Sunday, November 23, 2008

Maheras, Rubin and Prince blow up Citigroup

Remember the fond days when Sandy Weil didn't take trading risks? Citigroup's CEO Chuck Prince, thought it would be simpler to just trade your way into profits, and Thomas Maheras was the head of risk management who was supposed to get this done. Instead he cost shareholders over $200 billion dollars.

Weill's strategy for building Citigroup had little to do with taking big trading risks, Maheras said. Instead, Weill drove up profit, and the stock price, by stripping the fat out of the companies he acquired and sticking to businesses that would generate safe, steady growth.

Now Prince is under pressure to improve Citigroup's revenue, profit and stock price. As of last Friday, Citigroup shares had climbed 8.5 percent since he took over in October 2003, compared with gains of 33 percent for J.P. Morgan Chase and 32 percent for Bank of America.

Lifting revenue, at least in capital markets, sometimes means taking more chances. That is where Maheras comes in. A former Salomon Brotherstrader, Maheras is no stranger to risk. "You have to stick your neck out in trading," he said. "And in management."

Prince promoted Maheras to head of capital markets in February 2004. Citigroup has spent more than $1 billion in the past three years to strengthen the bank's equity and fixed-income units, which are Maheras's bailiwick.

According to the NY Times, Chuck Prince didn't even know Citi had $43 billion of exotic mortgages on it's balance sheet until September of 2007. After all Maheras, the director of risk, had only written down these CDO's by $11 million dollars:

There, Citigroup’s chief executive, Charles O. Prince III, learned for the first time that the bank owned about $43 billion in mortgage-related assets. He asked Thomas G. Maheras, who oversaw trading at the bank, whether everything was O.K.

Mr. Maheras told his boss that no big losses were looming, according to people briefed on the meeting who would speak only on the condition that they not be named.

For months, Mr. Maheras’s reassurances to others at Citigroup had quieted internal concerns about the bank’s vulnerabilities. But this time, a risk-management team was dispatched to more rigorously examine Citigroup’s huge mortgage-related holdings. They were too late, however: within several weeks, Citigroup would announce billions of dollars in losses.

But is was also overpaid and overloved Bob Rubin who helped craft this strategy:

Citigroup insiders and analysts say that Mr. Prince and Mr. Rubin played pivotal roles in the bank’s current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits...

Chuck Prince going down to the corporate investment bank in late 2002 was the start of that process,” a former Citigroup executive said of the bank’s big C.D.O. push. “Chuck was totally new to the job. He didn’t know a C.D.O. from a grocery list, so he looked for someone for advice and support. That person was Rubin. And Rubin had always been an advocate of being more aggressive in the capital markets arena. He would say, ‘You have to take more risk if you want to earn more...

In fact, when examiners from the Securities and Exchange Commission began scrutinizing Citigroup’s subprime mortgage holdings after Bear Stearns’s problems surfaced, the bank told them that the probability of those mortgages defaulting was so tiny that they excluded them from their risk analysis, according to a person briefed on the discussion who would speak only without being named..

Just like AIG. And Citigroup's fate will be the same.

1 comment:

Anonymous said...

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