Sandy Weill's Citigroup Officially Dismembered Today

It took years...many years.....but Sandy Weill's original, unwise and unwieldy merger of Travelers and Citibank was dissolved today with the IPO of Primerica.



After probably inducing then-Treasury Secretary Bob Rubin to look the other way while he smashed Glass-Steagal, Weill hired Rubin as the non-executive Chairman of the merged firm. It didn't take long for Weill to manage to toss former Citibank CEO, his alleged co-head of the merged firm, out a window, leaving Weill to play with his new, hydra-headed toy.



That was 1998-2000.



Ten years on, Weill's monstrosity has been significantly dismembered with the separation of its insurance and banking components.

The nearby price chart for Citigroup and the S&P500 Index shows how badly the universal bank performed since Weill's grand mistake.

In the same timeframe, the index was down only slightly.

Too big to fail? How about just too big to be managed by anyone, and, instead, just limp along losing shareholders' wealth?

Am I the only person who doesn't completely understand why Sandy Weill wasn't sued by shareholders?

Sandy Weill's Regulatory Suggestions

Monday's edition of the Wall Street Journal featured an editorial by Sandy Weill, ex-CEO of Citigroup, and Judah Kraushaar. In it, Weill articulated six steps which he believes will "revitalize" the US financial system.

I was a little surprised to find that I actually agreed with several of Weill's ideas, given that he is responsible for assembling the failed mess that is today's Citigroup.

Weill starts out on the wrong foot by, as you'd expect, defending the concept of "too big to fail" as moot and irrelevant. By choosing to see the recent financial mess as caused by Lehman's failure, which isn't, strictly speaking, true, he feels he can simply declare bank size of no practical importance.

I would beg to differ. What got the ball rolling on this crisis was the mid-2007 failure of two Bear Stearns mortgage-related mutual funds. By year end, Citigroup, Merrill Lynch and others were hastily writing off a combined hundreds of billions of dollars of marked-to-market mortgage-backed holdings.

Lehman marked the end of the valuation-based failures of private sector, publicly-held firms, not the beginning.

However, despite Weill's very biased view on this point, which might be expected to color his entire analysis, several of his other points actually make sense.

The first one, unfortunately, does not. Weill wants the Fed to be the financial super-cop. There's so much wrong with this idea that I couldn't deal with it, and Weill's other remarks, in one post. Suffice to say, you don't give more power to the guy who just misused the considerable power he already had. Also, I'd note that Weill was, for nearly his entire career, a securities industry operator. I'm not entirely sure he really understands Fed regulation.

His second point is worthwhile. He, like me, believes that "complex instruments," by which I assume he includes derivatives, should have regular market pricing and be traded through exchanges. The much-feared daisy chain effect of AIG's financial products unit failing would have been eliminated, had its derivatives positions been held via an exchange which required posted collateral. Exchanges remove counterparty failure risk, and would have removed most of the concern over an AIG or Lehman failure in the first place.

Another point Weill makes, which echoes my own prior posts, is to force underwriters of structured financial instruments to retain a healthy portion of the issues, and regularly sell portions to affirm their pricing.

His desire for regulators to somehow oversee the ratings agencies isn't really sensible at all. Just from stories I've heard from senior rating agency employees, it's clear to me that they face undue pressure from their clients, as well as intellectual and technical intimidation. It's unlikely that a bunch of mid-level civil servants at regulatory agencies will ever be capable of going toe to toe with Wall Street financial engineers and produce a useful result. Bank regulators are used to simply counting things and comparing existing reserves to required ratios, reviewing loan documents, and generally checking accounting and paperwork. They aren't securities valuation experts.

Perhaps the best of Weill's suggestions is that regulators stop messing with bank loan loss reserves. According to Weill, the regulators have been pressuring financial institutions to lower reserves in the healthy portion of the lending cycle, then take larger reserves as losses mount. He's correct to note that classical banking does the reverse- fund the loss provisions in good times, both to match losses to when the loans were made, and to smooth out the effects of loss recognition.

Finally, again, reinforcing published work of mine going back to the mid-1990s, he endorses making more senior executive compensation dependent upon and only vested after longer time periods. While he advocates the wrong metric, ROE, his basic instinct is correct. Long term vesting, lagged average total-return based compensation will put a stop to executives reaping quick cash bonuses while avoiding longer term consequences of risky strategies.

Overall, I was pleasantly surprised with Weill's ideas. For a guy whose best years in the financial service industry were spent hoovering up ailing wire houses and rationalizing their back offices, he actually seems to understand more about risky front office behavior than you'd guess from his failure in creating the monstrosity called Citigroup.

Vikram Pandit's Failure At Citigroup

It's a measure of the abject failure of Vikram Pandit's reign as CEO at Citigroup for nearly a year that his most recent measures for fixing the ailing, failing bank, described here, just a week ago, have had the perverse impact of requiring a Federal rescue, as I described here, earlier today.

I wrote, in last week's post,

"Pandit clearly has no clear grasp on the severity of Citigroup's problems. He's been in the job nearly a year, yet look at the firm's performance, as seen in the third Yahoo-sourced chart.
Citigroup has declined by about 70%, while the S&P has lost a relatively modest, by comparison, 40% over the past twelve months.

Yet Pandit has offered nothing in the way of strategic change at Citigroup. It's entirely possible that, like Rick Wagoner's GM, Pandit's Citigroup won't make it long enough to see those 'future opportunities.'"

Here's a view of just how badly investors reacted to Vik's warm words that morning.

By Friday afternoon of last week, as seen in the nearby Yahoo-sourced 5-day price chart, his bank's equity price had fallen more than 50%, while his erstwhile-competitors of size, Chase, Wells Fargo and BofA, held steady with the S&P.

After yesterday's rescue announcement, Citigroup's equity popped back up to only a 20% loss since last week.

What's really amazing is this chart from today's Wall Street Journal article in the 'Heard On The Street' column. Citigroup isn't even in the top four of US banks by market capitalization any more. The almost-unheard of US Bancorp is now ahead of it.

Even newly-minted 'commercial' bank Goldman Sachs, a fraction of the employee and business volume size, is within $6B of Citigroup.

The longer term view of Pandit's continued mismanagement of Citigroup, begun under Sandy Weill and left on autopilot by his successor, Chuck Prince, appears below. For the past year, Citigroup again underperforms its (now) larger, one-time rivals, having lost far more than 50% of its value in the timeframe.

Unfortunately, the only thing worse than Pandit's misguided actions at Citigroup- too little action, sans a strategy, too late- is the firm's do-nothing board. Headed by greatly-enriched, do-nothing non-executive chairman, Bob 'he started this mess' Rubin.

A more responsible board would not have handed this overwhelming job to Pandit in the first place. But, having done so, might have at least relieved him this summer, when it was clear he wasn't waking up to the fact that Citigroup is a simply unworkable conglomeration of businesses and assets. Failing that, they would use yesterday's rescue to end Pandit's reign of futility and clear the decks for someone to break the firm up into manageable chunks.

As usual, don't hold your breath for that outcome. Instead, count on shareholders continuing to be punished for the board's inaction.

Bob Doll On Citigroup, Sandy Weill & Bob Rubin

Bob Doll, chief equity investment officer at Larry Fink's BlackRock, was the guest host this morning on CNBC's Squawkbox program.

At one point, Doll, Joe Kernen and Charlie Gasparino engaged in a discussion of Citigroup's situation. Gasparino had opined that the company might have to cut its dividend, which, of course, is a current major topic among those observing and analyzing the deeply troubled banking goliath.

Doll seemed to agree with Gasparino. Then the latter launched into a recounting of Citigroup architect Sandy Weill's mistakes, and the cloud under which he departed the firm. He asked Doll directly what he thought, prefacing his question by noting that nobody seems to criticize Weill, even now.

Bob Doll masterfully responded on both sides of the question, crediting Weill with

'growing the top line, while cutting the middle lines and still acquiring businesses,'

or words to that effect.

Then, when reminded of the mess Weill and Citi made of the Smith Barney acquisition, Doll nodded his head in assent.

Gasparino then moved onto Bob Rubin, criticizing the former Treasury Secretary's 'leadership' of the executive committee of the board, while earning outsized fees running into the tens of millions of dollars.

Again, Doll carefully pirouetted around the question, responding carefully on both sides.

As I sat watching Doll, a very powerful and successful guy in his own right, I marveled at how much fear guys like Weill and Rubin clearly induce in other financial service senior executives.

Here is the most senior equity executive at one of the most successful private investment management firms, clearly fearful of uttering a single critical word of a retired sector heavyweight, Weill, and a stumbling, inept current board leader, Rubin.

I don't know Doll at all, other than having seen him on CNBC and read about him in various Wall Street Journal stories. He seems to be a very capable, savvy and intelligent equity manager. You'd think he is relatively immune to reprisals from people like Weill or Rubin.

I guess not. It would seem that Doll is aware, or concerned, that any former or current senior executive in the sector could, one day soon, be either a prospective investor in, a senior executive at, or acquirer of his firm, Blackrock.

This being the case, it causes me to wonder why CNBC even bothers to have such guest hosts on their programs. Or even bothers to discuss current issues involving other companies or sector executives. It was clear Doll was unwilling to give candid, substantive on-camera assessments of Weill and Rubin. He wanted to be able to respond to any comments from the two with a protestation that he had said something positive in their defense.

Doesn't this sort of behavior make you question nearly any positive comments or observations made by one senior financial service sector executive about another?