As expected, CEO Chuck Prince stepped down at Citigroup’s extra special board meeting Sunday. As not entirely expected, former Treasury Secretary and Goldman Sachs co-CEO Bob Rubin took over as
interim chairman and Citi Europe’s Win Bischoff as interim CEO. And the WSJ, NYT, and FT are all reporting (Sunday night) that Citi will announce another $8 billion to $11 billion in writedowns on Monday.
Prince was the longtime legal adviser of Citigroup creator Sandy Weill, and probably had no business being CEO of a global banking/brokerage company. I’m not sure who does have any business being CEO of a monstrosity like Citi (other than maybe Jamie Dimon), but Prince seems to have failed pretty magnificently as a risk manager. And managing risk is, in the end, a bank CEO’s most important job.
In a now infamous interview with the FT back in July, Prince made clear that he was aware of the risks his company was taking:
When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.
At the time, blogger Yves Smith warned that timing the end of the song was a really hard thing to do:
Prince has in essence said he knows that when the music stops, it won’t be one chair that will be removed, but several, perhaps most. He seems supremely confident in his ability to know when to exit, but with everyone planning to stay as late as they can, he is likely to be underestimating how quickly conditions can change.
Uh, yeah. Guess he was.
And that’s what been so fascinating and informative about the slow-motion ending to the credit market game of musical chairs that we’ve been seeing since August. We get to find out who actually knows how and when to stop dancing.
Update: Yves Smith and Felix Salmon (who, let’s just say it, know a lot more about banking than I do) both say the big news is in how many subprime-mortgage-related securities of dubious value Citi still has on its books. According to the WSJ:
Citigroup’s subprime exposure — and source of its problems — is found in two big buckets that together total $55 billion in its securities and banking unit, the bank said. The first bucket totals $11.7 billion, including securities tied to subprime loans that were being held, or warehoused, until they could be added to debt pools for investors. The second, totaling $43 billion, covers so-called super-senior securities.
These highly rated super-senior securities are portions of collateralized debt obligations, or CDOs. CDOs are repackaged pools of lower-rated securities backed by subprime loans into pieces with different levels of risk and return.
Yves runs the numbers and says it looks as if Citigroup’s exposure is far worse than that of Merrill Lynch, “and that is before taking into account any losses” (italics his) from Citi’s Structured Investment Vehicles. Felix concludes, “There’s really no reason that things shouldn’t get worse before they get worse.”
Most big companies, when they run into a patch of trouble, will eventually adopt what’s known as the kitchen-sink approach, where they write down the value of every possible asset in hopes of getting a nice fresh start. Citi seems to have been (and may still be) afraid of doing that, possibly because of concerns about its capital ratios, possibly because it is afraid its writedowns could snowball into an even worse meltdown of the market for subprime mortgage securities.
Update 2: Another post on the topic here.
Update 3: I think it’s only fair to note that Prince apparently does know how to dance. From the WSJ:
In May, he was honored by the American Turkish Society for Citigroup’s investment in Turkey’s third-biggest bank. At one point during the evening, the tall and burly Mr. Prince stepped away from business chatter and nimbly whirled his wife around on the dance floor. Citigroup employees watched with their mouths agape.