On Citigroup's Leadership Hunt

Today's lead article in the Wall Street Journal's Money & Investing section concerns Citigroup's search for a new CEO.


It's hard to believe that one of the country's three largest commercial banks wouldn't have had any serious succession plans in place for a CEO, Chuck Prince, who was in place more than three years.


Nonetheless, that appears to be the case.


The names on the Journal's list of potential candidates, now that John Thain sensibly chose Merrill over Citi, is predominantly filled with overseas bankers: Goodwin of RBS, Ackerman of Deutsche Bank, and Diamond of Barclays. Filling out the list are Robert Willumstad, a former senior Citibank executive, Vikram Pandit, currently head of the firm's investment bank, and Chase CEO Jamie Dimon.


Every one on the list is missing experience with at least one large part of Citigroup's lines of business. And, on the note, every one on the list has more experience with some part of Citigroup's businesses than he did.


For that matter, even Sandy Weill, who cobbled the hydra-headed financial utility together some years ago, then hip-checked John Reed out of the picture, had direct experience that was far short of covering the resulting merger's (of Traveler's and Citibank) broad business array.


I've written many posts about Prince's inept leadership of the questionably-organized bank, two of which may be found here, and here. Others are under the labels 'Chuck Prince' and 'Citigroup.'

What seems obvious to me, then, is that Citigroup is simply too diversified to ever successfully provide its shareholders with consistently better returns than they can get by merely holding the S&P500. This, I contend, is the acid test of whether a company is really creating investible value for shareholders.


Commercial banking, in general, among the remaining money centers, isn't a good bet to beat the S&P500 anyway. It's not just Citi's problem.

As the nearby, Yahoo-sourced price chart for Citi, Chase, BofA, Wachovia and the S&P500 for the past two years shows, none of the banks has outperformed the index. Citi is the worst, by far, Chase the best of the mediocre lot.


If you look back a bit further, Chase has slightly outperformed the S&P500, but, when adjusted for volatility, as I recently discussed in this post, the margin of outperformance nearly disappears. The other banks, again, all lag the S&P on a completely unadjusted (for risk) basis. Citi, again, is at the bottom of the bunch.


Even Chase's price curve indicates that the basis of its current five-year outperformance of the market is due largely to a few months in mid-2003. Which was prior to Dimon's arrival at Chase as CEO. Since then, it's performance has been somewhat flat, and not materially better than the index's, overall, with a significant period of falling returns, from early 2004 to late 2005.


The classic money center banks of the last decade, before they began to be merged with second-tier securities firms, were already tough to manage. It's only gotten worse with time and added complication.


For example, this last Yahoo-sourced price chart of the four banks and the S&P500 Index covers the period from 1989 to the present, or roughly 18 years.


Except for the 'old' Citibank, the other three banks moved pretty much in lockstep. And Wachovia wasn't even a large bank back then. Again, most of the banks are either below, or essentially on a par with the S&P return for the period.


Back in the day, Citi was a clear-cut innovator in financial services, nimbly outperforming every other large US commercial bank. However, that ended in 2000. Since then, it's plateaued, looking like the other major US banks.


I think the moral of this story is that it really doesn't matter much anymore who runs any of the largest five US commercial banks. Given a CEO with some banking background, all of them will pretty much move together, with occasional lags and surges from slightly different proportions of one business or the other in their asset and income mix.


Citigroup, however, remains overly diversified, relative to its ability to be managed for consistently superior shareholder returns , let alone as an average large US commercial bank.


To me, the solution at Citigroup is for Rubin and the board to simply begin packing and spinning back to shareholders an independent consumer bank, asset management firm, securities firm, and wholesale bank. Executives for each of these would be fairly easy to find, if not among the current heads of those units.


If only out of sympathy for the suffering shareholders of Citigroup, including the Prince in Saudi Arabia, the Citigroup board should understand and acknowledge the implications of their difficult CEO search, and just split the bank up into manageable units.