The merger between
Citi and Travelers is one of the worst big
bank mergers in history. Citigroup was the collection
of dozens of businesses, and so there had been issues
with compliance and risk management. The thing you have to realise
is that the merger that Sandy Weill and John Reed come
up with, it was illegal. If you look at simply its
share price performance, Citibank has trailed its
other big American rivals. Since the merger 25
years ago the stock is down over 80 per cent. Welcome to the banking
business, where you have a crisis around every corner. Time and again, you have seen
problems or scandals or trading losses erupt in
different corners of the bank that have taken the
senior managements by surprise. Citi is by no
means the only bank that has had to
pay fines for risk issues, money laundering
issues, compliance issues. But the bigger a bank gets,
the more complex it gets, the more global it gets,
the more challenges like this that they
have to come up against. We've seen Citibank
have problems with money laundering in
different departments, again, which the senior
management didn't know about. In the case of Banamex, if
there are problems that come up, you have to ask
yourself if they were paying good enough attention,
if their systems were focused on the right thing. More recently, there have been
big problems in this IT sector, where essentially
systems have broken down, and the bank has made payments
by accident to clients. Time and again, we
see the same pattern. Yes, we are back to thinking
about Citi and this nearly $1bn mistake in payment
that they made. So what really starts the latest
chapter of Citi's struggles, it's something
that's pretty basic. Citi just needs
to make a payment of around $9mn to a group of
creditors to the cosmetics company Revlon. But instead of
transferring $9mn, they accidentally
transfer $900mn. Ninety-nine per cent of people
don't pay attention to this. We just see headlines about
money moving and transactions. In fact, the plumbing
of the financial system is extremely complicated. Banks are doing millions
of transactions a day. 99.999 per cent of the
time it works out OK. What's unique
about this case is, one, obviously, it involves
a lot of money, $900mn. Two, it's this quirky
situation where some of the firms that
got repaid accidentally had a grievance with
Citigroup and had a reason not to give the money back. Most of those creditors,
a group of hedge funds, pay Citi that money back. They recognise, oh,
this was made in error. But a group of those hedge
funds think actually, you've paid us this money. There's no obligation
for us to pay it back. We're going to keep it. And so Citi is then in
this long protracted fight over around $500mn, trying
to get that money back that they accidentally
transferred. In addition to that,
regulators, investors are asking the question,
how can this happen? The Revlon issue at Citi
was due to human error, according to the
company, but it really reflects underlying
deeper problems. It was a microcosm of a larger
issue of antiquated technology. I mean, for all
the progress Citi has made in the front
office with digitisation for consumers, the back office
needs enormous modernisation. Remember the flash crash of
European stocks last month? Turns out it might have been
caused by a London Citibank staffer. In 2022, almost two years
after the Revlon case, there's another issue with Citi. They cause what's called a
flash crash, a sudden drop in a number of European stocks,
because of a fat finger trading error. One of their traders sent
through a much larger order of stocks than planned. This really moved markets
in a significant way. And again, these sort of things,
they do happen occasionally, but they shouldn't happen. And it just showed how the
problems that Citi has, they can't be fixed overnight. And if you look at simply its
share price performance, what is very clear is that
in the last few years Citibank has trailed its
other big American rivals. And even now, in
2023, it's trading below its projected book value,
which is quite remarkable. The problem at Citigroup
is simply the complexity. And so you know it really
stretches back to the mergers that they pursued. I'll tell you, Citi has it all. I mean, when this merger
was announced in 1998, it was the paradigm
of capitalism. This is where the future is
headed for the next 50 years. In hindsight, the Citi-Travelers
deal created a lot of angst. When Citibank did its
famous merger in 1998 it really became a
symbol of the changing American regulatory
landscape and the changing ambitions of American banks. The 90s really was a time
of growth on Wall Street and just in the
economy more broadly. It was a time of
burgeoning opportunity. The markets were good. National mood was
pretty positive. Interest rates were low. People felt like
they were on the cusp of this great
globalisation wave. You had booming emerging markets
in Latin America, in Asia, and really felt like the
financial world was going to become more interconnected. The whole period in the
80s and 90s came at a time when lots of companies
were combining in lots of different areas. Financial services was actually
kind of late to the party because there were rules against
particular types of mergers. That was the time when
people were talking about creating
financial supermarkets - buying everything
from the same company, whatever your financial need. And Citi was the first
one to give that a shot. The idea was that if you
created big champions they would do better, and
they would have more profits while also be able to cut costs. Financial services
to a certain extent trailed behind, even though
the bankers themselves were working on these
big merger deals. You had on the
one hand Citi that had a huge business
around the globe, known to be an innovator in
technology and credit card. It has its roots
back to the beginning of the American enterprise. Very traditional US bank, the
largest, the highest rated. What is today Citigroup started
all the way back in 1812 as First National
Citi Bank in New York. And decades later it became
one of the real pioneers in US banking, in going
overseas, in Latin America, in Asia, globally around
the world, in the late 90s. In 1974 it's
rebranded as Citicorp. And then in 1993, it
hits another milestone. It becomes the biggest bank
holding company in the world. This isn't just a New
York bank anymore. Citicorp at that
point was a giant bank that did corporate
and retail banking. Travelers, meanwhile, was an
insurance company that also had an investment banking arm. Smith Barney. They make money the
old fashioned way. Salomon Smith Barney, which
did wealth management as well - so it brought the
whole giant panoply of pretty much everything you
could do in financial services under one roof. John Reed was the CEO of Citi. He had come up through the
consumer side of the bank. On the Travelers side
we had Sandy Weill, who had built up broker dealers. He's from Bensonhurst, Brooklyn. He's different. He looks different than what
you would expect for a CEO and he saw the
world differently. The merger they're
proposing is illegal. Most bankers wouldn't go there. But it took someone who
had a different vision. And they decided, well,
we'll do the merger first, and the world's going
to change for us. And they were right. In 2001 the share price
almost hits $600 a share. Cheered on by investors,
the merger between Citi and Travelers - it's a really
seminal moment in US finance because it's the merger
that triggers the repeal of Glass-Steagall Act, which
is a post US Depression piece of legislation, had been
in place since the 1930s, basically to try to
de-risk US banks, to separate commercial banking
activities from riskier investment banking activities. When they announced the
merger it was not yet legal for all of these things
to be under one roof. But the Clinton
administration had made clear that they wanted to
relax the regulations. And it was pretty clear that
Congress was going to go along. So there was a general
agreement that they were going to change this. And by having an actual
deal, it meant that Congress had a deadline to act. I mean, in a way, it almost
forced Congress's hand. They had been talking about it. And now they had a deal that
if they didn't pass new rules, then this deal would
collapse, and it was this giant
successful deal, and was supposed to be fantastic
for the stock market. Citibank became the first
big American juggernaut to try and combine investment
banking and retail banking. And it did so in a
very dramatic fashion. And it made it
very clear that it wanted to be a one-stop
shopping enterprise. It went on a spending
spree, gobbling up all kinds of operations,
and essentially planting flags in many, many countries. The one I know best is Japan,
where essentially Citibank became one of the
first groups that really had a
significant presence in the Japanese market. One of the things that changed
when Citi merged with Travelers was that Travelers
was willing to take partial ownership of entities. And Citi had never
done that before. So for example, they owned part
of Bank Handlowy in Poland. They had ownership interest
in a bank in Turkey. Whereas previously, when
Citi made a bank acquisition they would acquire
100 per cent And I think that probably contributed
to some of the issues that have happened
down the road. The enormity of it, and the
difficulty of running all these various businesses, different
traditional segments, the old school bankers
with the risk takers, and the client-focused people,
the broker that was going to talk to the grandmother who
had savings and try to invest it - I mean, these different
cultures never really mixed. And so pretty
quickly, Sandy Weill, the ultimate operator who
had won out in the merger and got rid of his
rival, John Reed, to take over this all aisles
of finance - he can't make it work. And by 2003 and 2004,
Sandy Weill, he's out. Turned out that insurance,
at least in America, doesn't sit all that
well with banking. This is not true globally. If you look across the
Atlantic, the big French banks are what are known as
bancassurance banks. And they have found
a great way... I mean, they make money hand
over fist doing it their way. But in the US, for
whatever reason, insurance and banking do
not grow together very well. So Travelers decided
relatively... or Citigroup, which was the combine, decided
relatively quickly that they were not... they were not
getting good profits off Travelers. And so they split that part off. This idea of a
financial supermarket with consumer finance,
banking, insurance, all kinds of products,
you know, just build it and they will come,
that was a fail. Then you had a failed strategy. They layered mergers
on top of mergers and never integrated them. You had failed execution. When it wasn't working
well, they took extra risk. Citi has had a big
problem with silos in the last couple of
decades in the sense that it's so big and
complex that it's almost impossible
for the management to know everything that's
happening across the bank. And so when the
subprime mortgage crisis erupted Citibank was suddenly
left with a very nasty headache and problem which the senior
management appears to have had no idea was a potential risk. Chuck Prince, Charles Prince,
he made a very famous quote I believe to the
Financial Times just before the crisis about
having to participate in financial markets
and transactions. Even though things
were getting difficult and people were
worried, there was still this pressure to participate
in risky activities. And again, he
described it as dancing while the music is still
playing, a quote that still resonates today. In recent years, innovative
mortgage products have helped millions
of Americans afford their own
homes, and that's good. Unfortunately, some
of these products were used irresponsibly. So we get to 2007, 2008,
the financial crisis hits. Huge moment on Wall Street. And Citigroup is not spared. In fact, it's one of the
firms that's hit the hardest. It has all sorts of toxic
assets on its balance sheet. You could have seen
it coming, right. If there was a
risky venture, that was the point of Citigroup. The point of Citigroup
was to get money from lower return businesses
into higher return businesses. And the businesses that
have the highest returns are always the riskiest. And the riskiest business to
be in was subprime mortgage. So Citi ran right into it. 24 hours ago, the boss of
the world's biggest bank, Citigroup, fell on his sword
after revealing another £5bn of bad loans in
America's housing market. It was hit so hard
by the crisis, and it took all this
government money. It was really shackled
for many, many years. There was years of unwinding
its balance sheet, paying fines. Structurally, Citi was going to
have a harder time because it had a lot of pieces in a
lot of different countries, for example. JPMorgan in fact didn't
have a particularly big international footprint. Its stuff is mostly concentrated
in the US and the UK. So it doesn't have capital
popped all over the place. So in that world, Citi is
fighting against the tide. And so it's having
to reinvent itself. And it's really hard. A glass ceiling has been
shattered in finance. Citigroup president
Jane Fraser will soon become the first woman to
head a big Wall Street bank. Citigroup named her Thursday
to succeed Michael Corbat when he retires in February. Citi never really has a rethink. Vikram Pandit, who
takes over for Citi, he's also from the Wall
Street side of the business. He sort of has a similar
profile to Sandy Weill, and probably looks at the
world in the same place. The person who takes over from
him, Michael Corbat, he also, he's a Salomon Brothers person. So he's also of this kind of
Wall Street merger risk taking. Now to look forward is... in a way, Jane, she doesn't
come from the dominant culture on Wall Street, the investment
bankers, and the merger types. Everybody who has run Citi
basically since the 2008 crisis has been trying to simplify, and
clean up, and rationalise Citi. And they've tried
different ways. And Jane Fraser is no exception. She has tried to trim back the
bits that are not profitable. And she has tried to focus
Citi on the things it does well so that it can be
profitable without wasting money. She has struggled
to make that work. I think anybody would
struggle to make that work. In fact, her predecessors
definitely struggled. There's a cynical view
sometimes expressed on Wall Street which is that
when a big company gives a top job to a woman, it's
often because the company is in trouble. And I'd love to think
that wasn't the case. But certainly, when
it comes to Citi having given the top
job for Jane Fraser, it does raise a question about
whether once again a woman is coming in as a troubleshooter. Jane Fraser was a management
consultant earlier in her career, and has been at
Citigroup for many, many years, and respected executive. She's in the early
part of her tenure. And so her challenge
really is that, again, now that
we're like 10 years on from the financial
crisis, Citigroup is as clean and streamlined
as it has been in a long time. Can it now actually
start to grow? Can it take market share? Can its valuation improve
as its valuation multiples trail many of its peers? And can they turn the
corner on this narrative that the firm is too big, and
too complex, and not well run. It helps that she is an
unflashy, unflamboyant person who doesn't often
grab headlines. And that's very much
in tune with the mood and zeitgeist in banking today. Because whereas you used to
have these rock star bankers and financiers a
couple of decades ago, which would basically
grab the headlines and lots of
attention, today it's very clear that investors
want their banking leaders to be essentially understated,
if not almost shy, and focused on sober, unglamorous
parts of finance, rather than trying to gamble
or do profitable hedge fund trading or things like that. So in that sense, Jane Fraser is
very much suited to the times. But it remains to be clear
whether she can convince investors that she really has
a new mission, a new strategy for Citibank. Her current plan, which
she just announced, which is the most sweeping
reorganisation in 15 years, is to bust down the
silos, I would say. Citi was divided into
divisions, and each division had a specific operational
manager, and she was on top. And that would have been true
for the previous CEO as well. She has decided to get rid
of that layer of management and have six different
operational businesses that directly report to her. It's an interesting strategy. It's risky. It very much means
that she is personally responsible for the operational
decisions they make. She has no insulation. If something terrible
happens, it's her. Which may be great. If she, if she turns out to
be a really good manager, and really good at making
choices, and freeing up each of these businesses
to do their best, it could be very good. If it doesn't go well, there
isn't anyone else to blame. When the merger
was done, it really was a time of more
is more for banks. Whereas now with Citi, less
is more for these guys. They really need to
refocus the business and show itself that it can
be really profitable at what it does instead of trying to
be all things to all people. JPMorgan Chase, Jamie
Dimon's figured out how to be a bank to everyone. Bank of America has also
merged investment banking with traditional banking. So I think it's wrong to
say that Sandy Weill's vision failed, but it
certainly failed at Citigroup. This entire industry
has become more humble. And Citigroup, when
it was created, was not an exercise in humility. It was an exercise in arrogance. And we live in an era
of humble banking. And Citigroup is going
to have to figure out how it fits into that new world.