Issue of the week: The shake-up at Citigroup

last updated 8 January 2015

Charles Prince has vacated the CEO’s office at Citigroup, but the problems that bubbled up on his watch will live on, said Peter Eavis in Fortune.com. Prince, 57, resigned this week after the giant bank disclosed that losses on its subprime mortgage holdings could swell to an eye-popping $11 billion in the fourth quarter. That’s on top of the $6.5 billion mortgage-related hit the bank took in the third quarter. “Given the size of the recent losses in our mortgage-backed securities business,” Prince said, “the only honorable course for me to take as chief executive officer is to step down.” Firm co-chairman Robert Rubin, the former Treasury secretary, will take over Prince’s duties while the board of directors seeks a permanent successor. The board faces a difficult task. Few candidates are “capable of both managing through more pain and drawing up a far-reaching restructuring plan that could win over discontented employees and investors.” While the search goes on, all eyes will be on Rubin, said Rich Miller and Yalman Onaran in Bloomberg.com. “Putting out financial fires has become something of a specialty” for Rubin, 69. As chairman of Goldman Sachs, Rubin steered the investment bank through an insider-trading scandal in 1987. As head of the Treasury during the Clinton administration, he is “credited with helping achieve the first U.S. budget surplus in a generation, saving Mexico from economic ruin, and holding together the global economy during the currency crises of 1997 and 1998.” But there are some blots on his record. Shortly after he arrived at Citi in 2001, he tried to use his Treasury connections to stop credit-rating agencies from downgrading Enron, a major Citigroup client. And critics say that Rubin, who served as “consigliere” to Prince, is partly responsible for the failed strategies that landed Citi in hot water. Rubin’s first order of business should be to find out just how hot that water is, said The Wall Street Journal in an editorial. Prince’s departure was triggered by the revelation that Citi’s bad mortgage debt far exceeded the bank’s previous estimates. “That has extended the uncertainty about how widespread the damage is, both at Citi and throughout the financial system.” Prince is gone—and good riddance. But “the management shake-up does little to inspire confidence that the problems are over for America’s largest bank.” Citi is hardly the only bank having trouble estimating its losses from mortgage securities, said Carrick Mollenkamp and David Reilly, also in The Wall Street Journal. Those securities seldom change hands, so they can’t be valued using market prices. Instead, banks rely on mathematical models. “Citigroup’s struggles to put an exact number on its losses demonstrate just how fallible the models can be.” Merrill Lynch relied on similar methods, and last week it had to acknowledge that its recent mortgage losses were closer to $8 billion than to the $4.5 billion it previously estimated. It’s unlikely that Citi and Merrill were the only banks to lowball their losses. And that’s making the markets very nervous.