People will be discussing what led Citigroup into its disaster for a long time. We’ve discovered a two year old Bloomberg article that should be required reading for everyone. It was written by Justin Baer, and is built as a profile of Tommy Maheras, then a rising star at Citi. The article explains how and why Citi increased its exposure to risk, even anticipating eagerly a “market crisis” that would allow it to take on even more risk.
Here’s how it concludes:
Citigroup will continue to take on more risk for clients, Maheras says. And when the next market crisis hits, his traders will be ready to extend even more capital. “We’ll view that as an opportunity again to go into the market, use our resources to give capital to clients who need it,” he says. “We’ll win market share during those tougher times.”
As always, Maheras is willing to sink millions into a calculated risk.
The entire thing is worth reading if you want to understand the culture at Citigroup in 2006 that led the bank to take insane positions. The bank was, as the New York Times revealed Sunday, operating on the assumption that there could never be a national housing market downturn.
Sandy Weill had grown the bank through a massive amount of acquisitions. Lots of people got rich as Weill’s investments seemed to pay off. But after a few scandals in the early years of this century, Citi’s ability to grow through acquisitions was stymied. Executives felt pressure from both investors and Wall Street analysts to grow the firm by internally taking on more risk.
Alwaleed and other investors want more evidence that Prince’s strategy of pursuing organic growth is working. “I’m not a Saudi prince, but I do think their board will come under pressure if we don’t see a noticeable increase in their revenue growth,” says Marshall Front, chairman of Chicago-based money manager Front Barnett Associates LLC, which owns 574,000 Citigroup shares.
“Citi is always in the league tables, but it’s very much considered a jack of all trades, master of none,” says Shaun Springer, a London-based executive recruiter. “It’s a lumbering juggernaut.”
Lifting revenue, at least in capital markets, sometimes means taking more chances. That’s where Maheras comes in. An ex-Salomon Brothers Inc. trader known to friends and colleagues as Tommy, Maheras is no stranger to risk. “You have to stick your neck out in trading,” he says. “And in management.”
Maheras has an instinct for both, says ex-U.S. Treasury Secretary Robert Rubin, now chairman of Citigroup’s executive committee. “When Jon Corzine was running all of fixed income at Goldman, he would walk the trading room and just know this stuff,” says Rubin, who preceded Corzine, now governor of New Jersey, as Goldman Sachs Group Inc.’s co-chairman. “He had it in his bones. He had it in his fingers. And so does Tommy.”
You see where this is going. Citi was under fire for being too slow, for taking on too little risk.
Merrill Lynch & Co. analyst Guy Moszkowski says it’s about time Citigroup spent money to improve its existing businesses and loosened its approach to trading risk. “They probably underinvested in a lot of areas,” he says. “The world has changed a lot. Wall Street doesn’t get paid not to take risks.”
The solution was apparently to set Maheras, then global head of capital markets, free. “And Charles Prince, Weill’s successor, is counting on him and his colleagues at the company’s corporate and investment bank to come to the rescue again and help restore the pace of 10 per cent-plus annual profit growth that Citigroup produced in the Weill era,” Baer writes.
Though Maheras supervises just 8,500 of the company’s 307,000 employees, his capital markets division accounted for more than $9 billion, or almost a quarter, of the bank’s $44.4 billion in revenue for the first half of 2006 and for $2.6 billion of its $10.8 billion in first-half net income.
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