The Hanger-on

Illustration by Ward Sutton

It’s unlikely the two have ever met, but Citigroup chairman and CEO Chuck Prince and Yankees relief pitcher Luis Vizcaino have something in common. Consider Game 2 in the recent American League divisional playoff series, when Vizcaino was brought into the game in the bottom of the eleventh, after Joe Torre had burned through his best relievers. Nervous Yanks fans could only watch in stupefaction as Vizcaino loaded the bases just in time to face the Indians’ top slugger. How was it that with everything on the line, this was the guy holding the ball? The same is asked about Chuck Prince, who gave up the Wall Street equivalent of a grand slam when Citigroup reported a third-quarter loss of $5.9 billion. The company’s share price now rises when there’s bad news in the hopes that it will lead more quickly to his departure. But despite calls for his ouster from all over Wall Street and from Jim Cramer in this magazine, he’s still very much in the game.

What the critics fail to fully consider is, who would replace him? With no obvious choice from within—and no eager prospects from without—the bank is suffering from what one might call the Vizcaino Condition: Watch and pray he doesn’t do half as badly as everyone expects.

Why is Prince held in such low esteem? The simplest answer is that he’s no Sandy Weill. As Prince’s predecessor, Weill had pursued a single-minded strategy in the nineties: He bought companies that threw off a lot of cash, then used that cash to buy even more companies, adding to both the size of the organization and his own stature in the process. Starting with a troubled consumer- credit company called Commercial Credit, he went on to buy Travelers Insurance, Shearson Lehman, and Citicorp. As he continually traded up, he built a colossus, though an unwieldy one, capped by the $76 billion merger of Travelers and Citicorp in 1998.

Wall Street loved Weill because he was a deal machine that churned out fees for everybody. Plus Weill presided over a stock on the move—shares of Citi tripled between the merger and the peak in 2000—and a stock that’s moving means buyers and sellers, which means … more fees. But having trained his Wall Street lapdogs to value growth-by-acquisition, Weill walked out the door when the company was literally too big to continue on its previous trajectory, setting up Prince to disappoint.

The more complex reason is that Prince was the right man for a moment that quickly passed. Weill’s exit from Citi was hastened by regulatory troubles stemming from Enron, WorldCom, and corrupt practices in the company’s equity-research department.

If Weill had left at any other time, it’s unlikely Prince would have become CEO. But he was a lawyer when legal know-how suddenly seemed crucial to Citigroup’s future, and he was also coming off a decade-long demonstration of fealty to Weill. As the newly installed CEO, Prince moved swiftly, negotiating directly with then–attorney general Eliot Spitzer and taking a $4.95 billion after-tax charge in 2004 to settle the regulatory issues.

Bob Rubin is the X-factor—if Rubin bolts for the Clinton campaign or retires, Prince is toast.

It’s all been a nightmare from there. Failing to learn from his mentor, Prince has regularly violated a cardinal rule of Wall Street etiquette—he has repeatedly made promises he has not kept. In 2005, for example, he talked of maintaining positive operating leverage (revenues growing faster than expenses), something the bank failed to do until 2007. In 2004, he suggested that buying hedge-fund companies was a “flavor of the moment.” U-turn! In April 2007, he spent a reported $800 million to acquire Old Lane, run by former Morgan Stanley honcho Vikram Pandit. Old Lane had been in business for just over a year and managed only $4.25 billion in assets, and its reported 6 percent return in 2006 was hardly inspiring—making it one of the most questionable purchases of a hedge-fund company to date.

In July, Prince injudiciously announced that Citi would continue “dancing” to the music of the buyout boom until it stopped. Less than a month later, the roof was falling in on the dance hall.

Throughout his reign, Prince has shown a knack for turning allies into enemies. One memorable move: When Prince was given the CEO slot, his co-chief was Chemical Bank veteran Bob Willumstad, whom the board saw as the man to run day-to-day operations. In 2004, after negotiating the annual budget with far-flung division heads, Willumstad presented it to the board only to be overruled by Prince.

“From that point forward, Bob had no credibility,” says a former Citi executive. “Everyone knew if they wanted an answer, they had to go right to Chuck.” Indeed, Prince is said to have brought a level of distrust into the executive suite that far exceeds that which existed under Weill, a man who, it should be noted, threw his own protégé, Jamie Dimon, overboard in a fit of pique. In July 2005, Willumstad announced he would leave the company.

Then there was Marge Magner, head of the company’s consumer-banking unit, who along with Willumstad had built Citi’s consumer business into an $12 billion behemoth. In 2005, Magner had been hit by a taxi and was out of commission for three weeks. Prince chose this time to confront her over how her division should be organized, a showdown that ultimately led Magner to resign.

There’s a postscript: Both Willumstad and Magner landed in the embrace of Jamie Dimon, now head of rival JPMorgan Chase, who provided much of the funding for a private-equity firm that has since raided Citi for other talent. Firing people is one thing—driving them into the arms of your closest competitor is another.

One thing Prince has done right is assiduously court the three constituencies that matter most to his keeping the corner office: major shareholder Prince Alwaleed of Saudi Arabia; Bob Rubin, chairman of the company’s executive committee; and the rest of the company’s board.

Rubin is the X-factor in Chuck Prince’s world. One of the most respected people on Wall Street, the former co-chairman of Goldman Sachs and Treasury secretary under Bill Clinton has managed to get himself what one former executive calls “the best gig in town.” He’s paid $17 million a year with no operational responsibilities—tasked merely with playing a corporate and diplomatic glad-handing game of the highest order.

Prince needs Rubin’s support and, for the time being, seems to have it. But Rubin may not be around for long. If Hillary Clinton wins the Democratic nomination, Rubin could jump ship. Or he could merely retire. At 69, he could be forgiven for concluding that his time is better spent fly-fishing.

As for the board, well, it will support Prince, as they say, until it doesn’t. It’s a board, it should be noted, that gave Prince a 13 percent pay raise, to $26 million, in 2006, a year during which Citi’s profits fell 12 percent and the company lost market share on several fronts. Says one former executive, “A different board would have thrown Sandy out. So it’s kind of strange to expect it would do something with Chuck. And many of them have faced the same issues as Chuck. Dick Parsons [of Time Warner] had Carl Icahn. Alain Belda [of Alcoa] has been criticized. And everybody knows what Mike Armstrong did to AT&T. With the exception of George David [of United Technologies], who is a rock star, none of them have distinguished themselves of late. It’s hard to imagine this group will take any action.” Indeed, Parsons said of Prince recently, “Chuck is doing a good job, and I think he has been working in an extraordinarily complex situation through difficult markets. Now is not the time to be saying, ‘Do we change course or do we change captains?’ ”

In an effort to delay the inevitable, Prince has taken a measured approach to feeling out a new strategy for Citi, one that includes a focus on organic growth (except when it doesn’t), a shift to grow the company’s overseas revenues more quickly, and a renewed focus on ethics. In other words, multiyear changes that contain an implicit argument in favor of keeping him around. How can you fire a man in the first or second year of a five-year plan? Prince also has been restocking the executive ranks. In poaching new CFO Gary Crittenden from American Express, he doubled Crittenden’s salary from $5 million to $10 million. What better way to make a BFF? And just last week, Prince restructured top Citi management, dispatching a potential successor and promoting Pandit. This move elicited words of support from Rubin: “I think Chuck’s going to be here for a lot of years.”

For right now, nobody seems to be gunning for Prince’s job, which may be the main reason he’s safe. The most talented internal candidate, former CFO Todd Thomson, was thrown under the bus in January in a Machiavellian opera that included allegations of escorting CNBC’s Maria Bartiromo on the company jet. New York Stock Exchange CEO John Thain, often rumored to be a potential replacement, obviously doesn’t want the job, as he’s failed to take the opportunity in the two years Prince has been on the ropes.

After the disaster that was the last earnings report, Prince again made an imprudent prediction. Despite the $33.1 billion in lending commitments to leveraged-buyout deals that Citi has yet to get off its books—and which could result in yet another gargantuan hit to earnings—Prince declared that the bank’s earnings would be back on track by the end of the year. The bases are loaded again.

The Hanger-on