Credit crunch claims its biggest scalp

Click to follow
The Independent Online

The crisis at Citigroup is set to send shockwaves through the markets today after the credit crunch claimed its highest-profile victim to date.

Following an emergency meeting of Citigroup's board, it was announced that Chuck Prince, the chairman and chief executive, was stepping down. He will be replaced as chairman by Robert Rubin, the chairman of Citigroup's executive committee and a former US treasury secretary. Mr Rubin has long been a close adviser to Mr Prince, focused on strategy rather than day-to-day operations.

Sir Win Bischoff, chairman of Citigroup Europe and a member of the Citigroup management and operating committees, will serve as interim chief executive.

Along with the scalp of Mr Prince, Citigroup, one of the world's largest financial institutions, is expected to unveil billions of dollars of further losses from sub-prime loans, although it would not confirm any details in yesterday's announcement.

The board has come under pressure from disgruntled investors after the investment bank reported $6.5bn in write-downs and losses from credit markets at the beginning of October wiping one-fifth off the value of the company. Speculation that the group may cut the dividend in an attempt to balance the books has also hammered its share price.

The bank is also facing an investigation by the Securities and Exchange Commission which is understood to be looking at Citigroup's books to see if the bank properly accounted for $80bn in structured investment vehicles (SIVs).

Calls for Mr Prince's resignation have been mounting for months. His departure comes just one week after Stan O'Neal was ousted from his position as CEO at Merrill Lynch.

It also comes just months after Mr Prince, in reference to the company's appetite for leveraged lending, said: "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."

Mr Prince has been at the helm at Citigroup since October 2003 when he took over from Sanford Weill. Since then, he has tried to impose order on the sprawling empire built up by Mr Weill. But Citigroup has fallen foul of regulators in various markets and investors have attacked Mr Prince's inability to control costs.

Analysts said Citigroup would still face the same issues following the departure of Mr Prince and may need to undergo a restructuring to sharpen its focus. The group could be split into three separate companies – a consumer bank, an investment bank and a wealth management division.

Richard Staite, a US banks analyst at Atlantic Equities in London, said: "The question people will ask about Citi is whether it is too big to be managed effectively. If they get someone else in, they are going to face the same issues unless they are going to break the group up and make it smaller and more focused."

He added that since the credit crunch started, Mr Prince, 57, "hasn't looked particularly clever. He has not shown particularly clear leadership," he said.

The first chief executive of a major bank to go due to the credit crisis was Swiss bank UBS AG's chief executive, Peter Wuffli, who was dismissed in July. Last month, UBS said finance chief Clive Standish and investment-banking head Huw Jenkins were stepping down. Bear Stearns Co-President Warren Spector and Citigroup's trading head Thomas Maheras have also lost their jobs. Meanwhile, James Cayne, the chief executive of Bear Stearns is also coming under pressure due to his handling of the crisis.

Fears over the financial sector sent stock markets in London and New York lower on Friday. Shares in Barclays lost 6 per cent, making it the FTSE's biggest faller, following rumours that it had been forced to seek emergency funding from the Bank of England. In addition, analysts at Goldman Sachs forecast that Barclays Capital, the investment banking division, would likely see a 40 per cent fall in second-half income.

Citigroup workers in London are understandably concerned. The bank employs 12,000 staff at its Canary Wharf offices, one of the largest UK-based workforces of any foreign bank. Despite the turmoil, economists do not believe the Bank of England or the European Federal reserve will cut interest rates this week.