Citigroup signaled a breakup of its unwieldy financial supermarket model with a
possible deal to sell a share of its prized retail brokerage business
to Morgan Stanley,
said several people with knowledge of the discussions, underscoring the
enormous problems the bank continues to confront even after receiving
taxpayer bailout funds.
The new chapter of wrenching change came as former Treasury Secretary Robert E. Rubin,
who came under fire for his strong support of that model in an advisory
role that helped fuel the bank's troubles, said he would resign.
The developments highlight how badly Citigroup has been damaged by the global financial crisis.
Deepening losses, declining confidence in its leadership and a
desperate need to raise capital have forced the bank to rethink the
strategy it has clung to for years.
"This is either a one-off or the first inkling of a dismantlement of the company, taking apart of what John Reed and Sandy Weill
did," a senior executive with ties to the company said, referring to
the two leaders who forged the landmark deal to bind Citicorp and
Travelers Group in 1998.
With pressure mounting on Vikram S. Pandit,
Citigroup's chief executive, the company's executives say the decision
to split off Smith Barney, the "crown jewel" brokerage business he said
he loved a few months ago, suggests the bank's troubles are so deep
that he is looking to reshape the company in a former image of itself.
While a deal is not yet final, such a change would position
Citigroup to look more like Citicorp - a global franchise with
strengths in trading, corporate and investment banking, and
international consumer banking - than the bloated and unwieldy company
it has become.
It also could lead to yet another shift in power on Wall Street. A
joint venture with Morgan Stanley would create the nation's largest
brokerage network of 20,000 advisers, edging out Merrill Lynch's
thundering herd of brokers that Bank of America
snapped up in September. Citigroup and Morgan Stanley had been in
preliminary talks about a joint venture with Smith Barney as early as
summer, according to people briefed on the talks.
As Citigroup braced for devastating fourth-quarter losses, with the
government pressuring it to raise capital, Mr. Pandit restarted the
discussions last month to shore up the bank's financial condition. Both
firms signed exclusivity agreements precluding either from discussing
rival transactions with others. A deal could be announced as early as
the middle of next week.
Citigroup is likely to undertake further changes, including a
possible shake-up of its board, according to a person briefed on the
situation. Although directors have been impressed by Mr. Pandit's
financial acumen, they continue to question his leadership ability. And
Citigroup directors are considering replacing its chairman, Winfried F.
W. Bischoff, with Richard D. Parsons, its lead director and the former Time Warner chairman, as early as next week, this person added. A Citigroup spokesman declined to comment.
For Mr. Rubin, his resignation is a sobering turn in a sterling
career in Washington and on Wall Street. Since joining Citigroup in
1999 as an adviser to the bank's senior executives, Mr. Rubin, 70, who
is an economic adviser on the transition team of President-elect Barack Obama, has sat atop a bank that has made one misstep after another.
When he was Treasury secretary during the Clinton administration,
Mr. Rubin helped loosen Depression-era banking regulations that made
the creation of Citigroup possible. During the same period, he helped
beat back tighter oversight of exotic financial products, a development
he had previously said he was helpless to prevent.
In his capacity as a senior adviser to Citigroup's top executives
and board, he pushed hard for the bank to step up its trading of risky
mortgage-related securities and other complex investments as long as it
improved oversight - a strategy critics say sowed the seeds of the
bank's current troubles. Mr. Rubin, whose contract specifically
absolved him from daily operational responsibilities, has maintained
that he could not have foreseen the current mess.
"This is not a decision that I have come to lightly," Mr. Rubin said
in a statement released by the bank. "But as I enter my 70s and with
all that is now in place at Citi, I believe the time has come for me to
make these changes."
"My great regret," he added, "is that I and so many of us who have
been involved in this industry for so long did not recognize the
serious possibility of the extreme circumstances that the financial
system faces today."
Mr. Rubin, who has no severance contract and has turned down a bonus
for the last two years, will still leave the bank with millions of
dollars in accumulated pay. He has been awarded more than $126 million
in cash and stock over the past decade, and has already withdrawn
virtually all of his deferred compensation for estate planning
purposes, said a person with knowledge of Mr. Rubin's pay.
Mr. Rubin plans to deepen his involvement in public policy
initiatives, charitable projects and personal hobbies like fly-fishing.
Mr. Rubin's other role has been to serve as a sounding board and
supporter for Citigroup's senior leaders - including Mr. Pandit and Mr.
Pandit's predecessor, Charles O. Prince III.
But Mr. Rubin's influence in urging the bank to ramp up risk-taking,
while failing to properly supervise the big bets taken on mortgages and
other complex investments, put him under fire.
Citigroup has already posted more than $65 billion in losses and is
likely to post its fifth consecutive quarterly loss this month. Every
Wall Street firm has suffered from the financial crisis. But the scale
and scope of Citigroup's losses, from its investment banking to its
credit card and retail franchises, has been particularly pronounced.
Mr. Rubin began backing away from his senior advisory role last
summer when he started counseling Mr. Obama, according to several
Citigroup executives who have spoken to him recently. Still, he held
discussions with Treasury Secretary Henry M. Paulson Jr.
as Citigroup negotiators orchestrated the bank's bailout in late
November. The government injected more than $45 billion into Citigroup
and agreed to guarantee about $269 billion of illiquid mortgage-related
Although Mr. Rubin had been contemplating leaving Citigroup for
several months, he may have hastened his departure to try to get ahead
of the criticism facing the bank's board, said two people at Citigroup
with knowledge of the situation. Mr. Rubin is fiercely protective of
his reputation, and though he most likely would have been re-elected,
he faced the potential embarrassment of a public struggle with
investors who have been critical of his tenure and lucrative pay.
The Smith Barney joint venture will open a new chapter of wrenching
change at Citigroup. Under the proposed deal, Morgan Stanley will pay
Citigroup around $2.5 billion to bring itself up to 51 percent
ownership of the brokerage business. That values Smith Barney at
roughly $12 billion, people with knowledge of the matter said. Morgan
would also retain the right to purchase the rest of the business in
three to five years.
If the business produces strong revenue, both banks would benefit,
and as the market improves, Citigroup stands to see the price it will
be paid for its share increase.
Both Citigroup and Morgan Stanley would also reap sizable cost
savings from combining their back-office systems and cutting back pay
packages to retain and lure brokers from other firms. Both banks, as
well as UBS, have been dangling huge sums in front of brokers at other firms because the brokerage business provides steady returns.
- 104 Globalization
- 106 Money & Politics
- 201 Executive Compensation
- 208 Regulation