Chuck Prince danced out the door and Robert Rubin is Citigroup’s new chairman.
Charles Prince resigned on Sunday as chairman and chief executive of Citigroup Inc, as the bank said it may write off $11 billion of subprime mortgage losses, on top of a $6.5 billion write-down last quarter.
Robert Rubin, the former U.S. Treasury Secretary who had chaired Citigroup’s executive committee, was named chairman, while Sir Win Bischoff, who runs Citigroup’s European operations, was named acting chief executive.
“I am responsible for the conduct of our businesses,” Prince said in a memo to employees. “The size of these charges makes stepping down the only honorable course for me to take as chief executive officer. This is what I advised the board.”
My comment: The peculiar way things are, risk is rewarded whether it works or doesn’t. If it works, the compensation is huge stock options. If it fails, the result is a golden parachute. What a deal.
Citigroup, whose capital levels have been called into question, expects by June 2008 to return to normal capital levels, after previously expecting an early 2008 return. It has no plans to cut its 54 cents per share quarterly dividend.
My comment: Plans or not, Citigroup is going to have to reduce that dividend. And yes, its capital has been called into question. Please see Question of Solvency at Citigroup for more details.
Prince’s departure came after he told investors on October 15, four days after an investment banking management shake-up, that the board thought Citigroup had a “good, sustainable strategic plan,” and that further management changes weren’t needed.
His exit ends a tumultuous four-year tenure marked by heavy turnover among senior executives, questions over strategy, and the mounting loan and credit losses. Problems have also spurred calls for the bank, which has $2.35 trillion of assets, to be broken up because it is too unwieldy.
My comment: Citigroup will not survive in its current state.
Prince stepped down five days after Merrill Lynch & Co ousted Chief Executive Stanley O’Neal following a $8.4 billion write-down that was more than 50 percent higher than the bank had forecast, in what was also a speedy exit.
My comment: Write-downs have barely begun, at financial institutions in general, not just Citigroup.
In a joint interview, Rubin and Bischoff expressed support for Prince’s overall strategy. “The board is extremely supportive of Chuck’s strategy,” Rubin said. “This is absolutely the right track.”
My comment: What kind of “right track” leads to $11 billion losses in subprime mortgages? What kind of board support such strategies? Prince has now been replaced by a parrot singing the same tune. Are shareholders going to be happy with the costs of replacing a prince with a parrot?
While Citigroup’s Prince appeared to have some success early this year, the write-downs have thwarted that goal.
My comment: Bear Stearns had similar successes and so did Merill Lynch. However, in the second half, Bear Stearns had two hedge funds go to zero, and Merill Lynch suffered enormous write-downs.
The U.S. Securities and Exchange Commission is examining whether Citigroup accounted properly for its own SIVs, the Wall Street Journal said. Citigroup declined to confirm the existence of a probe.
Citigroup now joins Merill Lynch (MER), and Countrywide Financial in SEC investigations. The allegations against Citigroup and Merill are both very serious.
Reuters is reporting Citigroup sees large write-down.
Citigroup Inc. (NYSE: C) announced today significant declines since September 30, 2007 in the fair value of the approximately $55 billion in U.S. sub-prime related direct exposures in its Securities and Banking (S&B;) business. Citi estimates that, at the present time, the reduction in revenues attributable to these declines ranges from approximately $8 billion to $11 billion (representing a decline of approximately $5 billion to $7 billion in net income on an after-tax basis).
These declines in the fair value of Citi’s 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. The impact on Citi’s 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 above.
Citi also announced that, while significant uncertainty continues to prevail in financial markets, it expects, taking into account maintaining its current dividend level, that its capital ratios will return within the range of targeted levels by the end of the second quarter of 2008. Accordingly, Citi has no plans to reduce its current dividend level.
It will be interesting to see how fast those plans change. While the woes in residential real estate are widely known, commercial real estate and municipal bonds are both likely to take a hit in the not too distant future. Let’s see how long that dividend lasts at Citigroup.
Mike Shedlock / Mish
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