Sandy Weill's Monster

It's called Citigroup, and it's really big and complicated. Even its deal-addicted boss hasn't quite figured out how to manage it.

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Actually, FORTUNE's attempt at constructing an organization chart of Weill's management team produced an image of Weill sitting imperially center stage, drawing from multiple streams of expertise and tolerating an occasional overlap. "I do like to have various sources of information," he says, pointing out that "you learn more" when you avoid homogeneous opinions. "This company is too big to micromanage," he says, "but it's not so big that you can't know what's going on."

One of his key informants, co-chief operating officer Fishman, is virtually a managerial octopus. As noted, he's CEO of Travelers Insurance, which is big; he's in charge of expanding insurance globally; he runs Citi's overall consumer businesses in Japan and Europe, which everybody wants to see grow; and now he's got this fancy new job that puts him to "extending Sandy's range." The truth here is that Weill is given to overloading people he trusts, and Fishman, who's been in the shop for 12 years, is definitely one of those.

At the moment, Fishman is busy answering Weill's call for better information than he's got about "risk"--or, more specifically, credit risk. It's not that there isn't already a welter of data on this subject. The problem is, there's so much stuff that you could drown in it. So Fishman is attempting to give Weill and other executives what he calls a "synthesized" picture, which for the moment at least is being presented in a monthly 54-page book that Fishman figures can be easily digested. He says that if a problem arises at Citi, "I didn't know" is not an acceptable excuse for an executive to fall back on. "One of my responsibilities," he says, "is to take away the 'I didn't know.' " His remarks recall the troubled 1998 days of the merger, when Salomon Smith Barney had no conception of how deeply it was exposed to long-term capital, and Citibank was equally blind to its Russian risks. There were a good many renditions then of "I didn't know," and you can tell Weill is trying to head them off at the pass.

For high-octane help today, he's also got Bob Rubin, with whom Weill says he has a "terrific" relationship. Working out of spacious offices that are only a few paces apart--and sometimes walking between them in stocking feet, a Rubin habit that Weill's trying out--the two talk often about wide-ranging subjects. Other Citi executives frequently call on Rubin's brains and experience too. His role, though--and this is adamantly the way he wanted it--is advisory, not operational.

He does say, with a little chagrin, that his plans to do side stuff, like public policy and charity work, have gone somewhat awry. "My theory of the case," he said in March, "was that I would take a reasonable working day and spend most of it here at Citigroup, but some of it elsewhere. Well, the 'elsewhere' has happened, but it's turned out to be on top of the working day, which is actually more than a day." Even so, Rubin's been delivering the side stuff. He recently had an op-ed piece published that opposed the Bush Administration's idea of a massive tax cut. Weill says he wanted Rubin to make the last line of the piece, "Sandy doesn't agree with me."

But Sandy has agreed on other issues. At Rubin's suggestion, Weill has instituted a weekly meeting of himself, Rubin, and senior executives, including the four business heads and the new chief operating officers. Weill, who'd never scheduled more than a monthly management meeting at Citi, says he was initially dubious about weekly sessions because he wasn't sure there'd be that much to talk about--which, when you think about it, says a lot about Weill's view of management. But the meetings have turned out to be so valuable that people even tune in by phone when they're out of town.

The get-togethers are useful because in a company of Citi's size and complexity, there are dozens of issues--business overlaps, competitive threats, regulations--that cut across divisions. In an institution that promotes cross-selling, for example, there is always the question of how the financial spoils are divided up between the two divisions--a matter that goes under the name "transfer pricing." For example, suppose that a Salomon Smith Barney financial consultant sells a mutual fund "manufactured" by Citi's investment management division. What's the price that the IM division receives? The answer, since it determines profit, is extremely important to executives getting paid (and paying their people) according to what their own bottom line looks like. One former Citi executive says that difficult questions like these have sometimes aggravated business heads to the point of their "barely speaking to each other."

Asked about transfer pricing pains at Citi, Weill says testily that he wishes people "would think about doing the business first, and worry about who gets the credit second." But, trying to mediate, he also has his financial people studying plans for internally double-counting revenues, so as to make profits (or losses) accrue to both parties involved in a cross-selling event. He adds that the weekly meeting of the business heads has the potential--he obviously hopes--to soothe disagreements like those about cross-selling, because it encourages these people to "relate."

These days, the weekly meeting is often consumed by the usual suspects--the economic downturn and how to deal with it. "We're affected by everything," says Weill. Indeed, Citi faces almost every peril in the book: rising losses on credit cards and loans, economic crises in places like Turkey and Argentina, declines in brokerage revenues everywhere, asset-management fees that have fallen with stock market values, fewer underwritings.

The investment banking business, in fact, is taking its licks just as Citi is feeling justifiable pride in the way that its investment bankers and commercial bankers are working together to secure underwriting deals. These are sometimes supplemented with Citi loans that are a key to the transaction. Weill himself isn't wild about lending to big corporations, because the business is thin in profits. But if the ability to make a loan is crucial to getting a large and profitable equity underwriting, Citi will typically step right up and do the loan. In fact, the ability of Citi, and a few other companies, to bring both lending capacity and underwriting skills to a client is forcing traditional Wall Street firms to "use their balance sheet" (as the expression goes) to make loans to their clients, when they'd just as soon not. It is very possible that companies like Morgan Stanley and Merrill Lynch will be driven by these dynamics into mergers with banks.

At the moment, even with investment banking deals scarce, there are a number Citi likes to display. Weill's No. 1 mention: Philip Morris, a longstanding Citicorp client, has made Salomon Smith Barney a lead manager of its upcoming public offering of a portion of Kraft Foods. Weill adds that the deal produced a call of thanks, from him to veteran Philip Morris director John Reed, who Weill figured had helped get SSB the business.

And what about Citi's technology strategy? Reed had grand plans for creating a Citi e-bank that would have operated on its own, without connections to the company's more mundane businesses. Post-Reed, Weill, who views e-business as a cost to grit his teeth through, lost no time in shuttering the e-bank. He moved most of the Internet projects into the businesses, which are supposed to fit the Net into their own operations. Weill's actions cut overall costs, but there are plenty still hitting the bottom line.

The Internet could strip profits in other ways. Financial services companies are, at heart, intermediaries, and everyone knows that the Internet threatens to rip profits from anyone trying to be a go-between. Citi's businesses have responded to this threat in varying ways. Salomon Smith Barney's retail business, for example, has been a hard-liner in trying to stick with full-service rates. In other words, the firm, unlike some of its competitors, does not offer an unbundled, bargain-basement rate to clients who want simply to do Internet trading. Deryck Maughan, a Citi vice chairman and CEO of E-Citi, an umbrella operation, says SSB's strategy obviously fits Weill's obsession with the bottom line: "It's unwavering," he says. "Shareholders seem to like it, and Sandy is unalterable on the subject." But he also acknowledges that the jury is out on which business model will work.

Maughan also relates to a point made by Reed in one of his recent speeches. Banks, Reed said, make a lot of their profits "by moving money around," under a pricing system that he intimated did more for the banks than for their customers. "You could argue," he said, "that with technology advances, profits from moving money could disappear." Maughan thinks the point valid: "There are some people who say the Internet is over. I say, 'Watch out.' "

So he has worked to put Citi into a variety of e-efforts that clearly could strip away the middleman's profits. For example, Citi has long been a powerful, and highly profitable, foreign-exchange dealer. But it has now become one of four owners of a new foreign-exchange electronic market called Atriax that could radically change the profit dynamics of the business. Maughan, his voice rising, as if he's repeating arguments he's made to disbelievers internally, says this kind of proactive stance is essential: "We are saying that we would rather disintermediate ourselves in partnership with others and grab a large share of the new market than sit around in some pre-Information Age factory."

Meanwhile, the pre-Information Age person running this factory, Weill, is thinking, as he always does, "Just let it be good for the stock."

How Citigroup Sees Its Earnings
At Citi, core income refers to earnings before hits like restructuring charges.

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