Sunday evening, the chairman and Chief Executive Officer of Citigroup Inc. (C), Charles Prince, elected to retire from the company following the company's dismal third quarter performance as well as huge write-downs associated with Citigroup's exposure to the sub-prime mortgage industry. The company named Robert Rubin, the Chairman of the Executive Committee of Citigroup and a member of the Board of Directors, as Chairman of the Board and appointed Sir Win Bischoff, chairman of Citi Europe and a member of Citi's Business Heads, Operating and Management Committees, as acting CEO. Separately, the company said that it will write-down an additional $8-$11 billion to reflect the declining value of sub-prime mortgage securities.
Charles Prince becomes the latest high-profile victim of the sub-prime market turmoil. Last week, Stanley O'Neal, the chairman and CEO of Merrill Lynch & Co. Inc. (MER) retired following that company's first quarterly loss in six years and the biggest in its 93-year history, on larger-than-expected write-downs related to subprime mortgages and asset-backed bonds. Prince had been under increasing pressure to step down following the steady erosion of the capital levels of the company as well as its frequent disappointing financial performance, which raised questions about the company's diversified business model, growth strategy and risk management practices.
Commenting on his decision, Prince said, We have made strong progress in our strategy for building for the future, evidenced in the momentum we have achieved in most of our businesses. Nevertheless, it is my judgment that given the size of the recent losses in our mortgage-backed securities business, the only honorable course for me to take as Chief Executive Officer is to step down. This is what I advised the Board.
Citigroup's board designated a special committee consisting of Rubin, Alain Belda, the CEO of Alcoa Inc. (AA), Richard Parsons, the CEO of Time Warner Inc. (TWX), and Franklin Thomas to conduct a search for a new CEO.
Alain Belda said, Chuck has been an extraordinarily committed leader who took on many difficult issues that needed to be addressed and strengthened Citi's position for the future. He moved the company toward its higher margin businesses, investing in areas where we have key competitive advantages.
Belda added, We are fortunate that Chuck will continue to serve the company in an advisory capacity while a search for his replacement is underway.
Robert Rubin said that the company intends to complete its search for a new CEO as expeditiously as possible, reviewing qualified CEO candidates from outside as well as within the organization. He further said that the company established a new unit that would solely focus on managing the assets related to sub-prime mortgage securities and their resultant exposures and added that the unit would be separate from the other parts of its capital markets and banking business.
Since Charles Prince took over as the chief executive of Citigroup in October 2003, the share price of the company had declined by 15.4%, while at the same time, shares of the banking sector as a whole, as measured by the Philadelphia KBW Bank index, rose by nearly 13%. In the year 2007 alone, the share price of Citigroup declined by more than 13%, performing worse than the Philadelphia KBW Bank index's 7.45 % decline.
Citigroup had reported a 57% drop in net earnings for its recent third quarter, due to lower fixed income results coupled with higher credit costs in the global consumer division. The company attributed a rise in late payments on consumer mortgages as the primary reason for making additional provisions for bad loans. The bank had also issued a warning that the trend is likely to continue for some more time.
Investors were not happy with the performance of Citigroup and the stock movement in the bourses since the release of the financial results for the third quarter stands testimony to that fact. The share price of Citigroup declined to $43.93 on October 17, the lowest since September 2005 and were helped by unconfirmed talks that the company's management was mulling a board meeting to find a replacement for Prince. Just the previous day, Citigroup issued a warning that defaults would haunt the financial industry for the rest of the year.
Last week, analyst Meredith Whitney at CIBC World Markets Corp. downgraded her rating on Citigroup's stock to sector underperformer from sector performer. In her report, Whitney said that Citigroup has made US$26 billion of acquisitions since 2006, increased its dividends, and written down more than US$6 billion of assets - all while generating little income growth. Whitney further suggested that Citigroup need to raise over US$30 billion in capital either through asset sales, a dividend cut, a capital raise, or combination thereof over the near term to shore up the losses sustained in the recent past in the subprime crisis. The stock price of Citigroup declined more than 9% following the downgrade.
In October, in an effort to shore up its operations, Citigroup said it merged its Citi Markets and Banking business as well as its Citi Alternatives Investments business into the newly formed Institutional Clients Group. The company announced the appointment of Vikram Pandit as Chairman and CEO of the newly formed group with immediate effect. In addition, the company announced that Thomas Maheras, the chairman and co-CEO of Citi Markets and Banking, would leave the company and appointed James Forese in his place.
Also in October, a consortium of global banks, including Citigroup, Bank of America Corp. (BAC) and JP Morgan Chase & Co. (JPM), agreed to create a single master liquidity enhancement conduit to boost liquidity in the market for asset-backed commercial paper and medium-term notes issued by structured investment vehicles, or SIVs. However, some critics objected to the plan of creating a consortium, calling it an escape devise for Citigroup, which has more SIVs than any other bank.
Charles Prince was previously Chairman and CEO of Citi Markets & Banking, which provides corporate and investment banking, sales and trading as well as transaction services. Prince began his career in 1975 as an attorney at U.S. Steel Corporation (X) and joined Commercial Credit Co., a predecessor company to Citigroup, in 1979. He was appointed Executive Vice President in early 1996 and made Chief Administrative Officer of Citigroup in early 2000. He was named Chief Operating Officer in early 2001. Prince was appointed Chairman and CEO of Markets & Banking in 2002, became CEO of Citigroup in 2003 and was named Chairman in 2006.
The new chairman of the board, Robert Rubin, began his career in finance at Goldman, Sachs & Company (GS) in 1996. He joined Goldman as an associate, became a general partner in 1971, and joined the management committee in 1980. Rubin was Vice-Chairman and Co-Chief Operating Officer from 1987 to 1990 and served as Co-Senior Partner and Co-Chairman from 1990 to 1992. Before joining Goldman, he was an attorney at the firm of Cleary, Gottlieb, Steen & Hamilton in New York City. Rubin, long active in national and New York City's public affairs, left the private sector in 1993 to join the Clinton Administration. He was appointed as the nation's 70th Secretary of the Treasury and sworn into office on January 10, 1995. Rubin joined Citigroup in 1999, where he participates in the strategic, managerial and operational matters of the company.
Citigroup's acting CEO, Sir Win Bischoff, joined the Company Finance Division of J. Henry Schroder & Co. Limited, London, in 1966. He was appointed Chairman of J. Henry Schroder & Co. in October 1983 and Group Chief Executive of Schroders plc (SDR.L, SHNWF.PK) in December 1984. Bischoff was appointed Chairman of Schroders plc in May 1995. Following the acquisition of Schroders' investment banking business by Salomon Smith Barney, Inc., a subsidiary of Citi, he assumed his position of Chairman of Citi Europe in May 2000.
Separately, Citigroup announced significant declines in the fair value of the approximately $55 billion in U.S. sub-prime related direct exposures in its Securities and Banking or S&B business. The company said that its estimates the reduction in revenues attributable to these declines to range approximately between $8-$11 billion, which represents a decline of about $5-$7 billion in net income on an after-tax basis.
The company noted that the declines in the fair value of its sub-prime related direct exposures followed a series of rating agency downgrades of sub-prime U.S. mortgage related assets and other market developments, which occurred after the end of the third quarter. Further, the company said that the impact on its financial results for the fourth quarter from changes in the fair value of these exposures will depend on future market developments and could differ materially from the range provided.
Citigroup said that the $55 billion in U.S. sub-prime direct exposure in S&B as of September 30, 2007 consisted of approximately $11.7 billion of sub-prime related exposures in its lending and structuring business, and approximately $43 billion of exposures in the most senior tranches of collateralized debt obligations which are collateralized by asset-backed securities.
The company said that while significant uncertainty continues to prevail in financial markets, it expects its capital ratios will return within the range of targeted levels by the end of the second quarter of 2008, taking into account the maintaining of its current dividend level, and added that it has no plans to reduce its current dividend level. Citigroup provided specific targets for its two primary capital ratios. The company said that the target for Tier 1 capital ratio is 7.5%, while the target for the ratio of tangible common equity to risk-weighted managed assets or TCE/RWMA ratio is 6.5%. C closed Friday's regular trading session at $37.73, down $0.78 or 2.03% on a volume of 138.71 million shares. In the 52-week period, the stock has been trading in a range of $36.52-$57.00.
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