structuring of mortgage-backed securities and other, riskier, products tied to home loans known as collateralized debt obligations, or CDOs.

“Leaders such as Lehman Brothers and Bear Stearns have shown that this vertically integrated model leads to better performance and risk management as well as increased flexibility to experiment with and exit from innovative, high-margin products,” Chubak wrote.

Lehman Brothers Holdings Inc. and Bear Stearns Cos. were Wall Street investment banks that dealt in mortgage-backed securities. Lehman failed in September 2008, filing the biggest bankruptcy in U.S. history because of too much debt and risky real estate investments, according to an examiner’s report.

Bear Stearns was sold to JPMorgan Chase & Co. in a March 2008 sale that headed off a bankruptcy. Bank of America Corp., which similarly rescued Countrywide, has spent more than $40 billion cleaning up claims tied to the mortgage firm’s faulty home loans and foreclosures.

Costiglio and Daeninck declined to comment on the report.

(Updates with 2007 report on how to prevail in the subprime mortgage market starting in sixth paragraph.)
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