user: A Stormy Decade for Citi Since Travelers Merger

“I cannot think of one positive thing that developed as a result of these two companies,” said Richard X. Bove, a financial services analyst at Punk Ziegel. “The miracle of Citigroup is that it still is in the position it is in, given the massive mismanagement.”

Vikram S. Pandit, the new chief executive of Citigroup, is struggling to steer the titanic company through the most turbulent period in its decadelong history. Just over 100 days into the job, he must reckon with the legacy of Mr. Weill, who retired as Citigroup’s chairman in 2006, and his own immediate predecessor as chief executive, Charles O. Prince III.

Mr. Pandit, like Mr. Prince before him, is shying away from Mr. Weill’s strategy of providing one-stop shopping for financial services. Instead, he is focusing on businesses and markets that generate higher investment returns.

To help, Mr. Pandit has brought in several outsiders, as well as old confidants from his time at Morgan Stanley, to strengthen Citigroup’s management. His decision to go outside is a crushing blow to Citigroup executives, who have long prided themselves on grooming the best and brightest in the industry. Recent hires include new heads of investment banking, alternative investments and consumer banking, as well as a new risk chief.

This week, Mr. Pandit announced the bank’s 10th major management shake-up since 2002 and its latest reorganization, moves that underscore Citigroup’s failure to integrate and invest in its operations over the last decade. Executives caution that the road ahead will be rough. For example, it may take at least five years before the company’s technology systems catch up to those of its main rivals.

Don Callahan, the chief administrative officer of Citigroup, said the company’s original model has evolved over time. “Vikram Pandit is now taking the bold steps essential to ensure proper execution across all businesses and geographies, for the benefit of our clients, employees and shareholders,” he said in a statement.

Mr. Pandit must move quickly. Citigroup is being battered by the troubles in the credit markets. So far, the company has taken more than $20 billion in write-offs, and in recent months has raised billions of dollars from foreign investors. Wall Street analysts expect Citigroup to disclose billions of dollars of new losses when it reports earnings this month.

Whatever happens at Citigroup, the aftershocks of the 1998 Citicorp-Travelers merger are still reverberating through the financial system. The deal paved the way for the repeal of the Glass-Steagall Act of 1933, the law that separated investment banks, which underwrite securities, and commercial banks, which accept deposits and make loans.

The end of Glass-Steagall ushered in an era of consolidation and integration within the financial services industry, with mixed results. Mergers between Wall Street and Main Street banks helped American institutions compete with foreign rivals. But the deals also fostered some of the financial innovations that many say contributed to the subprime mortgage crisis. The Bush administration’s plan to remodel the system regulating the financial industry has rekindled the debate over the government’s role in the markets.

In a brief interview last month after JPMorgan’s bid to buy Bear Stearns, the troubled investment bank, Mr. Weill said Citigroup, as a diversified company, could weather the storm better than old-fashioned Wall Street banks. Citigroup’s ability to raise capital “says a heck of a lot about the diversified model,” he said.

But even Mr. Weill seemed to back away from his once-vaunted notion of the financial supermarket.

Citigroup has “got to determine what are the core assets and what are the assets that are going to get the returns they want,” Mr. Weill said. “They have got to get their costs in line, and they have got to get their management together.”

Whatever the case, Mr. Weill’s appetite for profits, rather than an orthodox belief in the diversified banking model, always drove his deal-making. The “financial supermarket” was part of the Wall Street sales pitch. Over the years, Mr. Weill built his empire by making big acquisitions and then wringing out costs. He pressed his business heads to maximize profits every quarter to finance his next deal.

But Mr. Weill, reluctant to sacrifice those earnings, failed to connect Citi’s sprawling operations. Instead, Citigroup stuck businesses together but ran them independently.

“It was like they were painting the house without making sure the plumbing was strong as it needed to be,” said one longtime Citi follower who was not authorized to speak by his company. “After a while, that catches up.”

Under Mr. Weill, each part of Citigroup was run like a separate fief, leaving the company without a single, cohesive culture. Even now, some Citigroup bankers recount the glory days of Citicorp, while old hands on its bond trading desk answer their phones “Salomon Brothers!”

Mr. Weill also struggled to retain his best managers. He and John S. Reed, the head of Citicorp, clashed from the start. Many of Mr. Weill’s lieutenants eventually left. Among them was James Dimon, Mr. Weill’s operational whiz and one-time heir apparent, who now runs JPMorgan.

Mr. Weill finally chose Mr. Prince, his chief lawyer, to run the company and extricate Citigroup from several regulatory messes. In the late 1990s and early part of this decade, Citigroup bankers were at the center of some of the biggest corporate scandals of the time, including the collapse of Enron and WorldCom and the investigations into Wall Street research tainted by conflict of interest.

But with little operating experience, Mr. Prince was ill equipped for the top job. He cut jobs and sold several businesses, but he was eventually forced out last fall after Citigroup ran up steep losses on complex mortgage investments.

The question now is whether Mr. Pandit can make a leaner Citigroup work. He recently announced plans to give more authority to four regional heads to try to speed decision-making, and to centralize areas like legal affairs, technology and risk management.

Guy Moszkowski, a longtime financial services analyst, said the idea behind Citigroup — that one company could do it all — was sound.

“I do actually think the premise is one that makes sense,” Mr. Moszkowski said. “The problem Citi has had is in executing it. It has been deeply flawed and much more difficult than they imagined.”

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assistant: The merger of Citicorp and Travelers, a deal that created a financial supermarket, is looking less visionary as the behemoth lumbers from one crisis to another.