Quotes of the Day
It was an awkward moment. Sandy Weill, the world's most powerful banker, came face-to-face with Eliot Spitzer, the toughest cop on Wall Street. Both were among the guests at a Sept. 10 lunch hosted by New York City Mayor Michael Bloomberg at Gracie Mansion. Their exchange was brief. But Weill, 69, CEO of Citigroup, indicated he was eager to talk about the ugly business that Spitzer, the ambitious New York State attorney general, has been finding in his probe of the financial behemoth. Within days a high-level session followed, and even Spitzer was impressed with Weill's sense of urgency.
The meeting that followed, at the attorney general's Manhattan office, between Spitzer and Charles Prince, the new head of Citi's subsidiary Salomon Smith Barney, marked the beginning of what is shaping up as a far-reaching peace treaty. Spitzer, who used a $100 million settlement with Merrill Lynch to reform stock research on Wall Street, wants a similar and more expensive pact with Citigroup to address systemic abuses in the way lucrative initial public offerings (IPOs) of stock have been showered on ceos who sent investment-banking business to Citi. Spitzer is still digging for dirt, so any deal may be several weeks away. But playing to fat cats at the expense of retail investors is no longer defensible.
Weill, says a longtime friend, has become "horrified and embarrassed" by the mud-spattered image of Citi, which stands accused of unethical and illegal behavior on multiple fronts. Among the alleged transgressions: doling out shares of hot IPO shares to WorldCom executives in a bribe-like manner to win banking business, devising complex financing to help Enron conceal debt and having stock analysts hype the shares of companies that were investment-banking clients. While Salomon Smith Barney was making the VIPs rich, another Citi subsidiary was charging consumers high fees and above-market interest rates on loans, according to charges Citi just settled with the Federal Trade Commission (FTC).
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Among the areas that Spitzer aims to reform is the IPO allocation process. One immediate goal, say sources close to him, is the disgorgement of profits that executives reaped through generous allotments of IPO shares in the late 1990s — a period during which those shares were virtually guaranteed to rise sharply. Spitzer filed a legal action last week. A prominent target is former WorldCom CEO Bernard Ebbers, who made $11 million in trading profits over four years on IPO shares he bought through Salomon, according to documents obtained by Congress. Spitzer would like to prohibit IPO allocations to executives that can't be justified by the amount of business those executives provide their broker through personal accounts. "You cannot give shares in an effort to persuade the CEO of a big company to bring business to your investment bank," Spitzer told Time. "That's commercial bribery." Spitzer also hopes to fully separate stock analysts from investment bankers.
Amid all the probing, Citi's stellar financial results — the company posted earnings of $8.9 billion in the first half of 2002, a 26% jump from the same period last year — are being seen in a different light. The stock has fallen nearly 40% so far this year. Weill's 23 million shares have lost more than $400 million in value. But just as grating to Weill is the threat to his legacy of bringing down the walls between banks, brokers and insurers. More than any other, it was Weill whose persistent lobbying persuaded Congress to deregulate the industry in 1999.
The collective magnitude of these problems eluded Weill during a season of nasty headlines. Spitzer's investigation of Merrill Lynch was sure to spread, yet bankers inside Citi say the prevailing view there as recently as late August was that the main issue was people's losses in the market and that these problems would pass when the market rebounded.
Some trace Citi's ethical lapses to Weill's 1997 acquisition of Salomon Brothers, a rowdy bond-trading house notorious for bending rules, which in 1991 suffered the wrath of regulators for trying to corner the market in Treasury securities. "Salomon had a well-known cowboy culture, and he did not put in the controls that were needed," says Michael Mayo, a bank analyst at Prudential Financial. Weill has been personally taken to task on two fronts: for possibly asking former telecom analyst Jack Grubman to rethink his negative opinion of AT&T, on whose board Weill sits, and for directing some of Citi's charitable giving to his pet causes.
Since his chance encounter with Spitzer in early September, however, Weill has made it clear that he has resolved to clean up his shop. In a recent internal memo, he apologized to employees, saying that "certain of our activities do not reflect the way business should be done," and in an overt nod to regulators seeking concrete change, Weill replaced Salomon's chief, Michael Carpenter, with Prince. If Prince, 52, hopes to succeed Weill one day, insiders say, he probably has just two or three months to clear up Salomon's troubles before they start to look like his own. Last week, Weill said he would give up seats on the boards of AT&T and United Technologies.
In rapid fashion, Weill has settled civil fraud charges with the NASD and the suit by the FTC accusing Citi of predatory lending. The NASD had charged that Grubman had recommended shares of Winstar Communications even though he privately harbored concerns about the telecom firm's prospects. While Salomon agreed to pay the NASD $5 million in fines, Grubman wants to fight the accusations and, according to the Wall Street Journal, has indicated that he wants to talk with investigators about the role Salomon's corporate culture played in the practices at the heart of the trouble. Grubman could not be reached for comment, and his lawyer declined to discuss the issue.
The FTC settlement, meanwhile, will cost Citi $215 million. The charges were that a subsidiary, Associates First Capital, which Weill bought in 2000, used deceptive marketing to lure consumers into taking out loans with high rates and buying optional, pricey loan insurance without realizing it. Even before settling with the FTC, Citi stopped selling the insurance and lowered rates for 200,000 debtors. It was the first to voluntarily adopt the "Spitzer principles" imposed on Merrill Lynch, and now requires officers of public companies who get IPO shares through Citi to tell their shareholders about it. Citi says it will give its independent directors bigger roles, count stock options as a business expense and lower its assumed pension-plan rate of return to 8% from 9.5%.
Citi still faces as much as $10 billion in potential costs stemming from settlements, fines and shareholder lawsuits, Mayo estimates. At the same time, the bank is dealing with souring investments in Argentina and Brazil and is under a cloud for lending practices in the Caribbean.
This should have been Weill's year. Citi's booming earnings have put it on track to unseat ExxonMobil as the most profitable corporation in the world. Fortune named Citi one of the world's most admired companies, and Chief Executive named Weill the best CEO. A proud business builder, Weill would like nothing better than to refocus the spotlight on what he's done right.
- DANIEL KADLEC
- Can Sandy Weill, the shrewd CEO of Citigroup, pre-empt a sweeping investigation