Transcript: Citigroup reboots

This is an audio transcript of the Behind the Money podcast episode: Citigroup reboots

Michela Tindera
It’s September of this year and Citigroup is hosting a town hall event for their 240,000 employees around the world. And the bank’s CEO, Jane Fraser, has a message to share.

[Jane Fraser voice clip]
I’m counting on everyone in the firm.

Michela Tindera
Just days earlier, Citigroup had released a plan to restructure the bank. It was the biggest reorganisation in 15 years. And this was Fraser’s first chance to talk to the whole company about it.

[Jane Fraser voice clip]
Focus on our priorities, win with our clients, and help change the way we run the bank. Get on board.

Michela Tindera
What you’re hearing is a clip from that town hall that was shared with the FT. And the reason Fraser is calling for this massive overhaul is because for years, the bank’s been struggling. Citigroup has long had a reputation of basically being everything for everyone. Here’s the FT’s US banking correspondent Stephen Gandel.

Stephen Gandel
The thing that has always made Citigroup unique is its broad reach. The tagline for years of Citigroup was Citi never sleeps. The idea is that you could do business with Citi anywhere in the world, from New York to Shanghai to Jakarta. Citi could manage those payments for you and get your money in whatever currency you needed it in.

Michela Tindera
But that old model has also been expensive to operate and at times bogged Citi down with bureaucracy. It’s meant that for years Citi’s been lagging behind its peers like Wells Fargo and JPMorgan Chase in things like their stock price performance. Here’s the FT’s US banking editor, Joshua Franklin.

Joshua Franklin
I would say of the big banks, Citi certainly looks like the weakest in the US. The returns are the poorest. And the strategy is more uncertain than in any other of the large US banks.

Michela Tindera
And this is what Jane Fraser hopes to fix. And so her message to employees is clear.

[Jane Fraser voice clip]
We have incredibly high ambitions for this bank, and the train it’s gonna move fast. So lean in, help us win the clients, help us deliver the changes, or get off the train.

Joshua Franklin
I think it really sent a clear message to employees that she was being serious about the changes that needed to be made at Citi, that this wasn’t just, you know, tinkering around the edges, you know, a little bit of window dressing to show that something was being done. This really is a root and branch change that she’s trying to put into place at the bank. Whether or not she’s successful in that, I think is the big question that people aren’t sure about.

[MUSIC PLAYING]

Michela Tindera
I’m Michela Tindera from the Financial Times. Today on Behind the Money. Jane Fraser has introduced the biggest reorganisation for Citigroup in more than a decade. But will it be enough to save the bank?

Hi Steve, Josh, welcome to the show.

Joshua Franklin
Thanks.

Stephen Gandel
Thank you.

Michela Tindera
So, Steve, I think to understand the changes that are being made today by Jane Fraser, we have to understand the origins of Citigroup. And that story begins in 1998 with a guy named Sandy Weill and this very ambitious vision to make Citi a so-called financial supermarket. So tell me more about Weill and what this big dream was all about.

Stephen Gandel
Yeah, Sandy Weill, who had been a titan to finance of the 90s, he had been a guy who had built firms from the ground up. He came up with the idea that the best business model for Wall Street was not to do just being Wall Street, but to do everything, that in the past we had had commercial banks that lent to companies and we’d had retail banks that have your savings account and makes you a mortgage. And then you had Wall Street firms that managed money or they managed bond or stock offerings for companies, they raised money for them, that all these things should be done by one company. And if you could pull the money in that you got from consumers and spin it into the business of managing stocks and running bond offerings for large companies, the whole thing would be worth a lot more. And so the idea was we could take the kind of dependable but least profitable places of finance and shift that money into the more profitable places of finance, the worlds of derivatives and high finance. And in the late 90s, this was this was gold.

Michela Tindera
Right. So tell me a bit more about what this actually looked like in practice inside of Citi. This bank has a regional structure, doesn’t it? That’s how it’s organized.

Stephen Gandel
Yeah. So they had not only heads of regions but also heads of countries. And those heads of countries actually kind of worked like their own little CEO of the bank and even the heads of the cities got their own kind of platform. And so you had all these regional managers running around with all these project managers and people that had worked at Citi for a while, they called it The Matrix, that to get anything done, you had a matrix of managers that you had to work your way through.

Michela Tindera
I see. And despite this sort of bureaucracy, it worked for a while. Citigroup’s share price does really well during a lot of the late 90s and early 2000s. But then the financial crisis comes along. What happened next.

Stephen Gandel
After Sandy Weill puts this thing together he has a lot of firepower and and money searching for the highest returns and what looked like the highest returns at the time with subprime lending and particularly subprime mortgage lending that got Citi into the mess in a big way, in a bigger way than many other places on Wall Street. And so when the housing crisis and the subprime mortgage boom busted, that left Citi with more of these toxic loans than anyone else and much more than they could afford to carry and take losses on.

Michela Tindera
During the financial crisis, Citigroup got a massive bailout from the US government and that premium valuation on their share price they had in the years before never returned. Over the next decade-plus Citi is chugging along. Different CEOs come in and try different strategies to rejuvenate the stock price. They sell off an insurance company here and a brokerage business there. But for the most part, they’re still working within the confines of this unwieldy structure that was dreamed up by Sandy Weill. The bank isn’t in what you’d call terrible shape, but they’re often behind compared to their peers. And then there are also some mishaps.

Joshua Franklin
They had one particularly big misstep back in 2020 involving the cosmetics company Revlon. They were supposed to be making a relatively small interest payment to Revlon’s creditors, and they ended up transferring almost $1bn to a group of creditors, including hedge funds. Most of the hedge funds said we’ll give the money back to Citi that you mistakenly transferred to us. But some of the hedge funds said, actually, we’re going to keep about $500mn. And it was a very long court fight that ensued over a number of years between Citi and the hedge funds. But what it really crystallized for regulators was that Citigroup might have some problems around its risks and control procedures for a mistake like this to happen.

Stephen Gandel
Not only did they have sort of a sub-profitable mess, they also had a mess that they couldn’t manage that could lead to some big problems.

Michela Tindera
So Josh, around this time is when Jane Fraser is picked to become Citigroup’s next CEO. Her roles announced in 2020 and she starts the job in 2021. What’s the reaction from employees and investors when she’s selected?

Joshua Franklin
I think people were very supportive of it at the time that it was, you know, kind of almost a Citi insider. Someone who’d been at the bank for a long time, had a number of different positions, but also an outside perspective as well, and that she’d started her career at Goldman Sachs, been at McKinsey as a consultant for a long time, so could take a kind of dispassionate approach to things. I think the issue is that and I think the worry is that this was a bit of a kind of glass cliff job for Jane in that she basically, you know, the bank has been run by a number of CEOs, none of whom have been able to make it work. So they turn to a consultant and a woman, give her the job. It’s a landmark appointment, but it’s a basically a troubled bank that she…

Michela Tindera
She might be set up to fail.

Joshua Franklin
Exactly.

Stephen Gandel
Right. And it was a surprise, like just a year earlier in a congressional hearing, all the CEOs of Wall Street firms, they were asked point blank, who among you thinks your successor is going to be a woman? And no one raised their hand. And so it didn’t look like it was going to happen. But the truth is that what Citi needed was someone who had had experience at cutting businesses. And that’s what Jane did. They sent her around first to the mortgage business, then to the retail business and then to the Mexico business. She had had this experience where she’d gone around and delivered tough messages to different people and said, we can’t be everything to everyone. And unfortunately, you’re the group that’s on the chopping block.

Michela Tindera
After Fraser started as CEO in 2021, Josh tells me she first focused on winning over three key constituencies — regulators, investors and employees. After the Revlon incident, Fraser had to prove to regulators that she was fixing things. Citi invested in areas like operational controls and compliance procedures. In 2022, she hosted an Investor Day, her chance to communicate directly with city’s biggest investors and get them on her team.

Joshua Franklin
She didn’t sugarcoat it for investors. She acknowledged that Citi had lagged behind peers for a long time and that the road ahead was not immediately going to be paved with gold that they had to stick with Citi for a number of more years of kind of market lagging returns before the turnaround would be complete.

Michela Tindera
And then for employees, Josh tells me she’s focused on showing them that she understands them.

Joshua Franklin
So I think it was about trying to, you know, gain as much credibility with all those three key constituencies that she could. And then ultimately, when the time came to do her big reorg this year with as much support as she could have.

Michela Tindera
So, Josh, Steve, tell me more about what’s in Jane Fraser’s new plan.

Joshua Franklin
Citi has been bogged down for decades, really by this bureaucracy and this unwieldy structure that partly because of regulation, just means that these different branches around the world can’t really operate in harmony with each other. And so Citi has really struggled to make that model that it was built on, work. And so now I think they’ve come to the point where they’re retrenching from a lot of their international ambitions and really refocusing the business to try to build something that actually can fit together well.

Stephen Gandel
Generally, the big shift is to get away from this idea that Citi is managed by place instead of make it Citi is managed by the different product lines. So not that Citi is going to offer you everything no matter what city you’re in, but Citi’s going to offer you its different services, investment banking, payments processing, asset management. They’re going to offer that service everywhere across the world. And so that’s the main change. You broke away that regional model, and instead now the bank is going to be structured by product.

Michela Tindera
Hmm. And how she planning to implement these changes?

Stephen Gandel
She’s taking away a layer of management. And so each individual business head is now going to report directly to Jane. And so she’s going to have more control, but maybe more responsibility over the success of those businesses. And another thing she said is she doesn’t want to have co-managers anymore. She don’t want to have any groups led by two people and she doesn’t want to have excess committee meetings. So she said from day one that she announced this, she was taking out a layer of management. She had immediately eliminated 35 different committees that would no longer have to meet.

Michela Tindera
So by taking away a layer of management, I’m assuming that means layoffs. What’s happening with those right now? What have you found in your reporting Steve?

Stephen Gandel
So there’s a bunch of different ways you can do layoffs. You can fire everyone and tell them to win back their job. You can fire no one. You can put out a number. Citi has been pretty vague about it. And Jane’s, if you want to call it strategy or their messaging, is that we’re doing this together, that this is a group decision among her managers. And then they also have said that this isn’t about cost. This is about making the bank more efficient. And my reporting is that it’s true that Citi really hasn’t set a number, a cost target or a number of employees they want to get rid of and that they’re slowly working from top down at each level, how many people they need. And what I was told is that by the middle of November, they’re only going to be through reviewing 1 per cent of all the positions at the bank. Each layer as they go down gets exponentially bigger. You would think that you want to do layoffs with shock and awe. You announce a big number. You send the people packing. You move the rest of your people along.

Michela Tindera
Well, it’s certainly what we’ve seen in the tech industry.

Stephen Gandel
Yeah, this one’s been managed much differently and we’ll see how that plays out. I mean, it could be that this period of uncertainty leads to more people leaving that Citi wants to keep, it leads to people being unproductive because they’re getting their resume out or doom scrolling. But Jane is trying to make it feel thoughtful. And we’ll see if the benefits of that outweigh the fact that it’s taking a while.

Michela Tindera
So what does success look like for Citi? How will we know when they’ve achieved it?

Stephen Gandel
I think if you let’s say we’re sitting here five years from now and Jane has accomplished everything that she’s wanted to do. What does Citi look like? I think you have a bank that is very close, has great relationships with international corporations that are moving money around the world. That’s a pretty good business to be in. You can make a good living from doing that if you’re a bank. They’ve grown in wealth management around the world, primarily in the US, and you have a pretty competitive investment bank. You’re probably not challenging JPMorgan and Goldman Sachs to be top of the league tables anytime soon. But you have a competitive investment bank and you have a decently sized retail operations in the US. And that, I think, would be a win for Jane if she’s there in five years from now. But obviously, it’s a Citigroup that is much smaller in terms of its ambitions than it was 20 years ago.

Michela Tindera
And how big of a deal is that if Citi doesn’t achieve these goals, what happens to the bank?

Joshua Franklin
I think there are real questions out there. If Jane Fraser can’t fix Citigroup now, is Citi fixable in its current form? So I think if this reorg doesn’t work, then I think all bets are off about what could happen. I mean, could be as small as, you know, if there isn’t a big improvement in the next three years or something, then another CEO comes in and tries again. Do investors get tired and start pushing for something more meaningful, like, you know, arguing that the debt that this bank is worth less than the sum of its parts. Let’s split it up. And then I think there’s also questions around what regulators and the US government decides to do. So I think this is a really pivotal moment for Citi.

Michela Tindera
Your quick opinion, can this happen? Can she do it?

Stephen Gandel
I think that she’s got as good a shot as anybody. I think that it is a very complicated bank. It’s more complicated than they take in deposits and make loans. It’s a hard mix of businesses to make work, but I think they have a lot of businesses that are good. It’s just figuring out how these things work together.

Joshua Franklin
I think that’s very well-put.

Michela Tindera
Josh, Steve, thank you both so much for coming on the show.

Stephen Gandel
Thanks for having us.

Joshua Franklin
Thanks very much.

[MUSIC PLAYING]

Michela Tindera
Behind the Money is hosted by me, Michela Tindera. Saffeya Ahmed is our producer. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.