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Stock Research Ė Citigroup Ė Sandy Wyleís decisions haunt current shareholders

January 24, 2007

Our stock research has come up with an interesting concept for you to focus on. Citigroup is in the press these days because its stock price has failed to keep up with that of its competitors including Bank of America, Wells Fargo, and JP Morgan Chase. The chairman of Wells Fargo, Richard Kovacevich is acknowledged to be the finest banking CEO in the business, but doesnít receive the press because no one can pronounce his name. Citigroup is up about 17% under the current CEO while cross-town rival J.P. Morgan Chase has gained more than 40%, and Union Bank of Switzerland (UBS) more than doubled. Reliable Goldman Sachs is up over 150%. Is anybody listening? You bet they are.

Chuck Prince, who took over Citigroup after the departure of the fabulously successful Sandy Weill, is now getting excoriated by the financial press because Citigroupís stock price has seriously lagged that of its rivals noted above. When youíre down, they kick dirt on you as the saying goes. The press has gone out of its way to jump all over the firing of Todd Thomson who ran Citigroupís wealth management division. Apparently the biggest recipient of the wealth management division was Mr. Thomson himself, who made extensive use of the bankís private jet fleet, when he wasnít tooling around town in his Lamborghini. Very conservative car for a banker, huh?

Statements have been made that Thompson committed $5 million of Citigroupís money to a new television program featuring CNBCís Maria Bartiromo, and Hollywood A-List actor Robert Redford. If that doesnít beat all, he had a wood burning fireplace installed in his office at Citigroup to keep warm while figuring out new projects to spend the bankís money on. He flew to China with a group of Citigroup executives, and then left them to find their way back home, while he flew back with an undisclosed companion. I guess those corporate jets get cramped with a couple more people aboard.

What a guy, what a management team, what does any of this say about Citigroupís inability to stay pace with its competitors financially after Sandy Weillís departure, and Chuck Princeís ascent to the helm of the ship? It says plenty, hereís why.

Back in the 1930ís, the Federal government under FDR decided to separate the banking industry from the investment industry. It was called the Glass-Steagall Act. Brokerage firms and banks had to make a decision. You could be a bank, or you could be a brokerage company. You could not be both. Firms like JP Morgan and company decided to remain a bank. The investment partners at JP Morgan walked out and formed Morgan Stanley, so that they could remain in the capital formation business.

Only one company by law was allowed to remain in both functions. It was Brown Brothers Harriman. FDR specifically decided to do a favor for his supporter Averill Harriman who controlled the family bank. Just for your information, President Bushís ancestral grandfather was a prominent banker at Brown Brothers. He ran the show, his name was Prescott Bush. For the next six decades it became apparent, separating the banking and investment functions was a good idea. Something else became apparent.

The mentality necessary to run a bank was radically different from the managerial expertise necessary to run a successful brokerage firm. In my 35 years of involvement with Wall Street, I have only seen one successful integration of a commercial bank with a Wall Street firm. Only Sandy Weill was able to pull it off, and he did it by combining Citibank with Salomon Brothers, and Smith Barney. Weill also managed to get Bill Clinton to get the Glass-Steagall Act repealed so that Weill could fulfill his personal vision.

No one else in history had been able to do it, and nobody else has successfully merged a bank with a brokerage firm function, nobody. Prudential failed with Bache. Bank of America failed when it bought Charles Schwab and Company. Schwab and Company failed years later when it bought US Trust. Arguably the best managed company in America was General Electric under Jack Welch. GE and Welch failed when they took over Kidder Peabody. GE walked away a couple of years later with billions in losses.

It seems that banks and brokerage firms just donít mix. Brokerage firms and other commercial type entities like General Electric donít mix either. The nature of risk is different for a bank versus a brokerage firm. Sandy Weill himself sold Shearson Lehman Brothers to American Express years ago. The merger failed once again, and Weill considered it the major setback of his career. It takes a certain type of manager to assess, and handle a brokerage firmís risk versus a bank. This concept keeps coming home to haunt companies that try their hands at both.

Is Citigroup a VICTIM of this MINDSET?

We believe that they are. We believe that the historic inability of a bank management team to run a brokerage firm has now reared its head once again in results we are seeing at Citigroup. Chuck Prince, the handpicked successor to Sandy Weill upon Weillís departure is a lawyer by training. The same is true for the new CEO of Home Depot. We believe that the experiences that legally trained minds endure, is wholly unsuited for the world of the superstar CEOís which is now the norm among the Fortune 500.

Citigroup for the last 15 years has had very large Mid East financial interests involved as shareholders. Those interests are now asserting themselves. They are demanding that the bank cut expenses. Itís really very simple. MONEY wants to make MONEY. Chuck Prince in turn has promoted former deputy Robert Druskin, as chief operating officer. They are actually referring to Druskin as the ďexpense czarĒ.

In our opinion, the actions taken so far will not be sufficient to reverse the lag that Citigroup is suffering from. Citigroup suffers an inability to mould historically disparate global operations together. They are not generating superior returns. Investment management, corporate lending, and wealth management just donít jell, and hasnít since the 1930ís. Extraordinary CEOís and visionaries like Sandy Weill come along once in a generation, and Citigroup doesnít look like itís going to be blessed twice. Stay tune for more fireworks before this stock becomes a buy.

Goodbye and Good Luck

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