Citigroup Trips Up on a Series of Corporate Governance Blunders ; BUSINESS ANALYSIS US Banking Giant's Chief Executive Needs to Steer the Group Away from Controversy
Griffiths, Katherine, The Independent (London, England)
IF CITIGROUP was hoping the recent wrong-doing in its Japanese private banking business would fade away, it was disappointed. Yesterday, Japan's financial watchdog blamed the group's "corporate culture and governance" for a list of regulatory breaches which last month prompted it to order Citigroup to close down its entire private banking business in the Asian economic powerhouse.
Hirofumi Gomi, the commissioner of Japan's Financial Services Agency, said: "It was very regrettable to have regulatory violations of this sort at any bank, foreign or domestic".
It was an unwelcome pronouncement for Charles Prince, the chief executive of Citigroup, who celebrated his first year as the head of the world's largest financial services group last week.
Mr Prince, a trained lawyer, succeeded Citigroup's larger-than- life former chairman and chief executive, Sandy Weill. A veteran of Citigroup, Mr Prince was given the task of stamping out the lapses of judgement by employees which had led to the bank being entangled in almost every recent financial scandal, including the Enron and WorldCom collapses, and the allegations of biased equity research.
Mr Prince told a meeting of Citigroup's managers in June: "We have a keen focus on not being in the headlines".
Reality could not have turned out more differently. Just a few weeks later Citigroup was on the front page when it emerged that its London bond team had executed a controversial trade, rapidly selling off $13bn of bonds and buying them back for less.
The deal was not illegal but it was frowned upon by the Financial Services Authority and by fellow traders, who believed Citigroup's team had broken the unwritten rule that no one in the market takes advantage of thin summer trading in such a dramatic way to make a quick return.
Mr Prince himself said last week the trade was "a completely knuckle- headed thing to do" and promised that disciplinary action would be "felt stingingly" by those responsible.
Altogether more serious were the problems which emerged barely weeks later in Japan. On 17 September, the country's regulators ordered the bank to close its private banking business after an investigation revealed the group had committed extensive legal violations over seven years.
The financial impact on Citigroup's business - which has a market capitalisation of $228bn, and assets of $1.3trillion - is likely to be fairly small. Even the seemingly punitive charge Citigroup took in its second quarter of almost $5bn or possible lawsuit payouts over WorldCom and other cases was the equivalent of just three months' earnings.
Yet, even if Citigroup's deep pockets are not feeling the pinch, investors are worried that the seemingly endless stream of controversies will hurt the banking giant, whose empire includes investment and corporate banking, and financial services for personal customers.
Kathleen Shanley, a senior bond analyst at Gimme Credit Finance in Chicago, said: "I have not seen anything that threatens their financial stability. But it is a curse and a blessing that they are so large that they can write off a lot of these issues without endangering the cash flow because it could start endangering their reputation. …