Missing Pieces

How poor risk-management techniques contributed to the subprime mess.

Big Isn’t Always Better

For Citigroup, the subprime crisis simply accelerated a downward slide. With investors calling for the bank’s breakup long before the crisis, Citigroup’s $20 billion subprime-related losses and its battered structured investment vehicles (SIVs) further exposed the difficulties of managing this complex institution. In fact, in addition to taking onto its balance sheet as much as $43 billion in CDOs, Citi had close to $100 billion in SIVs.

Internally, the finance function has been in flux for some time. Two consecutive CFOs — Todd Thomson and Sallie Krawcheck — were replaced in short order. It wasn’t until last March that the bank hired what one corporate-governance scholar calls a “professional CFO,” American Express’s Gary Crittenden, but by then it was too late. Indeed, in an analyst call in October, Crittenden conceded that Citigroup’s massive CDO losses had to do with failure to properly monitor the value of the bank’s CDO holdings until it was too late to hedge or sell them. Collaboration “between the credit-risk team and the market-risk team was not as strong as it needed to be,” he said. “We have to have more integration between the way those teams operate.”

Like Merrill’s, Citi’s CDO losses were disclosed gradually. (Ironically, Thomson had been in charge of risk as CFO, but that structure was dismantled during Citi’s struggles to overcome a series of crises over reputation risk.) A $5.9 billion third-quarter hit predicted in November mushroomed to $11 billion in December. CEO Charles Prince, who in the summer said that Citi would “keep dancing” as long as the music played, resigned. The bank named Pandit as CEO in December and split the role of CEO and chairman. But those and other corrective steps did not prevent a fall in the bank’s capital ratio to 7.3 percent from its 7.5 percent target, triggering a downgrade from Moody’s Investors Service.

Overall, the risk function at Citi lacked visibility or direct lines to the top. Former CRO David Bushnell reported to Citi vice chairman Lewis Kaden, who had been a chief administrative officer, an ineffective organizational structure, according to corporate-governance gurus. Just prior to his retirement in November, Bushnell served as both risk officer and chief administrative officer, reporting to Prince. In November, the bank named Citigroup risk veteran Jorge A. Bermudez as CRO, reporting directly to acting CEO Sir Win Bischoff. Citi also formed an advisory committee of senior leaders from across the company that will provide input on ways to strengthen risk-management processes. The group meets weekly, with the CEO often present.

Crittenden, meanwhile, has said he would centralize the treasury functions to “facilitate the allocation of capital to our highest growth and return opportunities.” He is also in charge of conducting an ongoing review of the bank to increase efficiencies, including head count. A second, one-time review of all the bank’s businesses is under way and is headed by Pandit. That review will yield results that may include a breakup — a scenario under which Crittenden might be tapped to head a division.


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