Citigroup Flop Exposes Folly of Empire-Building: David Pauly

Commentary by David Pauly

Nov. 25 (Bloomberg) — Sandy Weill never dreamed Citigroup Inc. would end up as a ward of the government.

When he merged Citicorp and Travelers Group Inc. in 1998, Weill envisioned the ultimate financial-services empire — peddling checking accounts, stock brokerage, investment banking and commercial loans around the world.

Today, five years into his retirement as chief executive officer, Citigroup has collapsed under the weight of massive bad market bets.

After the company’s stock closed Nov. 21 at $3.77, down 87 percent for the year, the U.S. government threw more aid at the giant to prevent a run on the bank by customers.

The Feds agreed to back up $306 billion in Citigroup bad debt, covering 90 percent of losses after the bank absorbed the first $29 billion. The government also infused $20 billion into the bank with a purchase of preferred stock. That was in addition to the $25 billion of Citigroup preferred shares it bought last month as part of a plan to recapitalize U.S. banks.

Citigroup’s failure undercuts the strategy of many U.S. businesses. Bigger is better, CEOs argue. Only the big survive in a cutthroat world. What they don’t say is, I get paid more if my company gets larger. In the years 2000 through 2005, Sanford I. Weill took $83 million in bonuses for his work at Citigroup.

Weill and his successor, Charles Prince, might argue that they had bad luck. No one predicted the collapse of the credit markets that followed the excesses of the U.S. mortgage business. Still, wasn’t the Citigroup financial powerhouse built to survive any crisis?

Sorry History

Better that they should acknowledge the colossus was a bad idea, and their own poor management. Citigroup’s $66 billion in write-offs for bad loans proves a reckless approach to investments. On Weill’s watch, Citigroup issued fraudulent reports on stocks and paid billions of dollars to settle charges it misled bond buyers.

The government may have let current Citigroup CEO Vikram Pandit remain at the helm because he has been in charge only since December — leaving most of the blame to Weill and Prince.

Citigroup shares yesterday rallied along with the rest of the stock market after the company’s second bailout, climbing to $5.95. The Standard & Poor’s 500 Index rose 6.5 percent.

U.S. taxpayers can only hope this latest government move is the answer to the credit-market woes. If banks start trusting each other again, losses on the bad-loan deal with Citigroup might be minimal.

Happy Returns?

There’s also a chance the government will earn a little money for its efforts. For the new $20 billion in cash, it gets $27 billion in Citigroup preferred stock, paying an 8 percent dividend. The Feds also get an option to buy a 4.5 percent stake in Citigroup common stock.

As part of the earlier deal, the government owns $25 billion of Citigroup preferred, paying 5 percent the first five years and 9 percent after, plus warrants to buy common shares equal to 15 percent of that preferred investment.

Weill’s Citigroup stock prospered for a time after his merger, topping $50 on occasion. But the shares began falling steadily in the spring of 2007. Citigroup’s best strategy now may be to undo what Weill wrought and Prince tried to manage.

“We should be thinking about breaking this company up and redistributing the assets into stronger hands,” says Christopher Whalen of Institutional Risk Analytics, a research firm in Torrance, California.

Let’s hope Bank of America Corp. CEO Kenneth Lewis is paying attention. Lewis bought Countrywide Financial Corp. to beef up in mortgages, and is buying Merrill Lynch & Co. to add stock-brokerage and investment-banking assets. Does he really want to mimic Citigroup?

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