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A Stack of Weill Problems

Citi's Hard-Driving Honcho Can Probably Handle His Bank's Overload of Embarrassments. But He'll Sure Have His Hands Full

Jul 26, 2002 |

What does Sandy Weill, the famously demanding boss of Citigroup, do about the mounting pile of, shall we say, problems, at his door?

In recent days, Citigroup has faced congressional leaders alleging that the financial behemoth helped Enron structure financing deals designed to hide debt from investors. Citigroup (C ) is also in the spotlight for the contribution of its telecom analyst, Jack Grubman, to creating that sector's bubble. Most worrying to investors, Citi is facing a growing volley of independent lawsuits. The fear is that it'll become the deep-pocketed scapegoat for those seeking to recoup losses due to Enron, WorldCom, and their ilk.

Stung by such serious criticism, one of the first things Weill's Citigroup has done in response is buy back stock. On July 25, it announced that it had accelerated its share-repurchase program, buying $2 billion worth of stock in July alone. Citi's board has authorized it to repurchase up to $5.5 billion in additional shares.

BAD DAY AT THE OFFICE. This is a clear move to calm investors, who have been fleeing the stock all year. Citigroup shares, which started the year at $50, have drifted steadily lower since this spring, before plummeting to a low of $25 following news on July 23 of the congressional inquiry into the Enron transactions. As the broader market recovered, the stock has moved higher, closing on July 25 at $30.

Weill, who is said to check Citigroup's price several times a day, is himself one of the company's largest shareholders. He personally owns 32.5 million shares of common stock, according to the latest proxy. So when the price fell from $32 to $27 on July 23, his personal net worth deflated by a cool $162 million.

Given that slide, it's safe to surmise that Weill, who has a notable temper, is madder than he has been in years. A veteran screamer, Weill is likely to be storming around the hallways of Citigroup's executive suite, bursting into colleagues' offices, and asking a lot of questions. Former colleagues speculate that passersby of Citigroup's Park Avenue headquarters may actually be within earshot of his rage.

No doubt, Weill is also working the phones. Along with doing a lot of behind-the scenes damage control with major shareholders, he's likely to be calling deep into the trenches, figuring out who's responsible for the decisions that led to the bank's Enron-related woes.

INVITING SCRUTINY. "Whoever was involved in making the decision that Enron was a good entity to lend to probably will not have the greatest career at Citibank," says one senior executive at the company. As for the structured finance group that designed the Enron transactions and marketed them to other firms, this exec's guess is that Weill will want out of that business. "After this," says the exec, Weill won't want "anything to do with it."

Weill promised employees in a July 25 letter released to the public that the firm would quickly adapt to a new era of higher scrutiny. "It is our responsibility as the preeminent global financial services firm to take the lead in ensuring that our business practices reflect these new higher standards going forward," Weill wrote to employees.

He also essentially admitted he was in the process of cleaning house. "Throughout our organization, we are reviewing and will continue to review our business practices to ensure they adhere to these new standards," he wrote to employees. "If we find that anyone in our company has done anything wrong or fails to abide by our professional standards, we will take all appropriate actions swiftly."

SOOTHING WORDS. Weill, as well as Citigroup's legal team, is portraying the apparent misdeeds of its corporate and investment bank as well within former industry standards which, sadly, they probably were. Indeed, few industry observers think Citigroup did anything illegal. J.P. Morgan analyst Catherine Murray upgraded the stock on July 24 stating, "We find it hard to believe that Citigroup knowingly participated in fraudulent activity." (Of course, J.P. Morgan is facing the same scrutiny for its own structured finance deals sold to Enron.)

Weill, meantime, is doing his best to calm the troops (after all, two-thirds of them own stock in their company). He addressed employees on July 23 after the stock took a 15% one-day hit, reassuring them that the bank's consumer-related businesses were bolstering its bottom line and that Citi has plenty of reserves to weather any foreseeable storm.

His July 25 letter concludes: "The steps we are taking to further improve standards throughout our company only enhance my confidence in our great future." In its fatherly blend of encouragement and praise, the statement is vintage Weill.

Ultimately, Weill and Citigroup have little choice but to wait out the storm of scandal and fend off the lawsuits as they come. "Lawyers will try to go after deep pockets to try to get restitution," says Peter Cohan, an author and investment strategist. In many ways, the late-breaking news of Citigroup's Enron transactions is good timing. As the Enron investigation wears on for 10 months, it has become increasingly clear that the string of bankruptcies and trillions lost by investors is due to serious flaws in the financial system that go far beyond the dealings of any one company.

SURVIVAL INSTINCTS. Although the congressional inquiry is embarrassing for Citi, few analysts think any prosecutable charges will come of it. "It's a lot of sound and fury signifying nothing," says Richard Bove, an analyst with research boutique Hoefer & Arnett, who thinks there's neither a valid case nor the political will to bring charges against Citigroup at a time when the country's economic well-being may be teetering.

Nor does Bove think Weill's tenure is in jeopardy. "Obviously Weill doesn't get good marks for what has happened in this period," says Bove. "But I don't think there is enough of a power base to unseat Weill over anything that has happened in the past few weeks, nor do I think he should be unseated."

Weill, whose career in financial services is nearing the 50-year mark, has been in the maelstrom of his share of scandals and has survived them. In fact, he was just named Chief Executive of the Year by a panel of his peers at a gala dinner hosted by Chief Executive magazine on July 8. He can't yet be called the Teflon CEO, but if the latest volley of criticism doesn't stick, he may well lay claim to that moniker.

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