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Citigroup Faces Fallout from Subprime Market

November 5, 2007 at 6:25 PM EDT
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GWEN IFILL: The subprime mortgage mess continues to claim big-name corporate victims. The latest to fall is Charles Prince, the chairman and CEO of Citigroup, the nation’s largest bank. He resigned under pressure yesterday.

The company has announced it will write off between $8 billion and $11 billion due to a drop in the value of subprime-related securities. Former Treasury Secretary Robert Rubin, a top Citigroup executive, was named chairman. And Sir Win Bischoff, the head of Citigroup Europe, was named interim chief executive.

Will the dominoes continue to fall? For that and more, we turn to Roben Farzad, senior writer at BusinessWeek magazine.

Welcome back.

ROBEN FARZAD, Editor, BusinessWeek: Hi, Gwen. How are you?

GWEN IFILL: I’m fine. Last week, we heard about Stanley O’Neal. This week, we’re hearing about Charles Prince. What’s similar and what’s different about these two dominoes falling?

ROBEN FARZAD: You know, sadly, it’s a continued purging, but Citigroup is a far bigger animal than Merrill Lynch is. Merrill Lynch is an icon of Wall Street; Citigroup is that 300,000 strong, 100-nation financial supermarket. And it is the largest U.S. bank in terms of asset size. So its tentacles reach out everywhere around the world, so any time something like this happens, naturally the entire sector is very nervous.

GWEN IFILL: Well, $11 billion sounds like a lot of money to most of us. Does this mean that Citigroup is pretty shaky now?

ROBEN FARZAD: The worry is that it’s the tip of the iceberg, because we know plus or minus $55 billion in mortgage-related securities sit on Citigroup’s books. Now, we thought a couple weeks ago that this write-down, that it might have to take a $5 billion charge for some of these bad loans. That $5 billion turns in $11 billion.

And management in the call yesterday — actually, it was an odd weekend announcement, and people were speculating Friday that there would have to be a shake-up — said we’re not sure that this is the end of it. I mean, it depends on the market coming back. It depends on the vagaries of the housing market and whether this credit crunch on Wall Street will subside. So there are more questions asked than answers, really, in this.

A financial supermarket

GWEN IFILL: You know when bad news hits, the CEO takes the fall. In this case, how much of this was really Charles Prince's fault?

ROBEN FARZAD: Charles Prince never really got off the ground in terms of winning hearts and minds of Citigroup shareholders. He comes in as a cleanup guy in 2003 after Citigroup is mired in these Enron and WorldCom scandals. He's been that attorney figure in Citigroup who's always there, almost a gray eminence figure behind the iconic Sandy Weill, who was the wheeler and dealer.

And he had to come in, clean up the Enron and WorldCom messes, settle nearly $5 billion in lawsuits. There were regulatory issues in Japan. They sent him overseas to bow down in front of regulators. He had to settle a whole other issue in Europe.

And I think that distracted from the charge of maybe some creative destruction, taking apart the behemoth that Sandy Weill had handed him and maybe picking his battles, thinking, "Maybe I can't be tops in retail banking. I should sell off this unit. Maybe I should sell off the investment bank. Maybe I shouldn't specialize in hedge funds."

Citi's fault -- and a lot is reflected in Chuck Prince's tenure -- is that it tried to be that financial supermarket, which really was a relic of a long ago period. That was Sandy Weill's imprimatur, and Chuck Prince never really got his own imprimatur. He was more of a caretaker for four years.

Heading Citigroup

GWEN IFILL: Let's talk about Bob Rubin, who's the member who was, at least in terms of compensation, was the second most highly paid guy at Citigroup, $17.3 million last year, I read.

ROBEN FARZAD: That's right.

GWEN IFILL: What was he doing for all that money?

GWEN IFILL: You know, he had -- really running a victory lap after his celebrated stint as treasury secretary. He started off at Goldman Sachs. He joined the Treasury Department, really helped the United States and Mexico during the peso crisis of the mid-'90s. And then he was handed the crisis in Japan -- I'm sorry, in Asia and Russia in '97 and '98, and really was this person who could do no wrong.

He had bipartisan support. A lot of people thought of him and Alan Greenspan as the twin financial towers of that Clinton economy. And afterwards, he was really I think in the market for a sinecure, and Sandy Weill handed it to him. He said, "You can have a corner office here. You can be our professor emeritus-type figure, travel the world, sell our deals, really just make phone calls for us."

And it's a wonderful opportunity. It keeps the guy in the loop, and he collects a nice paycheck. But, unfortunately, now...

GWEN IFILL: Well, was he part of the problem or is he really the one, the best person with a solution?

ROBEN FARZAD: You know, Gwen, anyone who was part of a caretaker board -- and, by the way, it's not just him. It's people as diverse as Dick Parsons, the CEO of Time Warner. You had C. Michael Armstrong, who helped run AT&T into the ground at the audit committee.

I think it's becoming abundantly clear that the board was asleep at the switch, and they allowed the CEO to take ever larger amounts of risk and embolden the troops to do as much. And, obviously, they're paying for it in spades.

GWEN IFILL: Well, these very same people you're talking about are now in charge of finding Charles Prince's successor. Are there any names that anybody is taking bets on so far?

ROBEN FARZAD: You're hearing about John Thain, who is a former Goldman executive who now runs the New York Stock Exchange. He is known as Wall Street's Boy Scout, as his good boy, that might be brought in to do it. People are talking about one of the new people brought into Citigroup, Vikram Pandit, who has more trading expertise.

But this really, in many ways, is going to be a thankless job. I think one analyst described it as a three-point turn on a supertanker. You really have to effect change. Not only do they have to clean up the image of the firm, but shareholders want a coherent strategy. They want growth. So you have to be Mr. Fix-It, and you have to be a swashbuckling dealmaker and M&A guy. And no one immediately fits that bill on Wall Street.

Imminent CEO departures

GWEN IFILL: Well, you mentioned Richard Parsons, who announced today over at Time Warner that he's leaving his job by the end of the year. Is there any connection to be drawn? I know they're different kinds of companies, but is there any connection to be drawn about these two imminent departures?

ROBEN FARZAD: You know, I think in both cases shareholders are really tired of caretaker CEOs who came in after an era of scandal. If we rewind back to 2002, the market was in a panic. It was tumbling. Enron and WorldCom are really pungent in the shareholder memory, and they wanted people who could come in and fix the problems.

You know, Time Warner and AOL was probably the most disastrous deal in history. And they brought in Dick Parsons who's, in many ways, a statesman -- he's probably going to run for mayor in New York -- to really heal the wounds caused by that disastrous merger.

But a lot of analysts thought that, OK, one or two or three years into that, enough of that fence-mending. We need a person who actually gets down to brass tacks and cuts the deadwood, spins off bad units.

So there is a universality here between Parsons and Chuck Prince. Chuck Prince remained a caretaker during a period where the rivals saw their share prices skyrocket. And in the end, the stock fell 20 percent under his tenure amid one of the biggest booms in Wall Street history.

GWEN IFILL: Well, you said the fear is that this may be the tip of the iceberg. Are people now waiting, cringing on Wall Street, waiting for another head to roll?

ROBEN FARZAD: Very much so. And the money is on Jimmy Cayne at Bear Stearns. Bear Stearns is the other Wall Street firm who had binged on some of these subprime securities, saw two hedge funds blow up in the summer, and in many ways caused this entire subprime meltdown to ripple across Wall Street. The money is on Jimmy Cayne being out soon.

But the problem is, if we are, indeed, at a tip-of-the-iceberg period, this affects everybody, because Wall Street had made a fundamental miscalculation in thinking that you could parcel up bad mortgages with good mortgages and decent mortgages and spread the risk down the food chain.

In the end, it's like a game of musical chairs. You know, whoever is stuck standing is standing, and a lot of people are stuck standing, holding the bag, to mix a couple of game metaphors here. And Citigroup still has $30 billion to $40 billion left of securities to reconcile. They're hoping and praying that the market comes back. If it doesn't, they're going to have to take another haircut.

GWEN IFILL: May take more than hopes and prayers, Roben Farzad. Thank you again for joining us.

ROBEN FARZAD: Thank you, Gwen.