LINKS TO MAPS
Central
Map .....
Initial
Map
.....
USA Map .....
Australian
Map
.....
International
Map
.....
Corporate
Practices Map.....
(to
print)
Path
Home
Page .....
US
Health Corporate page
..... Access
Citigroup
Mayne Hospital Links
..
Affinity Health ...
Mayne
Purchasers
Early Citigroup Links
.. Citicorp/Citibank
... Salomon
Smith Barney ...
Citigroup
merged
21st Century Citigroup
Links
Marketplace
... Analysts
... Spinning
... Employees
... WorldCom
... Enron
... Health
... Settlements
... Culture
The many extracts on these
pages are from copyright material. They are owned by the reference
given or its owner. They are reproduced here for educational purposes
and to stimulate public debate about the provision of health and aged
care. I consider this to be "fair use" in the common interest. They
should not be reproduced for commercial purposes. The material is
selective and I have not included denials and explanations. I am not
claiming that all of the allegations are true. The intention is to
show the general thrust of corporate practices as well as the nature
and extent of any allegations made.
Citigroup Culture
and
People
What jumps
off the page in these documents is the Wall Street firms'
disregard for the individual investor in pursuit of personal
benefit. In
Wall Street
Hierarchy, Short Shrift To Little Guy The New York Times April
29, 2003
This page examines the characters of people
involved in the Citigroup saga and in doing so looks at the culture
of Citigroup, the New York Stock Exchange and the lobbying and
political system
CONTENTS
to
contents
Introduction
and Theoretical Perspective
After examining corporate health care
I have
suggested that a competitive
marketplace in an area where there is a strong conflict of interest
selects specifically for people who can be described negatively as
closed
minded, one eyed or in positive
corporate jargon as focussed. We end up with leaders who perceive
only what they wants to perceive and a culture which ignores
evidence, argument and reason in order to meet accepted measures of
performance. In the marketplace this measure is profit. These are the
people least suited to work in areas where there are conflicts of
interest.
We all have the potential to behave like
this, particularly when under pressure to perform but some are more
likely to do so.
Similar conflicts of interest to those in
health care have been created in large financial institutions by the
progressive liberalisaton and deregulation of this marketplace. At
the same time competitive pressures have been ramped up driving the
process towards unacceptable behaviour.
Not surprisingly we see the same things
happeningas in health care. The fiduciary duty to make money is in
conflict with the social responsibility to deal fairly and honestly
with investors. Market analysts were professional people with a
professional obligation to serve the interests of the investors they
advised. They were under strong pressure to put the interests of the
company ahead of their professional duty to the community. Those who
did so prospered.
Grubman was the Citigroup analyst blamed for
creating most of the DotCom bubble by publishing deceptive
reports.
For years,
only the bottom line mattered for Citigroup. The financial
conglomerate formed by the 1998 merger of Travelers and Citicorp
made mountains of money - Dollars 14.6bn (Pounds 10bn) last year -
and its shares consistently outperformed the competition.
Diversity could come back
to haunt Citigroup: The US financial group's breadth of business
may be a risk Financial Times (London,England) July 1, 2002
Investment
bankers pressured Grubman to maintain positive ratings on
companies in part to avoid angering the covered companies and
causing them to take their investment banking business
elsewhere.
--------------------------------
Thereafter, the then-head of investment banking for S.S.B. and the
head of telecom investment banking called Grubman separately. The
head of investment banking told him not to downgrade the stocks
because doing so would anger these companies and hurt S.S.B.'s
investment banking business. The head of telecom investment
banking told him that they should discuss his proposed downgrades
because some of the names were more sensitive than others. S.S.B.
and Grubman did not downgrade these stocks until months
thereafter, continued to advise investors to buy these stocks and,
in the weeks and months following, merely lowered the target
prices for each of these companies.
----------------------------
(Grubman email) "Another one. I hope we were not wrong
in not downgrading. Try to talk to folks to see what they think of
these downgrades. Maybe we should have done like I wanted to. Now
it's too late".
-----------------------------------
Later the same day, the same analyst e-mailed Grubman, warning him
that an institutional investor thought downgrading XO would:
"definitely get the Lame-O award on CNBC and wouldn't help anyone
out, it would just call attention to our negligence on not
downgrading sooner." . . . WALL
STREET SETTLEMENT; Excerpts From Settlement With Citigroup on
Salomon's Recommendations The New York Times April 29, 2003
The people I am describing are people who see
only their objective and how to get there. They do not see what they
do not want to see and ignore the adverse consequences of their
actions. When what they don't see is obviously harmful to others then
I have called this successful
sociopathy. The people are successful
sociopaths and the culture that results is sociopathic.
There are situations where charismatic people
who have enormous drive and no doubts can be enormously successful
and make major positive contributions to society. If the context does
not contain conflicts of interest they can perform very well and
become icons. The problems come when they have conflicts of interest
and I have argued that these are the worst possible people for health
and aged care because of this. The same may well apply to
financiers.
These individuals and groups frequently
rationalise their conduct to persuade themselves and their supporters
that what they are doing is legitimate.. The following extract
relates to rationalising the banks complicity in the Enron fraud
-
turning debt into profit on balance
sheets.
When the
banks did these deals, they thought Enron would repay the money,
and they viewed such transactions as routine and acceptable. It is
worth noting that the deals moved things around Enron's balance
sheet, not off it, unlike some of Enron's other outrageous
maneuvers.
Beautifying Balance
Sheets Was Routine. Is It Now a Crime? The New York Times July
26, 2002
I have borrowed the term from a paper
"Successful Sociopathy" by Robertson et al (MJA 1996). I have
suggested a variable continuum from being open minded or reflective
at one extreme to being closed minded and ultimately a sociopath and
impervious to the suffering of others at the other extreme. Strong
pressures to perform in less than socially acceptable ways push us
towards closed minded and sociopathic behaviour. While Citigroup
staff were aware of the problem with Grubman, management took no
action and continued to pay Grubman US $20 million a year based on
the business he generated from these reports. Profits were their
prime and only consideration. Tenet Healthcare's administration
behaved in much the same way when warned that the doctors they were
supporting were carrying out unnecessary
heart operations.
S.S.B.
(Salomom Smith Barney) failed to respond adequately to red
flags regarding research.
Members of
research management received copies of research reports and call
notes when they were issued and routinely reviewed research. Based
on this review, complaints from S.S.B. employees and customers,
and otherwise, S.S.B. was aware of problems with its research.
Indeed . . . members of research management themselves expressed
reservations about S.S.B.'s research. Nevertheless, S.S.B. did not
take steps to supervise the activities of research analysts
adequately.
By early 2001,
one of Grubman's supervisors believed that Grubman's ratings were
inconsistent with the performance and prospects of the some of the
companies he covered.
Moreover, on
July 2, 2001, a director who provided research management support
sent an e-mail to all research personnel, and others, warning that
the models S.S.B. analysts, including Grubman, used to predict
future revenues and earnings and generate target prices "must
make sense" (emphasis in original) and must be "smell
tested." He criticized these models for using "aggressive
inputs to arrive at a predetermined valuation/outcome." He
concluded by noting that, "Clearly, projected long-term growth
rates for many of our companies are too high and would benefit
from a thoughtful reappraisal" (emphasis in original). At
least one recipient of this e-mail thought he was referring to
Grubman ("Amen! You should have cc'd this to Grubman just to make
sure.") The author of the e-mail did not disabuse the recipient of
this assumption: "No comment on that, at least not in writing."
WALL STREET SETTLEMENT;
Excerpts From Settlement With Citigroup on Salomon's
Recommendations The New York Times April 29, 2003
From the descriptions given in the reports
many of those who have been described as corporate acquirers in
contrast to corporate builders seem to show closed minded or
sociopathic characteristics. Typically they are overconfident and
intolerant of the views of others. They believe leaders are
"born
and not made".
They are more likely to pressure their acquisitions for more profit
to enable further takeovers. They don't look too hard at how profits
are made.
By
Jeffrey Sonnenfeld an associate dean at the Yale School of
Management and author of "The Hero's Farewell."
--------------------------------
Looking at the group of troubled corporate leaders Dennis
Kozlowski of Tyco, Ken Lay of Enron, Bernie Ebbers of WorldCom,
Gary Winnick of Global Crossing and John Rigas of Adelphia -- it
is easy to conclude that flaws in board governance or shady
accounting practices are behind their problems. This diagnosis
overlooks the commonality in the approach of these corporate
executives: All of them are "serial acquirers" of other companies.
Proud of his leadership model, Mr. Kozlowski once even offered a
"C.E.O. Academy" to help new chief executives follow his
path.
These executives
saw their jobs first and foremost as expanding corporate holdings,
rather than managing their companies to produce better products
and services. And because their focus was on immediate financial
results, they also tended to see regulators as adversaries and
accounting rules as inconvenient barriers to fulfilling their
schemes.
It is not
surprising that opaque financial reports are a common denominator
with these chief executives. Nor is it surprising that those
reports withered under scrutiny.
---------------------------------
Mesmerizing Wall Street with a dazzling number of deals makes an
absence of long-term management vision easy to hide.
--------------------------------
These serial acquirers did not build businesses around core
competencies but were scavengers for good deals, a strategy that
rarely pays off in the long run.
--------------------------------
In three years, Tyco acquired 700 companies, creating a pileup of
businesses
---------------------------------
Yet "Deal-a-Day Dennis," as Mr. Kozlowski was proud to be known,
was celebrated for Tyco's 20 percent annual growth rate -- until
the last six months, in which the stock has fallen by 81 percent,
losing over $80 billion of value.
The flawed
strategic logic of these serial acquirers repeats the failures of
their predecessors from the 1970's.
--------------------------------
Rather than having to demonstrate skill in creating new products,
providing better services or motivating employees, these
executives are usually judged by investors and analysts only by
the swelling size of their empires.
--------------------------------
Perhaps because they go unchallenged, executives of this kind tend
to believe that leadership is an intrinsic, unearned quality. New
survey data from the Yale School of Management and the Gallup
Organization found that out of 130 prominent chief executives
surveyed, 26 percent believe that "great leaders are born and not
made." Who are these leaders anointed with greatness at birth?
They are the serial acquirers. Those who believe that great
leaders are born have tended to invest less in their existing
businesses through expanding factories, developing new products
and the like, and were far more likely to prefer growth through
acquisitions (some of them are considering making more than 20
acquisitions in the coming year). Those who believed that great
leadership is developed through experience were less likely to be
serial acquirers.
Executives who
build their businesses primarily on acquisitions are perhaps most
susceptible to another pitfall: They tend to fly solo. Their near
total control in setting strategic plans for their companies makes
it difficult for subordinates or the board to critique the
direction of the company. And yet, acquirers generally lack a
strategic logic that can survive market changes; as a result their
empires of hype can be undone very swiftly by market discipline.
None of this is really new. The fall of the most recent corporate
acquirers provides spectacular reminders of lessons we've seen
decade after decade. Expanding
Without Managing The New York Times June 12, 2002
It was New
York investment bankers who drove the mergers-and-acquisitions
deal culture of the 80's and 90's and who most aggressively
oversold the myth of synergy that justified it. It was New York
investment bankers and their Wall Street brothers who trained a
generation of obedient American C.E.O.'s (by means of
stock-option-based compensation) to worry more about jacking up
their share prices in the short term than about running their
companies well for the long haul.
City of Schemes
The New York Times October 6, 2002
While Citigroup was a prime offender others
admired their successful practices. Goldman Sach's for example
attempted to entice Grubman away from Smith Barney. Some in the
company objected on ethical grounds but the profits he would bring in
silenced the dissenters.
Jack B.
Grubman, the former star analyst of telecommunications stocks, was
such a controversial figure on Wall Street that executives of the
Goldman Sachs Group had a heated debate about whether to hire him
four years ago, according to internal documents and people close
to the firm.
Some Goldman
officials, including the head of the firm's research department,
argued against hiring Mr. Grubman because he was too involved in
the investment-banking side of the business, according to these
people and documents. But others countered that Mr. Grubman could
bring in as much as $150 million in annual fees to Goldman, more
than repaying the $37 million in cash and stock that the firm was
considering paying him.
--------------------------------
But Goldman's failure to hire him was not for lack of trying,
according to Representative Richard H. Baker, Republican of
Louisiana.
---------------------------------
"Goldman Sachs made a grab for Grubman," Mr. Baker said in his
statement. "While Grubman's conflicts of interest are the thing
that led to his downfall at Salomon Smith Barney, they were the
very same characteristics that made him hot property for Goldman
in 1998. Jack Grubman was the poster child of analyst conflicts,
and yet Goldman pulled out all the stops to put him on the
payroll." Goldman Wooed A
Star Analyst, DocumentsShow The New York Times October 12,
2002
Leaders of health care corporations in the
USA have tended to behave sociopathically. These people are often
highly intelligent, charismatic, self centred and with an
over-inflated opinion of themselves. Success in the marketplace
serves to reinforce their inflated egos and they see themselves as
infallible. They surround themselves with admirers and Yes Men -
people who will do what the master wants.
I prefer not to call individual people
sociopaths but prefer to give a brief outline of the behaviour of
corporate leaders and players and supply descriptive extracts. The
terms closed minded and sociopathic describe broad patterns of
behaviour. Make up your own minds if they show similar features. I
don't think all those I describe do.
to
contents
Market
Pressures
Mergers and Takeovers
My argument is that there are two prime
factors responsible for the failure of the marketplace when conflicts
of interest exist. The first of these is the intense pressure
generated in the marketplace. The pressures generated by takeovers
and mergers are particular coercive. Being competitive becomes more
important than being responsible. Those who are responsible rather
than competitive go under. Unsavoury behaviour becomes essential for
survival and those subjected to these pressures develop explanations
and justifications which make unsavoury behaviour legitimate for
them.
The second is the erosion of civil society,
norms and values by progressive marketisation. We are existential
beings. The development and maintenance of norms and values can only
occur by exercising those values and norms while interacting with
others in day to day life. They need reinforcement. In a marketised
world there are fewer and fewer opportunities to do so.
Health and aged care are two such areas but
they are being rapidly marketised. Even childcare, the care of our
young children is no longer sancrosanct. An examination of the
business pages of our newspapers shows that the measure of success in
these areas becomes profit rather than care. Corporations demand
total dedication and promote a workaholic approach. Employees have
little opportunity to develop their social selves. Value systems and
social norms are blunted.
Under these market pressures only the tough
and ruthless succeed and the system selects for them. When local
opportunities dry up the financiers go global.
Wall Street patterns of thinking and
ruthlessness have spread across the world. The financial giants are
global and they have brought their practices with them. We can
compare Citigroup's policy with Peter Smedley's "allfinanz"
and "bancassurance" policy in
Australia, some of which he brought
to Mayne Health.
1998
Last week, Merrill Lynch & Company's biggest rival was
Morgan Stanley Dean Witter. Today it looks like Citigroup, the
$50.4 billion giant to be created by the merger of Citicorp and
Travelers Group .
Merrill and
other financial firms are expected to respond to the Citigroup
deal, announced yesterday, by looking for their own merger
partners. In all likelihood, other behemoths will be formed, as a
host of corporate chiefs ponder their suddenly diminutive status.
Rumors swirled yesterday about possible combinations between big
banks, brokerage firms, insurance companies and investment
management companies. Will it be Chase Manhattan and Morgan
Stanley? J. P. Morgan and Merrill Lynch? Or maybe Paine Webber and
the Donaldson, Lufkin & Jenrette unit of Equitable?
The creation of
Citigroup, with hundreds of offices from Boston to Beijing, is
perhaps putting the most pressure on Chase, now the largest United
States bank -- pending the merger plan announced yesterday -- and
the biggest domestic brokerage firms, including Merrill. Chase and
Merrill would each be well under half the size of the envisioned
Citigroup, and each has global aspirations and businesses to
match.
"This alters our
sense of scale and boundaries," said Ron Chernow, the
award-winning financial historian and author of "Titan," a
forthcoming biography of John D. Rockefeller Sr. "It is an
entirely new creature in that it puts investment banking,
commercial banking, retail brokerage and insurance all under one
roof. And not only under one roof: all four are very large players
in their respective fields.
---------------------------------
The Citigroup deal means there is no turning back to the old world
of distinct financial industries where banks compete with one
another, while brokerage firms vie with each other and insurance
companies keep to their turf, analysts say.
------------------------------
"Going forward, it means increased pressure both to grow in
absolute size and to grow in terms of the full range of financial
services products," said H. Rodgin Cohen, a partner at the law
firm of Sullivan & Cromwell, who advises big financial
companies on their strategies.
------------------------------------
The Citigroup merger is even expected to force mutually owned
insurance companies to offer stock to the public.
"The starting
pistol has sounded," said Michael Blumstein, a life insurance
analyst at Morgan Stanley Dean Witter. "They will have to go
public because they've got a behemoth on their back."
---------------------------------------
Chase, in a statement, said that the deal "will put pressure on
Congress to pass the kind of liberating financial legislation so
necessary for sustaining U.S. leadership in global financial
services."
One thing is for
sure. Citigroup's leaders hope the trend toward financial services
giants will benefit the Salomon Smith Barney investment banking
business that will be part of their new conglomerate. When asked
what the merger meant for his competitors, Sanford I. Weill,
Travelers' chairman and the new co-chairman of Citigroup with
Citibank's John S. Reed, said: "We'd hope they'd all call the
bankers at Salomon Smith Barney. They know how to do
deals." SHAPING A
COLOSSUS: THE INDUSTRY; Gigantic Shadow Over Wall Street The
New York Times April 7, 1998
John S. Reed
first realized his vision of Citibank as a financial supermarket
for the emerging global middle class in Asia during the 1980's,
when the bank opened hundreds of branches, granted thousands of
mortgages and sold millions of credit cards from Taiwan to
Thailand.
Now, by planning
to merge Citibank's parent company, Citicorp, with Travelers
Group, Mr. Reed, the Citicorp chairman, is betting that Asia's
middle-class consumers are ready to buy an even broader array of
financial services from a single company.
-------------------------------------
"This is the model that Asian and European banks will have to
adopt if they want to compete," said David K. P. Li, the chairman
of Bank of East Asia, a Hong Kong bank with a major presence in
mainland China.
Mr. Li predicted
that the deal would force Governments in Japan and South Korea to
relax restrictions on financial institutions -- allowing them to
offer commercial and investment banking services, as well as to
sell insurance. "The Governments in this region have to recognize
that this is the new model," he said.
------------------------------------------
Executives at Citibank's Asian headquarters said the bank was
already discussing plans to offer Travelers insurance to its
corporate and individual clients. That business is now dominated
by American International Group and National Mutual, a
French-owned company. But if Citibank were to offer homeowners
insurance with every home mortgage, Travelers could quickly become
a powerhouse here.
-------------------------------------------
The deal greatly strengthens Salomon Smith Barney, the investment
banking arm of Travelers, by giving it access to Citibank's web of
connections throughout the region.
-------------------------------------------
"For Salomon's point of view, access to Citibank's long history in
Asia and distribution network can only benefit us," said Andrew
Butcher, the director of business planning at Salomon Smith Barney
in Hong Kong. Bold Step
for Citigroup On Shaky Asian Ground The New York Times April
9, 1998
1999
As Western economies slow and deflation unfolds, excess
capacity and excruciating competition will continue. Indeed, some
firms are now anticipating disappointing profits with job cuts.
Raytheon has announced terminations totaling 14,000, even though
its earnings prospects appear solid.
The acquire-and-fire
economy Forbes January 25, 1999
2003
But the sale contrasts with Citigroup's strategy of expanding
in emerging markets. Sandy Weill, chairman and chief executive,
has said one of the key reasons he merged his mostly domestic
Travelers group with Citicorp in 1998 was to tap into Citicorp's
developing-world franchise.
During his
fourth-quarter earnings review last week, Mr Weill reiterated his
enthusiasm for taking Citigroup's products to new places. But the
targets of opportunity he cited were largely in the former
communist world.
Mr Weill was
positively giddy about Russia, where in November Citigroup became
the first US bank to open a retail branch with services including
internet and telephone banking. Banking
colossus needs to adjust its footwork: Recent shifts of emphasis
are indicators of where in the world Citigroup is placing its
bets. Financial Times (London,England) January 27, 2003
to
contents
Citigroup
Culture
All of the Citigroup web pages and extracts
describe the company's conduct and provide insights into its culture.
They describe a series of massive scams. Large numbers of people from
the company were involved. Everyone in the company must have had a
good idea about what was happening yet no one spoke out and there
were no whistle blowers. Senior staff could not have been unaware
where the money was coming from and how. The money was rolling in and
they simply chose not to look. They rationalised their practices
dressing them in corporate jargon and self evidentness. This allowed
them to openly promote deceptive practices.
2002
Both Mr. McCaffrey and Mr. Hoffmann supervised Jack B.
Grubman, a former telecommunications analyst at Salomon.
------------------------------
Two years ago, according to a document cited in the lawsuit, Mr.
Hoffmann wrote Michael A. Carpenter, then head of Salomon, that he
hoped to "better integrate our research product with the business
development plans of our constituencies, particularly investment
banking."
The suit also
describes a seminar led by Mr. McCaffrey in which "analysts
learned how to manipulate their financial models to support
underwriting" by Salomon.
Citigroup Removing
Officials From Salomon Unit The New York Times October 10,
2002
Some individuals were inevitably worried by
the morality of what was happening and this was reflected in their
private emails. Those who did speak out were likely to be out of a
job.
2003
Some of the most entertaining reading in the masses of
evidence that regulators have made public for use by aggrieved
investors in their own lawsuits is the commentary by Salomon Smith
Barney brokers about Jack B. Grubman's performance as the firm's
top telecommunications analyst.
As far back as
2000, brokers were expressing outrage and betrayal over Mr.
Grubman's woeful stock picking, which many noted was related to
his dual roles as investment banker and analyst. Yet even as the
brokers howled about Mr. Grubman's tendency to keep recommending
stocks as they collapsed in price, the analyst retained his job at
Salomon until last August.
Here are some
outtakes from Salomon brokers late in 2000. Mr. Grubman "should be
publicly flogged," one said. "Under the category, Bonus for
Creating Tax Loss Carry Forwards for Retail Clients, Grubman
should be recognized accordingly as our best analyst."
Many said the
analyst should be fired, while another broker said, "If Jack
Grubman is a top 'research analyst' then I have a bridge to
sell."
Another
remarked: "Boo Hiss. Banking showed its ugly head."
During the year
these comments were made, Mr. Grubman was paid $14.2 million in
salary and bonus.
-------------------------------
"Grubman has zero credibility with me or my clients. He is
collecting from two masters" at financial consultant
expense.
Then referring
to investment banking functions, he continued: "He brings IB
business to the firm and loses his objectivity. I am sure that
nothing will come of my comments. The spin-masters will say that
everyone else does it. Is there an honest person
left?"
In Wall Street Hierarchy,
Short Shrift To Little Guy The New York Times April 29,
2003
2002
Mr. Chacon says that he began complaining to his immediate
superiors: to the branch manager, the regional manager and upward.
A memorandum, dated May 2000, that he wrote to Jay Mandelbaum,
vice chairman of Salomon, describes improper allocation of hot
issues and notes that superiors had told the broker that the
allocation of Rhythm Netconnections shares to Mr. Ebbers was done
"to encourage him" to give additional banking business to the
firm. According to Mr. Chacon, he received no response from Mr.
Mandelbaum. He was terminated less than two months
later.
The spokeswoman
for Salomon said that Mr. Mandelbaum did not receive the
memorandum, which Mr. Chacon has presented in his
wrongful-termination dispute."Just as we believe he fabricated the
memo, there is no record of his ever having raised his alleged
concerns to his superiors," Ms. Nazerian said. She added that Mr.
Chacon was fired for violating corporate
policy.
Lawsuit Says Salomon
Gave Special Deals to Rich Clients The New York Times July 18,
2002
The culture in the merged Citigroup came to
be dominated by Weill and Carpenter's more ruthless results oriented
circle of supporters. The Travelers/Salomon Smith Barney culture was
promoted.
1998
Citicorp and Travelers Group Inc., which agreed last month to
merge into Citigroup, designated the management team yesterday to
run what would be the world's largest financial services concern,
provided it wins regulatory approval.
While the
overall hierarchy at Citigroup has ample representation from both
companies, Travelers executives secured more of the top leadership
spots and are best positioned to stamp their company's identity on
the merged concern.
Mostly notably,
Jamie Dimon, co-chairman and co-chief executive of Travelers'
Salomon Smith Barney investment banking and brokerage unit, was
named Citigroup's president. The post makes Mr. Dimon the clear
heir apparent eventually to succeed Citicorp's chairman, John S.
Reed, and Travelers' chairman, Sanford I. Weill, who will be
co-chief executives of Citigroup. Leadership
Plan for Citigroup Tilts in Favor of Travelers The New York
Times May 7, 1998
2000
Indeed, Mr. Reed's departure only signals that similar,
hard-minded decisions about how to manage Citigroup still
effectively lie ahead.
--------------------------------
Last year, he and Mr. Weill divided their managerial duties. Mr.
Reed was given authority over Citigroup's Internet strategy and
other technology initiatives. Mr. Weill, in a move that cemented
his power at Citigroup, was given the corporate equivalent of the
crown jewels: responsibility for supervision of all other
operational lines at the bank and the all-important right to
determine compensation packages for his managers.
At that point,
Mr. Weill had essentially outmaneuvered Mr. Reed, a view held by
many at the company and on Wall Street, although one that Mr.
Reed, a wily corporate survivor, might not have
shared.
Reed Announces Plans
to Step Down as Co-Chief of Citigroup The New York Times
February 29, 2000
Citigroup was not unique and I have included
enough on these web pages to show that other financial conglomerates
were similar and that the people who ran them were not markedly
different.
Some accounts suggest an arrogant male
dominated culture and this is what you might expect. Woman in the
company have accused it of sexual harassment.
1998
The suit against Smith Barney painted a tawdry picture of
sexual harassment and discrimination, detailing a "boom-boom room"
at the firm's office in Garden City, N.Y., where carousing male
bosses would grope and harass their female subordinates.
The case has
already had broad repercussions, chipping away at the securities
industry's established system of settling employment disputes
through mandatory industry arbitration -- a system that critics
said favored securities firms and disadvantaged
employees.
The Smith Barney
case has also influenced a similar class-action lawsuit filed by
women brokers at Merrill Lynch that is scheduled for a final
Federal court hearing in Chicago in
September.
A Revised Pact Is
Approved In Smith Barney Bias Case The New York Times July 25,
1998
The company's outward form and culture was of
a socially responsible organisation coping with conflicts of interest
in a professional way. Those who made these statements may well have
identified with corporate rationalisations and believed what they
were saying.
Duncan King,
a spokesman for Citigroup, said he could not comment about
specific client relationships but spoke more generally about the
bank's role as an adviser. "Potential conflicts have always been
inherent in our business," he said. "Our obligation is to manage
them appropriately, which is essential if we are to maintain our
reputation for providing quality
advice."
Market Place; Many
creditors are increasingly worried that big banks have conflicting
roles as both lenders and advisers. The New York Times June
13, 2002
to
contents
Citigroup ::
The People
The sort of people who come to lead these
companies give a good indication of the sort of corporate culture
they will support. The people who are successful and are rewarded for
this give an indication of the sort of culture that has developed.
The people who stand out in Citigroup are Sanford (Sandy) Weill. Jack
Grubman, Benjamin Lorello and Michael Carpenter. John Reed is also of
interest as he went on to become chairman of the stock exchange.
Charles Prince has recently taken over from Weill.
Sanford (Sandy)
Weill
Mr Weill has had an interesting career. He is
a twice made billionaire and primarily a predatory acquirer. In his
younger days he built up an empire and then when he was at the top he
lost out in a board room battle.
He promptly started again with a small
company which he grew by mergers and takeovers until it included
Travellers Insurance, Salomon Brothers and Smith Barney. He tended
always to buy and merge into companies with a better reputation than
his own and assume the name of the company acquired. Citigroup was
his ultimate merger.
2002
The market value of Citigroup, which he built over 16 years
into a conglomerate with $1 trillion in assets, tumbled 25
percent, or $45 billion, on Monday and Tuesday, as a Senate
committee began investigating - - - - .
----------------------------
Without a strong stock price, Mr. Weill will have trouble
financing acquisitions -- undoubtedly a frustration to a deal
maker like him. Mr. Weill has used his companies' rising stock to
pay for a string of purchases, from insurers to banks to loan
companies. In Two
Days, Citigroup Chief Traded Halo For Headaches The New York
Times July 27, 2002
2003
Still, one senses a turning point, the ebbing of power of one
of the financial world's most visible tycoons, the slow exit of a
take-no-prisoners deal maker who vaulted from near-obscurity to
the leadership of the world's single biggest financial
empire.
Tough and
nimble, Sandy Weill has almost always been the last man standing
in a amazing string of deals over four decades. Starting with a
tiny brokerage outfit he helped found in 1960, he spent the 1970's
gobbling up distressed white-shoe Wall Street firms, suffered a
rare reversal in a power struggle at American Express, then roared
back with a series of acquisitions that culminated in the
blockbuster 1999 merger between Travelers, Mr. Weill's insurance
and investment firm, and Citicorp, the venerable bank run by John
Reed. Sandy Weill Steps
Down The New York Times July 19,
2003
If ever
there was a case in which investors bought a boss, not a business,
it came in the fall of 1986 when a sleepy lender to borrowers with
not very good credit, known as Commercial Credit, went public.
-----------------------------------
Yesterday Mr. Weill, 70, announced that he was stepping down as
chief executive of the company, which after a long series of
mergers and acquisitions became Citigroup, the global financial
giant. Along the way it went through the names of Primerica and
the Travelers Group before merging with the bank then called
Citicorp.
----------------------------
Few thought that Commercial Credit was a great business at the
time. Only a couple of years earlier, the company had been unable
to find a buyer. Control Data, which owned Commercial Credit,
wanted out, and it brought in Mr. Weill in the hope of luring
investors.
Mr. Weill's
reputation had been based on the growth of a small brokerage firm
he helped found in 1960 -- first named Carter, Berlind, Potoma
& Weill -- into the Wall Street giant Shearson Loeb Rhoades by
the time it was acquired by American Express in 1981. Mr. Weill
got the No. 2 job at Amex, but eventually lost a power struggle to
the chairman, James D. Robinson III, and found himself out of a
job.
Later, when he
eventually merged his second empire with Citicorp, he made sure
that he was co-chief executive, and when a power struggle
developed this time, he won.
Mr. Weill's two
empires -- which in a way were one because much of what was
Shearson eventually ended up at Citigroup -- grew in similar ways.
He was always happy to take on the name of the company with which
he was merging. He made a practice of buying companies with
histories more glorious than their current conditions and whipping
them into shape -- all the while harnessing the fame of the name
acquired.
-------------------------------
There were, to be sure, some reversals. His mergers were often
questioned on Wall Street. Primerica, an empire run by Gerald Tsai
Jr., a onetime wunderkind mutual fund manager, was seen as
overleveraged and perhaps just a means by which Mr. Weill could
return to Wall Street through ownership of Primerica's Smith
Barney unit.
---------------------------------
He (Weill on retiring) also said he might help the company
with its hedging of foreign currencies, but that may have been a
joke about his reputation for micromanaging.
CHANGING THE GUARD:
MARKET PLACE; A Climb to Riches, One Merger at a Time The New
York Times July 17, 2003
Mr. Weill
built Citigroup over the last decade through a series of audacious
acquisitions that culminated with the merger of Travelers and
Citicorp, which for the first time combined a commercial bank and
brokerage firm. That deal forced lawmakers to repeal the 1933
Glass-Steagall Act, which had barred such combinations, in 1999.
CHANGING THE GUARD: THE
OVERVIEW; Chief of a Financial Giant Says He'll Step Down at
Year's End The New York Times July 17, 2003
As a
financier, Sanford I. Weill seemingly never met a deal he could
not pull off.
He engineered
the acquisition of the biggest bank in the United States and of
the second-biggest bank in Mexico along the way to creating
Citigroup, the world's largest financial company. He persuaded
Congress to change 66-year-old laws to clear the
way.
A Wizard at Financial
Mergers Loses Out on a Proposal to Merge Two Music
Organizations The New York Times October 8, 2003
Weill's greatest triumph was the merger with
John Reed's Citicorp to form Citigroup. Over the years he surrounded
himself with dedicated followers who shared his views and they were
given positions of power and succession.
Some
shareholder advocates and competitors dismissed the planned
management changes (Weill's resignation) as largely
cosmetic because Mr. Weill is not leaving the company and because
his handpicked successors are his most loyal lieutenants.
Indeed, Mr.
Weill, a self-described workaholic, said he planned to remain very
involved in the company. CHANGING
THE GUARD: THE OVERVIEW; Chief of a Financial Giant Says He'll
Step Down at Year's End The New York Times July 17,
2003
Analysts
attributed the advantage enjoyed by Travelers executives to the
strong cadre of talented loyalists Mr. Weill has put together the
last several years. Mr. Reed, on the other hand, has
periodically reshuffled or ousted prominent senior
executives.
"One of Sandy's
strengths is to keep very high-powered people in place," said Joan
Solotar, an analyst with Donaldson, Lufkin & Jenrette
Securities.
Leadership Plan for
Citigroup Tilts in Favor of Travelers The New York Times May
7, 1998
Weill was a highly focussed microeconomic
manager. He insisted on results and rewarded accordingly. He included
himself in the rewards. He became a billionaire. The fraud in Smith
Barney suggests that he did not involve himself directly in the
management of subsidiaries but he could not have been unaware of what
was happening. By doing so he kept a distance between himself and
unsavoury conduct. Rubin described below had a career in business
(chief executive Goldman Sachs) and politics before he joined
Citigroup in a senior position. Reports suggest he may have had some
difficulty in separating his roles.
Mr. Weill,
who rarely brooks challenges to his authority, edgily teases Mr.
Rubin about his campaign against tax cuts, which has prompted
Citigroup brokers to write irate e-mails about affronted clients.
He also gripes about Mr. Rubin's addiction to multitasking in
meetings. "It's rude," he said.
But those appear
to be minor distractions. Mr. Weill, 68, is as earthy and blunt as
Mr. Rubin is measured, but both men say they get along famously.
Mr. Weill said his partner's analytical ability and experience are
"invaluable" to him.
So is his
loyalty. When Mr. Rubin arrived, Mr. Weill was locked in a power
struggle with his co-chief executive, John S. Reed. After failing
to reconcile the two, Mr. Rubin sided with Mr. Weill in a Sunday
board meeting in early 2000 that resulted in Mr. Reed's
retirement.
ENRON'S MANY STRANDS:
DUAL ROLE; Rubin Relishes Role of Banker As Public Man The New
York Times February 11, 2002
Citigroup's
chief executive, Sanford I. Weill, who is famously obsessed
with his company's share price, addressed employees after the
market closed yesterday, said Leah Johnson, a company spokeswoman.
Sinking Feeling Is Now
Settling Over Citigroup The New York Times July 24, 2002
His dealings with Grubman show that he knew
what was happening in Smith Barney and was prepared to capitalise on
this. The whole industry knew what was happening and Weill could not
have been unaware of this - unless he had deliberately chosen not to
look.
"Sandy has
been a micromanager for 50 years," said Roy Smith, a former
Goldman Sachs partner and a business school professor at New York
University. "And there is a consequence to this. The real question
is this: can any single firm be active in so many different areas
without incurring such conflicts and the resulting
litigation."
Mr. Grubman
symbolized this inherent conflict: as a research analyst, his
primary responsibility was to provide objective research to the
firm's institutional and retail clients.
But Mr. Grubman
was not paid $48 million over three years in the 1990's to provide
investment advice to individual investors.
Instead, it was
his ability to corral the banking business of a new wave of
telecommunications companies ÷ many of which were competitors
of AT&T, like WorldCom ÷ by publishing positive research
on them that made him a meal ticket for Mr.
Weill. Citigroup's
Chairman Is Barred From Direct Talks With Analysts The New
York Times April 29, 2003
Like others in the company Weill accepted
that the Enron transactions were legal without regard to their
morality or intention to assist in fraud.
On Thursday,
Citigroup released a memorandum that Mr. Weill had sent to
Citigroup's 270,000 employees. "In the last few days, our company
has been severely criticized for past activities in our Corporate
and Investment Bank," Mr. Weill said. "I feel badly, and I truly
regret the pain that has been caused." But he said he believed
that the investment bankers who dealt with Enron did nothing that
was illegal or in conflict with accounting principles.
In Two Days,
Citigroup Chief Traded Halo For Headaches The New York Times
July 27, 2002
Weill was never shy about rewarding himself
and he became a bilionaire.
Over the
years, Mr. Weill has accumulated a huge hoard of options on the
stock of his ever-expanding company. Last year, Citigroup's board
gave Mr. Weill options on 619,095 shares on top of $26 million in
cash and stock. That was down sharply from the 18.2 million
options he received in 2000.
"He was my top
pig a few years back," said Graef Crystal, a compensation analyst
who compiles an annual list of what he calls executive pay "hogs
and heroes." Mr. Crystal figured that Mr. Weill's 2000 pay package
was worth $215 million, raising his total pay over 10 years to
slightly more than $1 billion.
Reed Announces Plans to
Step Down as Co-Chief of Citigroup The New York Times February
29, 2000
Like Richard
Scrushy, Richard
Eamer and other corporate leaders in
the USA Weill became a great philanthropist and a patron of the arts
and of good causes. He was lavish with his own and shareholder's
money.
TYCO
INTERNATIONAL'S lawsuit against its former chief executive, L.
Dennis Kozlowski, is shining a harsh light on yet another area
ripe for abuse by imperial chief executives: the murky line
between corporate philanthropy and their personal
philanthropy.
--------------------------
Even trustees and their closest confidants have a hard time
getting to the bottom of corporate philanthropy. A well-connected
director at one of New York City's most prestigious arts
institutions recalled efforts a few years ago to determine the
terms of a contribution by Sanford I. Weill, the chief executive
of Citigroup, for $100 million -- an astounding amount even by the
philanthropic standards of Fifth and Park Avenues -- to Cornell
University for its medical school. The director, who declined to
be identified for fear of disrupting friendships, called four
friends on the Cornell board, only to be told they didn't
know.
Two prominent
fund-raisers in New York City said they were confident that the
gift of Mr. Weill and his wife, Joan, was, in fact, the couple's
money. The Weills have since made a second $100 million gift to
the medical school, as well as other gifts to the university.
Worth an estimated $1.1 billion, Mr. Weill does not need to tap
the corporate coffers to create an aura of beneficence for
himself.
Citigroup -- one
of the few companies that does disclose its philanthropic
contributions in detail -- has been remarkably generous, however,
to some of the Weills's favorite nonprofit institutions.
---------------------------------
The biggest contributions made by Citigroup over the last four
years were to the three institutions most identified with the
Weills. In Charity, Where
Does a C.E.O. End and a Company Start? The New York Times
September 22, 2002
When it
comes to staying power, which is gauged by demonstrating the
ability to donate to the cause and line up other ticket buyers,
few have a better record than Mr. Weill, the chief executive of
Citigroup, and his wife, Joan.
In the last two
years they have played a leading role in at least 18 events. The
couple have repeatedly been chairman and chairwoman for the Alvin
Ailey Dance Theater Foundation. For the last 15 years, Mr. Weill
has served as a co-chairman of the annual gala of the Hebrew Home
for the Aged with Maurice R. Greenberg, chairman of the American
International Group. The gala raised $2.8 million at its recent
fall benefit, a drop from the previous year's total of $3.3
million.
List of Key Names For the
City's Galas Keeps Expanding The New York Times November 18,
2002
In all the
analysis generated by Mr. Weill's announcement, one aspect of his
life has been largely overlooked, namely his spectacular
philanthropy. A native New Yorker, Mr. Weill has given generously
to the city of his birth, particularly its cultural and medical
institutions. He has made it clear that this will continue;
indeed, he has described himself as a born fund-raiser. The big
question is whether Mr. Weill will actually be able to let go at
Citigroup.
Sandy Weill Steps
Down The New York Times July 19, 2003
to
contents
John Reed
John Reed became CEO of Citicorp and Citibank
in the 1984. He too was an acquirer and was largely responsible for
building a network across the world. It was this global network which
attracted Weill. He could use Citicorp/Citibank's global network as a
vehicle for expanding the Salomon Smith Barney investment banking
business.
Reed's willingness to buck the system and
exploit it to the limits is revealed in his resistance to regulatory
reform in the early 199os and the way the bankers continued to
launder
money for dictators and criminals
long after this conduct had been exposed and heavily criticised.
Citicorp became global in 1902 and Reed accelerated this.
Citibank
opened its first six branches in Asia in 1902 -- in Shanghai,
Yokohama, Manila, Singapore, Calcutta and Hong Kong. The company
has been active in the region ever since, though it ramped up its
expansion in the 1980's under Mr. Reed's direction. - - - - -
Citibank has made its logo as recognizable in Kuala Lumpur as
Kansas City. Its Asian operations earned $866 million in 1996, on
revenue of $3.3 billion. Bold
Step for Citigroup On Shaky Asian Ground The New York Times
April 9, 1998
Reed seemed to manage in a more direct manner
than Weill and more readily fired senior staff. As a consequence
Weill took a more established team into the Citifroup merger and this
team triumphed.
That said,
Mr. Reed leaves Citigroup after a 35-year career in which he wore
and bore the mantle of a wunderkind after becoming Citicorp's
chief executive in 1984 when he was just 45. His career has
witnessed giddy highs and some notable lows, but ends on a note of
accomplishment in an industry that has sorely lacked visionaries
and risk-takers like Mr. Reed.
-------------------------
To achieve his goals, he went in many different directions:
hired marketing wizards with no banking experience; coolly churned
through a series of talented executives before leaving them by the
wayside; pursued nascent banking technologies like automated
teller machines with monkish determination; and ignored, and then
sharply scaled down, a once formidable corporate banking business
that nearly brought Citicorp to ruin in the early 1990's.
-------------------------------------
The final act of his career, and one that was characteristically
risky, was the merger with Travelers, a move that created the
world's largest financial services concern, recommitted the
company to corporate banking and hitched the merged company's
fortunes to the unproved virtues of cross-selling financial
products.
-----------------------------------
In that capacity, Mr. Reed will leave the banking industry as he
once came in -- coolly analytic and rational.
Reed Announces Plans
to Step Down as Co-Chief of Citigroup The New York Times
February 29, 2000
Reed was a prominent member of the business
establishment and a member of the business round table. When chairman
Grasso was ensnared in controversy and resigned in 2003 Reed became
chairman of the New York Stock Exchange.
to
contents
Michael A.
Carpenter
Weill surrounded himself with long term staff
who did what he wanted so had a relatively stable executive. One of
these was Michael Carpenter whom Weill put in charge of Salomon Smith
Barney. He managed at a distance setting performance goals and
electing not to look at the consequences. He had been in some trouble
because of this once before and left a previous company under a
slight cloud. Weill fired him after the fraud settlement. Salomon
Smith Barney was the prime target of the fraud investigations and
Carpenter had been in charge at that time.
1998
In a move that will most likely lead to layoffs, Citigroup
said it planned to combine all corporate banking activities into
one unit jointly overseen by Michael A. Carpenter, former chairman
of Travelers Life and Annuity, and Victor J. Menezes, former
president of Citicorp.
----------------------------------
Mr. Carpenter has won praise for his management of Travelers' life
insurance and annuities business although he also ran Kidder
Peabody & Company during the financial scandals involving
Joseph Jett, the onetime bond-trading star.
Citigroup President, Heir
Apparent to Top Job, Quits Abruptly The New York Times
November 2, 1998
2002
For Michael A. Carpenter, the chief executive of Salomon Smith
Barney, the questions about his firm's role in financing Enron and
WorldCom may have a familiar ring.
Eight years ago,
when he was chief executive of Kidder, Peabody, the firm
discovered that Joseph Jett, a bond trader, had reported $350
million in phony profits. Mr. Carpenter ultimately resigned from
the firm, saying that he was proud of his accomplishments but was
making room for a new management team.
"I have a
feeling of deja vu," said a former Kidder executive of Mr.
Carpenter's current and former troubles.
Having helped
transform Salomon, a division of Citigroup, into one of the most
profitable investment banks, Mr. Carpenter has been trying to
limit damage to Salomon and Citigroup ever since Enron's troubles
emerged last fall.
----------------------------------
Mr. Weill hired Mr. Carpenter in 1994, after he left Kidder, to
head the life insurance unit of Travelers, which merged with
Citicorp to form Citigroup in 1998. "Sandy thought he was a good
strategist," said an executive close to Mr. Weill.
Mr. Carpenter
shares a zeal for cost-cutting with Mr. Weill.
"Salomon Smith
Barney has been at the forefront of cost control during this
market downturn," said Henry McVey, an analyst at Morgan Stanley.
Thanks in part to Mr. Carpenter's tight controls, Salomon's
investment banking profits increased 4 percent in the second
quarter.
Among other
things, Mr. Carpenter has been disciplined in what he pays
Salomon's bankers and brokers.
---------------------------
Salomon has also increased its share of a dwindling investment
banking business as competitors struggle.
A Strategist and
Cost-Cutter Seeks to Steer Citigroup Through Scandals The New
York Times August 2, 2002
Carpenter's comments suggest that he had
simply not grasped the enormity of what was happening. He looked past
it.
"The
short-term market response to these reports, frankly, is
surprising," Mr. Carpenter wrote in a memorandum to Salomon's
bankers and brokers last week. "I am very confident that the
strength of our business model will prevail in the long
term."
Along with
calming Citigroup shareholders, employees and clients, Mr.
Carpenter needs to satisfy Citigroup's chief executive, Sanford I.
Weill. Mr. Carpenter, 55, is one of a handful of executives viewed
as a possible successor to Mr. Weill, 69.
------------------------
Though no one questions the profitability of the investment
bank, competitors and former colleagues are wondering if Mr.
Carpenter did enough to track the bankers involved in the
Enron and WorldCom financings.
Other executives
wonder whether a management flaw appeared eight years ago. "He
is not a hands-on sort of guy," said a former executive at
General Electric, which had owned Kidder, of Mr.
Carpenter.
A report on the
Jett scandal by Davis Polk & Wardwell, Kidder's law firm,
found that Mr. Carpenter relied on another executive to monitor
Mr. Jett's trading because he "did not have a background in
securities trading."
------------------------------
"Whatever the business model is, it's working," said a competitor.
A Strategist and
Cost-Cutter Seeks to Steer Citigroup Through Scandals The New
York Times August 2, 2002
Jack Grubman, Benjamin Lorello and the other
bankers and analysts flourished under Carpenter. He had a business
model that worked and he did not look any further than
that.
to
contents
Jack
Grubman
Probably more has been written about Grubman
than about any other analyst or banker. Grubman seems to have been a
very ordinary person who exerted a profound influence.
Jack
Grubman, like all analysts really just a glorified business beat
reporter, was paid tens of millions of dollars by Salomon during
the last half-decade. From Salomon's perspective, there was, of
course, a real (albeit unethical) economic rationale for such
compensation, but from Grubman's perspective, there was one
additional factor: he lives and worked in
Manhattan.
City of Schemes The
New York Times October 6, 2002
Many consider Grubman the architect of the
technology bubble. He displayed a remarkable ability to rationalise
and justify. He made some good calls based on inside information
about AT&T, and rapidly rose to fame because of this. He had a
massive following and because of this many of his reports became self
fulfilling. All of this contributed to his self confidence and his
tendency to brag - something which almost brought Weill
down.
He became dictatorial and quite unable to
accept that he was wrong in his predictions. He ignored warning
signs.
He started life as a computer modelling
expert and worked for AT&T for a number of years before becoming
an analyst. Quite what happened at AT&T we don't know but Grubman
was consistently negative about AT&T and positive about the small
startups which competed with it. His glowing reports helped to build
them into giants with feet of clay.
It was Grubman's early negative reports about
AT&T that built his reputation. The exception to this came in
1998 when Weill persuaded Grubman to upgrade AT&T
briefly.
Grubman is a particularly interesting
character because it is clear that he identified and believed in his
vision and simply could not accept that it was flawed. He was capable
of dishonesty and was even able to boast of this. When pressured by
bankers not to downgrade stocks he complied. His ego and convictions
were such that this did not seem to cause him much
discomfort.
Articles in the New York Times and The
Financial Times (London) describes Grubman's career and his
rationalisations giving an insight into his character. I reproduce
sections from both.
2001
Mr. Grubman, an only child, grew up in a family of modest
means, living in a Philadelphia row house. His father was a
carpenter for the city; his mother worked in a dress shop. He
received a bachelor of science degree in mathematics from Boston
University in 1975 and a master's in probability theory from
Columbia in 1977. Then he went to work for AT&T.
At first, he
analyzed the demand for long-distance services, using computer
models. He later worked in corporate planning for the company's
breakup in 1984. In January 1985, he left for Wall Street, joining
Paine Webber as a telecommunications analyst.
His Wall Street
beginnings were inauspicious. In May 1986, according to regulatory
filings, Mr. Grubman failed the exam, called the Series 7, that
anyone who wants to be an investment professional must
pass.
He subsequently
passed. But even more important, he figured out how to stand out
from the crowd of analysts covering telecommunications, which in
those days meant analyzing AT&T and its recently freed
regional Bell offspring. Mr. Grubman's knowledge of the company's
internal operations gave him an edge. According to an analyst who
is no longer in the business, Mr. Grubman regularly beat out
competitors with information on AT&T that nobody else
had.
"Jack had
information that was never made public," said this person, who
like most others interviewed about Mr. Grubman asked for anonymity
for fear of ruining relationships on Wall Street. "I covered the
company like a rug, and it was extremely concerned about leaks at
the time."
Mr. Grubman
gained attention from investors by being cautious about AT&T
in a crowd that was mostly positive. He may also have recognized
that the advent of competition after the AT&T breakup meant
that there would be many more stocks to take public and bonds to
issue than there were in the one-company era.
"By being
negative on AT&T, Jack was able to gain the ear of other telco
C.E.O.'s," the former analyst said. In 1988, for example, Mr.
Grubman met Bernard J. Ebbers, the entrepreneur who eventually
built WorldCom into a telecom colossus. Mr. Grubman parlayed the
information he gleaned from small players in the business to
become an expert in the sector.
Finding
Fame and Fortune
In 1994, Mr. Grubman, well on his way to becoming a star
analyst, left Paine Webber for Salomon Brothers.
By the time the
firm was taken over by Smith Barney in 1998, Mr. Grubman had
toppled rivals and gained the top ranking in his industry on the
All-American Research Team, as listed by Institutional Investor
magazine.
----------------------------------
Telecom deals were pouring in, and Mr. Grubman became the go-to
guy. He ended up earning an estimated $20 million from the firm in
1999.
In January of
that year, he and his wife, Luann, bought a town house on the
Upper East Side of Manhattan for $6.2 million in cash. Soon, they
were renovating the entire house.
As the number of
telecom deals ballooned, and as Mr. Grubman's picks ascended, his
hegemony in the industry and the firm took hold. That attracted
still more business from executives who knew both how positive he
was on the sector and how powerful his buy recommendations could
be. In March 2000, for instance, when he raised his price target
for Metromedia Fiber Network, the stock jumped 16 percent in one
day. Companies deluged Salomon Smith Barney for their capital
needs, and Mr. Grubman churned out glowing research reports,
annually collecting a multimillion-dollar pay package.
------------------------------
And Mr. Grubman, at the top of his game, was scoffing at anyone
who questioned the propriety of having an analyst, whose job is to
provide investors with objective investment advice, work closely
with the firm's investment bankers. "What used to be a conflict is
now a synergy," he told Business Week in May 2000. "Objective? The
other word for it is uninformed."
Soon, however,
the bottom fell out of McLeod and the telecom sector.
-------------------------------
Many companies he favored are defunct or are trading for pennies a
share or have been delisted from the Nasdaq market.
- - - - - - But
Mr. Grubman's reports show a particular disregard for the dangers
of heavy debt piled on unproven companies. Debt, though not a big
factor in the Internet debacle, was the 800-pound gorilla in
telecommunications.
Nevertheless,
Mr. Grubman continually swatted away speculation that debt might
become a problem for his companies -- talk that began creeping
into the market a year ago when Ravi Suria, then a
convertible-bond analyst at Lehman Brothers, warned of looming
debt problems in telecommunications. One money manager said Mr.
Grubman often played down risk. "If a company comes out and
doubles its debt-to-equity ratio, you would say the risk is
greater," the manager said. "But he was always writing positive
reports around times when his companies were raising debt."
--------------------------------
Mr. Grubman's reputation has also been tarnished inside Salomon
Smith Barney, where the sales force used to treat him with
deference. In the old days, on the morning call to brokers,
listeners would hang on the analyst's every utterance, according
to several witnesses. He would speak expansively about his
favorite companies, taking 20 minutes to get through all his
points. Telecom's
Pied Piper: Whose Side Was He On? The New York Times November
18, 2001
2002
As much as any analyst, Mr. Grubman has straddled the line
that is supposed to separate banking and investment research. He
has boasted of his close relationship with senior executives of
client companies, like Bernard J. Ebbers, the former chief
executive of WorldCom.
Two years ago,
Mr. Grubman told Business Week, "What used to be a conflict is now
a synergy." He added that big investors respected his opinions
because "they know I'm in the flow of what's going
on."
TURMOIL AT WORLDCOM: THE
ANALYST; Timing of a Rating Shift Is Raising Some Questions
The New York Times June 28, 2002
Mr. Grubman,
probably one of the most influential telecommunications analysts
on Wall Street, has consistently defended his view that smaller,
more entrepreneurial companies like WorldCom would ultimately
overtake larger, more established companies like AT&T, the
long-distance leader. His bullish opinion of the prospects of
these smaller companies contributed to the formation of
expectations for the industry that resulted in an overwhelming
glut of communications capacity and a string of corporate
failures. House to
Question Executives of WorldCom The New York Times July 8,
2002
Taking after
a father who spent several years as a professional boxer before a
job in the local highways department, Mr Grubman himself became a
fighter and an avid follower of boxing.
The pride in his
boxing background - evident from the boxing posters and gloves on
display in his office at Salomon - also points to a pugnacious
character and a doggedness that enabled him to claw his way to
prominence.
--------------------------------
It was a single, powerful idea that finally set him apart from
the herd. The telecoms industry was on the brink of a revolution,
he predicted. With fibre-optics transforming the economics of the
business, it was possible to build new global communications
networks from scratch and undercut long-established companies that
were tied to old technologies and cost structures.
With Mr Grubman
providing much of the intellectual framework, Salomon - where he
had moved in the early 1990s - played a key role in raising the
cash and masterminding the mergers that brought this vision to
life. Mr Grubman had little time for old-time companies like
AT&T: newcomers like WorldCom, Qwest and Global Crossing were
the future. His uncompromising views coincided with an
unprecedented investment boom.
---------------------------------
The rags-to-Wall-Street-riches story may be genuine, but Mr
Grubman was not above a bit of self-mythologising along the way.
He once maintained, wrongly, that he came from the poor South
Philadelphia area that was made famous by another, fictional boxer
- Rocky Balboa. And he confessed to sprucing up his resume with a
claim that he attended the Massachusetts Institute of
Technology.
Inside Salomon,
his aggressive and uncompromising approach also made him a
controversial figure - as did his close involvement in the firm's
deal-making. According to some former colleagues, Mr Grubman was a
bully who often acted as though he ran the firm's telecoms group.
His reach went beyond research and affected the investment bankers
who worked with the companies, too. "Jack would be the first to
say he wanted to be an investment banker," says one former Salomon
banker.
His
protectiveness towards the companies he recommended went so far
that he practically chose which investment bankers would work on
which accounts, according to one associate. If he deemed a banker
unworthy of working for one of his clients, he would sometimes
tell the client not to co-operate. "Having him behind you meant
whether you would produce revenues or not," says a former Salomon
banker.
------------------------------------
Mr Grubman was unapologetic about his style of operation when he
appeared before a sceptical congressional committee in June. His
defence of his position, made at the height of the bull market,
was disarmingly simple. "What used to be a conflict is now a
synergy," he told Business Week. He argued that he could benefit
both companies and advisers by being close to both. It remains to
be seen whether that will convince Eliot Spitzer, the New York
attorney general, who has been examining Mr Grubman's
role.
Yet few of those
who know Mr Grubman accuse him of the kind of bad faith apparently
displayed by another analyst investigated by Mr Spitzer - Henry
Blodget of Merrill Lynch. While Mr Blodget recommended some stocks
publicly while criticising the companies in private, Mr Grubman's
belief in his industry never wavered. "He had a conviction and he
sold that conviction," says one former colleague.
Wall Street's faithful
bull: MAN IN THE NEWS JACK GRUBMAN: Financial Times
(London,England) August 17, 2002
Mr.
Grubman's seal of approval was nearly all upstart telecom
companies needed to access billions from Salomon-orchestrated bond
offerings and initial public offerings. His bullish research
reports urging investors to buy these stocks were all part of the
package deal, since Mr. Grubman was ostensibly an analyst
dispensing objective advice to
clients.
Jack Grubman's Last
Deal The New York Times August 17,
2002
While he
said he regretted that he had failed to predict the collapse of
the telecommunications industry, he said, "I am nevertheless proud
of the work I, and the analysts who worked with me, did." He added
that he felt he had been unfairly singled out for
criticism.
In a memo to
Salomon employees, Michael A. Carpenter, the firm's chairman,
called Mr. Grubman a "valued member of our research team" and said
the analyst had always conducted himself professionally and in
accordance with legal and ethical standards.
---------------------------------
(Grubman's vision) No one was more certain than Mr. Grubman
that this demand was going to be explosive and that the companies
most likely to profit from it would be new entrants unencumbered
by the bureaucratic mentality common among established companies.
He proselytized this view with institutional investors across the
country in speech after speech.
----------------------------------
"Jack Grubman ignored obvious signs of trouble at WorldCom,
including repeated downgrades by credit- rating agencies," said
Martin Weiss, chairman at Weiss Ratings Inc., an independent
research firm. "He was clearly a leading proponent of WorldCom
shares, almost to the bitter end, despite abundant signs of
trouble." Bullish
Analyst Of Tech Stocks Quits Salomon The New York Times August
16, 2002
The sign
behind Jack Grubman's desk used to say it all. In large block
capitals, it declared the mantra that helped to make the
telecommunications stock analyst a Master of the Universe during
Wall Street's biggest bull market: "BUY NOW
Wall Street's faithful
bull: MAN IN THE NEWS JACK GRUBMAN: Financial Times
(London,England) August 17, 2002
If investors
need any more evidence that many folks in high places on Wall
Street still don't get it and may never, they need read no further
than Mr. Grubman's resignation letter. It contains just one
parenthetical reference to his woeful record in stockpicking,
which was his job to get right, not wrong. The rest of the letter
was a whinefest worthy of a 6-year-old.
"The current
climate of criticism," Mr. Grubman wrote, has made it impossible
for him to perform to his high standards. Apparently, Mr. Grubman
is effective only when stock prices are rising.
"The relentless
series of negative statements about my work, all of which I
believe unfairly single me out, has begun to undermine my efforts
to analyze telecommunications companies," he added.
A Star Analyst Exits
Loudly. Others Hide Backstage. The New York Times August 18,
2002
to
contents
Weill, Grubman, AT&T, and the
Nursery School
Probably the best example of the culture and
accepted behaviour in Citigroup was this sordid saga. The information
comes from an email Grubman sent to a friend boasting of Weill and
Grubman's success in playing AT&T and its CEO Armstrong "like a
fiddle". Weill denied some but not all of it. Other memos from
Grubman to Weill lend support to the email.
Mr Armstrong was a friend of Weill and on the
board of Citigroup. He was less than enamoured with Grubmans negative
reports about AT&T. There was a lucrative AT&T contract to be
won and Weill was according to Grubman also looking for Armstrong's
support in his board room battle with John Reed, at that time joint
CEO. It is clear that Weill and Grubman had several discussions about
this issue and that Grubman went with Weill to AT&T board
meetings.
In essence Grubman made a positive report
about AT&T and Citigroup got the contract. He then went back to
being negative about AT&T. Citigroup in turn donated US $1
million to a select New York nursery school in order to secure the
acceptance of Grubman's twins at the school. Weill admitted only to
asking Grubman to look at AT&T again and to making the donation.
The school denies it was influenced by the donation. The issue
was wether securing the admission of Grubman's children to the school
was a bribe or reward for generating a positive report. What is
revealed is a close personal link between Weill the CEO and Grubman
the analyst who made so much money for Citigroup.
Investors who followed Grubman's advice and
bought AT&T shares lost heavily as the share price fell soon
after.
In the fraud settlement Weill's contact with
analysts was restricted but he was not penalised. Grubman was fined
and barred from practicing as an analyst.
People close
to AT&T said yesterday that in January 2000, AT&T began a
six-week "beauty contest" in which the big Wall Street investment
banks competed for a leading role in its wireless stock offering.
As part of those presentations, investment banks routinely
highlighted positive recommendations on the potential client's
stock from their designated analyst.
The three firms
that won the right to lead the AT&T offering were Salomon, a
unit of Citigroup; Goldman, Sachs; and Merrill Lynch. The
360-million-share deal was the largest initial public offering in
United States history at the time. Six months later, Mr. Grubman
lowered his rating on AT&T shares.
----------------------------------------
Mr. Armstrong and Mr. Weill have had a close business relationship
for at least nine years. In 1993, the Primerica Corporation,
headed by Mr. Weill, acquired Travelers, on whose board Mr.
Armstrong sat. As chairman and chief executive of the new
Travelers Group, Mr. Weill retained Mr. Armstrong as a
director.
Mr. Armstrong
returned the favor. Less than a year after Mr. Armstrong became
chairman and chief executive of AT&T in 1997, Mr. Weill joined
AT&T's board. Mr. Armstrong remains a director of Citigroup,
which was formed when Travelers merged with Citicorp in 1998.
--------------------------------------
At an AT&T board meeting in 1999, according to an executive
who was there, Mr. Armstrong pulled Mr. Weill aside and asked him
to tell Mr. Grubman to act "like a gentleman." While Mr. Armstrong
acknowledged that Mr. Grubman was entitled to his view, he asked
Mr. Weill to make sure the analyst did not attack the company or
Mr. Armstrong.
"Jack was always
saying that WorldCom was going to eat AT&T's lunch and that
AT&T couldn't get out of its own way," this executive said.
"He was very snide and, naturally, that got to Mike."
--------------------------------
After Mr. Grubman shifted his stance on AT&T, he was admitted
to the company's inner sanctum. On May 1, 2000, AT&T invited
Mr. Grubman and another analyst, Frank J. Governali of Goldman,
Sachs, to its Basking Ridge, N.J., headquarters and told them that
the company would not meet its earnings projections for the year.
AT&T did not tell other investors or analysts until the next
day. Since then, the Securities and Exchange Commission has
instituted rules forbidding companies from providing material
information to favored analysts and investors ahead of others.
AT&T Is Asked For
Information On Dealings With Salomon The New York Times August
24, 2002
In a
statement to top executives late yesterday, Citigroup acknowledged
the attempt by Mr. Weill, who was an AT&T director, to help
Mr. Grubman's children get into the school but denied it was
connected to the analyst's upgrade of AT&T's shares.
----------------------------
The circumstances surrounding Mr. Grubman's abrupt change in
the fall of 1999 to an upbeat view on AT&T from a long-held
negative one have come under intense scrutiny from investigators
in the office of Eliot Spitzer, the New York attorney general, and
NASD, formerly called the National Association of Securities
Dealers. They are trying to assess whether research practices at
the Salomon Smith Barney unit of Citigroup were corrupted by the
firm's investment banking relationships, or desired relationships,
with corporations. The e-mail message was among records Citigroup
turned over in the investigations.
Central to the
investigations is Mr. Grubman's upgrade of AT&T in November
1999. Soon afterward, Salomon reaped lucrative fees from an
offering of shares in AT&T's wireless subsidiary, which was
spun off to the public in April 2000.
Yesterday, Mr.
Weill acknowledged publicly for the first time that he had urged
Mr. Grubman in 1999 to "take a fresh look" at AT&T. In a
statement, Mr. Weill said that his request of Mr. Grubman was not
meant to be viewed as pressure on the analyst to upgrade AT&T,
a company which Mr. Grubman rated a tepid "hold" at the time.
Nevertheless, Mr. Grubman soon did raise his rating on AT&T to
"buy." A few months later, in April 2000, Salomon won a coveted
role selling shares in AT&T's wireless division to
investors.
Alix Friedman, a
spokeswoman for the 92nd Street Y, said that Citigroup made a
grant of $1 million over five years to the organization in the
early summer of 2000.
-------------------------
As for the e-mail message linking Mr. Grubman's upgrade of
AT&T to his daughters' entry into the 92nd Street Y's nursery
school, Mr. Weill said, "I tried to help Mr. Grubman because he
was an important employee who had asked for my help." Mr. Weill
said he called the school on behalf of Mr. Grubman's children but
did not say when. He added that Citigroup's grant was consistent
with the company's philanthropy, but he did not say whether the
money was given to persuade the school to admit Mr. Grubman's
children.
As the top
executive of Citigroup, Mr. Weill presumably has much influence
over the company's charitable contributions.
-------------------------
In the message, he said Mr. Weill had asked him to upgrade
AT&T to gain the support of its top executive, C. Michael
Armstrong, who was also a Citigroup director. The message said Mr.
Weill sought Mr. Armstrong's help in a boardroom power struggle
with John S. Reed, then co-head of Citigroup, who subsequently
resigned. That statement was a fabrication, Mr. Grubman said
yesterday, "to inflate my professional importance." And Mr. Weill
called that part of the e-mail message "sheer nonsense," adding,
"I would never attempt to manipulate a board member's vote."
---------------------------------
Mr. Grubman had been known for his dim view on AT&T and
shortly after the wireless offering was made to investors, he
lowered his rating on the company once again to hold.
---------------------------------------
'Just take a fresh look' is 90's code for change your opinion,"
said Tom Brown, chief executive of Bankstocks.com and a former
brokerage firm analyst. "At the investment banks in the 90's,
everybody realized we were making money because of transactions.
Whether it was your direct boss, the head of equity trading, head
of investment banking or the C.E.O. of the firm, the type of
pressure that was put on you was exactly what Sandy did."
-----------------------------------
But the existence of an e-mail message written by Mr. Grubman that
disputes his claims of only writing research that he believed in
may hurt his defense among the securities regulators who are
considering taking action against
him.
Wall St. and the Nursery
School: A New York Story The New York Times November 14,
2002
Jack B.
Grubman, the former Citigroup analyst, boasted in an e-mail
message early last year that he and Sanford I. Weill, Citigroup's
chairman, had played C. Michael Armstrong, the chief executive of
AT&T, "like a fiddle," according to two people who have seen
the message.
In the e-mail
message, which Citigroup turned over to regulators investigating
conflicts of interest at Wall Street firms, Mr. Grubman told a
friend that he had temporarily raised his rating on AT&T's
stock to accomplish two goals. One was to gain Mr. Armstrong's
support in Mr. Weill's struggle for control of Citigroup; the
other was to secure Mr. Weill's help in getting Mr. Grubman's
children into an exclusive nursery school in Manhattan.
Once he and Mr.
Weill got what they wanted, Mr. Grubman wrote, "I went back to my
normal negative self" on AT&T and lowered his rating on
AT&T stock. Mr. Armstrong, he added, "never knew that we both
played him like a fiddle," said the people who have seen the
e-mail message, parts of which have been reported over the last
two days.
-----------------------------
But investigators see the document as a confession by Mr. Grubman
that he had fraudulently misled investors about his true opinion
of AT&T's prospects.
-------------------------
Mr. Weill needed Mr. Armstrong's vote to "nuke" Mr. Reed in
the showdown between the men for sole control of Citigroup, Mr.
Grubman wrote, the people who have seen the e-mail message said.
Mr. Reed resigned from Citigroup in February 2000.
Mr. Grubman
wanted Mr. Weill's help in getting his twins into the nursery
school run by the 92nd Street Y. He got that and more.
Mr. Weill, other
directors of Citigroup and at least one other powerful person in
business contacted directors of the 92nd Street Y seeking to help
Mr. Grubman's children, said people involved in the investigation
or close to members of the Y's board. Citigroup also followed up
with a pledge to give $1 million to the Y over five years,
starting in 2000.
---------------------------
A person involved in the investigation of Citigroup and Mr.
Grubman said Citigroup officials would not deny that the company
gave the money to the Y to get Mr. Grubman's children admitted to
the nursery school. More
Details On Message By Ex-Analyst For Citigroup The New York
Times November 15, 2002
"No child is
guaranteed admission here," said Alix Friedman, director of public
relations. "Every child -- every child -- goes through the same
rigorous admissions process.
-----------------------------------
But heads of nurseries who do not bow to their fancy clientele
have been known to lose their jobs.
No Talking Out of
Preschool; Favoritism in Nursery School Entrance? No Comment
The New York Times November 15, 2002
Investigators
looking into Mr. Grubman's activities might have written off this
claim as too far-fetched had they not also found a memo from Mr.
Grubman to Mr. Weill dated Nov. 5, 1999, that was helpfully
entitled: "AT&T and the 92 Street Y."
The Pre-Kindergarten
Connection The New York Times November 16,
2002
"It is odd
that the money came from the bank," one major fund-raiser said.
"If it had come from the bank's foundation, well, then you might
be able to make a case that this was good citizenship. But from
the company itself? That's funny."
-----------------------------
"The one thing that just doesn't feel right, whether it violates
any rules or principles, is that this was shareholders'
money."
---------------------------
Mr. Grubman's seeking help with the school admissions was
mentioned not only in the e-mail message to his friend but also in
a memo he wrote to Mr. Weill, obtained by investigators looking
into Mr. Grubman's stock ratings.
----------------------------
"Given that it's statistically easier to get into the Harvard
freshman class than it is to get into preschool at the 92nd Street
Y (by the way, this is a correct statement), it comes down to 'who
you know,' " Mr. Grubman wrote.
Private Preschool
Admissions: Grease and the City The New York Times November
16, 2002
But it
differs too from some other dramas involving brokerage firm
titans: thousands of individual investors lost millions of dollars
because of what appear to have been self-interested actions by Mr.
Grubman and Mr. Weill.
-------------------------------
The fact is, Mr. Weill's request of Mr. Grubman draws him into the
circle of people that investors can consider at least partly
responsible for losses they incurred by following the analyst's
advice. Between his upgrade of AT&T when the stock was at
$57.43, and his downgrade, at $28.88, some $80 billion in market
value vanished.
-----------------------------------
Bill Fleckenstein, president of Fleckenstein Capital in Seattle,
said the incident showed "that it wasn't just the analysts and the
corporate finance guys on Wall Street who would do whatever it
took to make a buck. The C.E.O.'s did, too." But this was standard
practice on Wall Street in the 90's, he noted. "The only reason we
get to know about this is there was a paper trail," he said. And a
doozy of a trail at that. Does
the Rot on Wall Street Reach Right to the Top? The New York
Times November 17, 2002
While Mr.
Weill has publicly acknowledged asking Mr. Grubman to take a fresh
look at AT&T, documents released yesterday show that their
discussions were intricate and numerous and dated as far back as
the fall of 1998.
Mr. Weill
accompanied Mr. Grubman to meetings with C. Michael Armstrong,
then the chief executive of AT&T, and asked that Mr. Grubman's
AT&T report be sent to him, before its publication, e-mail
messages show.
--------------------------------
When Mr. Grubman neglected to mention AT&T as an industry
leader in a speech in October 1998, Mr. Armstrong complained to
Mr. Weill, who relayed the complaint to Mr. Grubman's
superiors.
"The last thing
I want to do is have AT&T put in an awkward position in
dealing with Salomon Smith Barney," Mr. Grubman wrote in a letter
to Mr. Weill that was released yesterday. "To the extent I have
done so I apologize to you and the firm."
-------------------------------
In August 1999, Mr. Weill and Mr. Grubman met with Mr. Armstrong
at AT&T's headquarters in New Jersey.
A few weeks
later, Mr. Grubman wrote to Mr. Armstrong, with copies sent to Mr.
Weill and Eduardo Mestre, the head of Smith Barney's investment
banking division. "When my analysis is complete and if the results
are in line with what you and I are expecting, there will be no
better supporter than I," he said in the letter. "I would welcome
the role of being a kitchen cabinet member to you."
In October, Mr.
Weill and Mr. Grubman had a 14-minute conversation in which Mr.
Weill asked him once again to take a fresh look at the stock. In
November, Mr. Grubman sent a letter to Mr. Weill updating him on
AT&T.
Throughout the
month, Mr. Grubman and Mr. Weill had numerous conversations about
progress on his work.
On Nov. 24, Mr.
Grubman alerted Mr. Weill to his upgrade, and on Nov. 29 he sent
an e-mail message to the publications department saying that "the
AT&T report must be edited and mailed out to printers today so
that it can be distributed in time to meet Sandy Weill's
deadline."
The next day,
Mr. Grubman issued his report of AT&T with a positive
rating.
In February
2000, Salomon Smith Barney was named a book runner for AT&T's
public offering of its wireless company, earning $63 million in
fees.
Citigroup's Chairman Is
Barred From Direct Talks With Analysts The New York Times
April 29, 2003
On June 11,
1999, Grubman sent Weill a memorandum noting that AT&T had not
responded to his questionnaire. Weill apparently then spoke to
AT&T's C.E.O. about the questionnaire. AT&T asked Grubman
to resend the questionnaire, and Grubman wrote Weill: "Maybe this
time we can actually make some progress in closing the deal with
AT&T's C.E.O. ." On July 19, 1999, AT&T sent an
11-page response to Grubman.
On Aug. 5, 1999,
Grubman and Weill traveled to AT&T's headquarters for a
meeting with AT&T's C.E.O. that Weill had arranged. On Aug.
19, 1999, Grubman wrote to AT&T's C.E.O.:
"I am writing to
follow up on our meeting with Sandy. . . . I thought it was
important to write to you directly to lay out what I think we
agreed to in order to get this process going. . . . I need to get
to a level of specificity well beyond what's on the street today
and I will need your help getting to the right people. . . . Wall
Street is lacking analysis that comes remotely close to answering
the detailed economic, technical and operational questions that
investors are demanding answers to regarding the rollout of the
bundled service platform using the cable plant. . . . When my
analysis is complete and if the results are in line with what you
and I are both anticipating, once I'm on board there will be no
better supporter than I. . . . As I indicated to you at our
meeting, I would welcome the role of being a 'kitchen cabinet'
member to you."
He (Grubman
in memo to Weill) referred to his earlier meeting with
AT&T's C.E.O. and to his scheduled meetings in Denver with the
head of AT&T's cable operations and in Basking Ridge in New
Jersey with AT&T's network operations personnel. Grubman also
sought Weill's assistance in getting his children admitted to the
92nd Street Y preschool. WALL
STREET SETTLEMENT; Excerpts From Settlement With Citigroup on
Salomon's Recommendations The New York Times April 29, 2003
to
contents
Benjamin
Lorello and William McGahan
Lorello was the health care banker for Smith
Barney. William McGahan was his right hand man responsible for
HealthSouth. Lorello's Grubman-like dealings with HealthSouth are
described in
other pages on this site. Lorello had
analysts working with him who gave positive reports. As in the case
of Grubman a series of companies were hyped up to the public and
floated on the stock market. Most of them imploded.
Indeed,
McGahan who is known for belittling his employees and riding
around the office on a Razor scooter counted HealthSouth as one of
his top clients.
-------------------------------
Lorello is a legend in the healthcare world. Known for being
fiercely intense and aggressive, he has been known to put heavy
pressure on small and mid-cap companies to do business with the
bank.
"What always
struck me as odd," said one healthcare executive, who asked not to
be named, "was that he continued to have high market share even
though his companies kept blowing up."
UBS' OWN GRUBMAN
The New York Post April 4, 2003
Behind every
great corporate empire they say, lies a filthy-rich investment
banker. For HealthSouth, that banker is Ben Lorello, a brash Wall
Street kingpin. Though HealthSouth is most closely associated with
its recently deposed CEO and founder, Richard Scrushy, Wall Street
insiders say the long arm of Lorello held considerable sway over
the company.
Lorello heads
UBS Warburg's health-care investment banking group. Wall Streeters
say he and his partner, who resigned suddenly on April 10, are the
kinds of bankers who give bankers a bad name (that's saying
something). In other words, they're fee-hungry, not particularly
concerned about investors, and often ill-tempered. McGahan is
known for his short fuse, Lorello for his insults (the latter was
once overheard saying, in his gravelly monotone, "If you were a
stock, I'd short you").
------------------------
Lorello, who has been known to sport Master of the Universe
attire, circa 1986 (dress shirts replete with French cuffs and
English collars), came to UBS in 1999 for a reported three-year
pay package worth $70 million. He and McGahan, who handled the
day-to-day relationship with HealthSouth, helped it raise billions
of capital, netting UBS millions in fees. Prior to that Lorello
and McGahan worked to build HealthSouth deal by deal beginning in
the mid-'80s, first at Smith Barney, then at Salomon Smith
Barney.
---------------------------
In 1996, I interviewed Scrushy and Lorello and wrote of the
latter that he "... is widely viewed as the premier health-care
investment banker--as he'll be the first to tell
you."
HealthSouth's Go-to
Guy :The collapse of HealthSouth is putting pressure on UBS
Warburg FORTUNE Tuesday, April 15,
2003
While Mr.
Lorello, the primary banker for HealthSouth, is not the subject of
an investigation, health care analysts at UBS Warburg have come
under increased scrutiny for having maintained positive ratings on
HealthSouth up to and after its stock collapsed last year. A
spokeswoman for UBS Warburg declined to comment, as did the
S.E.C. Analysts to
Pay Millions in Fines New York Times April 28, 2003
to
contents
Charles O.
Prince III
Prince was a lawyer who joined Weill early in
his career and has been a faithful servant ever since. He became an
excellent deal maker and arranged all of the many takeovers and
mergers in which Weill indulged. Weill came to depend on
him.
When scandals engulfed the company Weill
turned to Mr Prince who proved to be a skilled Mr Fixit and a good
negotiator, steering Citigroup through the scandals and the
settlements which spared Weill.
After he fired Carpenter, Weill put Prince in
charge of Salomon Smith Barney, the prime culprit in the scandals.
When Weill retired in 2003 he anointed Prince as his successor, but
elected to stay on as chairman where he could still exert
influence.
Prince undoubtedly has a good grasp of the
problems and insight into what happened. He is in a good position to
guide the company towards a more ethical future.
The problem for Prince is that social
consciousness and ethical behaviour do not make for success in the
marketplace. If he is not prepared to do whatever it takes to be
profitable then the market will replace him with someone who will. We
can probably expect a short respite before the next Citigroup
scandal.
The
appointment (to replace Carpenter) of Charles O. Prince
III, 52, who had been Citigroup's chief operating officer and
chief legal counsel, comes after months of bad publicity for the
investment bank, resulting in a decline in Citigroup's stock.
---------------------------
Mr. Prince has worked at Mr. Weill's side since 1987. He has
helped the Citigroup chief executive in his dealings with the
Federal Reserve and Congress, smoothing the way for the merger of
Travelers and Citicorp in 1998 to create Citigroup.
Citigroup Moves to Clear
Up Troubles at Investment Unit The New York Times September
10, 2002
CHARLES O.
PRINCE III (who replaced Carpenter) is amused by his image
as the chief problem solver at Citigroup.
---------------------------
He has met with state and federal regulators, hoping to devise a
speedy solution to the multiple investigations into Salomon's
business practices. Officials briefed on the meetings said Salomon
offered a sweeping settlement proposal that could include
separating its investment banking and research departments to
avoid conflicts of interest.
---------------------------------
The aggressive effort to repair the damage shows the imprint of
Mr. Prince, a workaholic lawyer known for his sense of humor and,
more important, his loyalty to Mr. Weill.
--------------------------------
If Mr. Prince succeeds, analysts say, he could be Citigroup's next
chief executive. If he fails, Mr. Prince said, with characteristic
bluntness, "I'm out of a job."
---------------------------------
Few executives at Citigroup are closer to Mr. Weill than Mr.
Prince, 52, who had been Citigroup's chief operating officer and
longtime chief legal counsel. Mr. Prince is part of a small circle
of executives -- now even smaller after departures of other
veteran aides in recent years -- who have been with Mr. Weill
through his career of deal-making.
"Chuck has
helped me on everything from my eating habits to my exercise
regimen," Mr. Weill said in a recent interview.
They are
occasional jogging partners, and Mr. Prince is the master of
ceremonies at an annual birthday party that the company's top
executives have for Mr. Weill.
The two men have
known each other since 1986, when Mr. Prince, as general counsel
of the Commercial Credit Company, then a troubled Baltimore
finance company, prepared the employment contract for Mr. Weill,
who became chief executive.
Mr. Weill used
Commercial Credit as the base for a series of acquisitions,
ultimately leading to the creation of Citigroup in
1998.
Although he now
runs one of the country's biggest investment banks, Mr. Prince has
roots that are far from the world of Wall Street.
Born and raised
in Los Angeles, he received his bachelor's, law and master's in
international relations degrees at the University of Southern
California.
He had ambitions
of working as a public interest lawyer, but instead took bland
jobs as an in-house corporate lawyer, working for United States
Steel and PPG Industries in Pittsburgh. Bored, he got a master's
degree in corporate securities law at Georgetown University in
Washington and in 1979 joined Commercial Credit in
Baltimore.
A few years
later, Mr. Prince, as general counsel, sold off much of Commercial
Credit's assets after the company's parent, the Control Data
Corporation, faced a cash squeeze.
AFTER Mr. Weill
arrived, Mr. Prince stayed as chief counsel. Over the years, he
helped negotiate acquisitions and deal swiftly with any problems,
building his reputation as a troubleshooter.
When Mr. Weill's
Travelers Group announced its merger with Citicorp in 1998 to form
Citigroup, Mr. Prince met with members of Congress and regulators
in Washington to smooth the way. Mr. Weill was eager for Congress
to repeal the Glass-Steagall Act, the Depression-era legislation
that prohibited banks from getting into some other businesses. The
legislation, repealed three years ago thanks in part to Citigroup
lobbying, would have required Citigroup to divest its insurance
business.
This month, Mr.
Prince laid the groundwork for a $215 million settlement of a
Federal Trade Commission lawsuit against Associates First Capital,
a consumer lending business acquired by Citigroup in
2000.
"He's an
incredible problem solver," Mr. Weill said.
Others doubt
that Mr. Prince can quickly move Citigroup past its present
predicaments.
------------------------------------
Mr. Prince's intensity in getting things done is no surprise to
colleagues. "He is relentless in terms of his work habits," said
Robert I. Lipp, another longtime aide to Mr. Weill who heads
Travelers Property Casualty, which Citigroup spun off earlier this
year. "If we are doing an acquisition, he'll often have a contract
written overnight."
Still, Mr.
Prince's new role at Citigroup is in some ways unfamiliar to him.
He will need to broaden his network beyond regulators and
lawmakers. He is little known on Wall Street or in business
circles.
His long hours
at Citigroup may have made it difficult. Mr. Prince, who is
engaged to be married and has two grown children from a prior
marriage, had been treasurer of the New York chapter of the
National Urban League, but he gave up that job because of the
demands of his Citigroup role. He did, however, recently become a
member of the Council on Foreign Relations.
-------------------------------
Mr. Prince said he felt up to running Salomon. "Sandy is the
premier deal maker, and I was one of a handful of people who
worked with him on every deal Citigroup has done," he said. "I
know what doing a deal means." Mr.
Fix-It for the House of Salomon The New York Times September
29, 2002
The
surprising decision (Prince to succeed Weill) underscores a
persistent unease Mr. Weill seems to have with his investment
bankers dating back more than 30 years.
-------------------------
Mr. Prince has emphasized that he will remain at the helm of
the investment bank. In a meeting with managing directors
yesterday, Mr. Prince said that he would be running the bank for
another year, if not longer, according to a Citigroup banker who
was present.
Already, a new
generation of bankers in such areas as equities and fixed income
are positioning themselves to succeed Mr. Prince as head of
Citigroup's investment bank.
-------------------------------
Though there is a widespread acceptance, if not resignation, that
Mr. Prince will remain in charge for the near future, many
Citigroup bankers are eagerly awaiting an executive with a keener
understanding of the business. While the bankers say they have
respect for Mr. Prince's knowledge of regulatory issues and credit
his history as Mr. Weill's top legal adviser on all his major
deals, they are less impressed with his nuts-and-bolts knowledge
of their industry.
Describing a
meeting Mr. Prince held a few weeks ago with about 400 Citigroup
bankers, several who attended said Mr. Prince's remarks struck
them as superficial.
-------------------------------
Mr. Prince is not the only person lacking in direct banking
experience who Mr. Weill has put in a senior position at the
bank.
Succession at
Citigroup May Start a Horse Race The New York Times July 18,
2003
to
contents
The New York
Stock Exchange and Richard
Grasso
The
Board
The Board of the New York Stock Exchange
(NYSE) has been made up largely of successful business men and women.
It is not surprising that it too should show some of these tendencies
and that some members have had to resign when their companies were
caught up in scandal and fraud.
Michael Carpenter from Salomon Smith Barney
was a member as was Martha Stewart who is charged with corporate
crimes which could send her to jail for 30 years. Of particular
interest is Richard Grasso who was chairman of the NYSE until he was
forced to resign and was replaced by John Reed.
Particularly revealing of the way the board
and the marketplace thinks was the nomination of Sandy Weill as a
member of the board to represent the public. This was supported by
Grasso.
Weill's Citigroup had just paid a large fine
for allegedly defrauding the investing public. This same public was
pursuing him and his company through the courts. The sordid dealings
with Grubman had made headline news. Grasso had involved himself
personally in the settlement so knew all about it.
There was an outcry and Weill sensibly
withdrew. No one challenged the appointment of the CEO's and
executives of Citigroup and many of the other financial groups
involved in the scandals to the board. They were representing the
industry and the industry had no problems with people like this. Many
show characteristics little different to those at
Citigroup.
One wonders how a board made up of people
like these, a board where people like Weill can be considered as
representatives of the public, can function as an effective
regulator. The nomination of Neal, Purcell and Ketchum show who won
the fraud war. The sense of impropriety which a civil society would
feel about such appointments no longer applies. It is all about naked
power and influence. Claims to "sweeping changes" are so much hot air
while attitudes like this persist.
But at board
meetings of the New York Stock Exchange, Mr. Weill would represent
not Wall Street, where he has spent almost his entire career, but
the investing public.
The exchange
said yesterday that Mr. Weill, who turned 70 on Sunday, is a
nominee to be one of 12 public members of its board. The chief
executives of two other big financial services companies, Morgan
Stanley and Merrill Lynch & Company, have been nominated to
represent the securities industry. Until last year, the chairman
of the Salomon Smith Barney securities unit of Citigroup
represented the industry on the board.
---------------------------------
The third director who left the board worked for Mr. Weill.
Michael Carpenter ran Salomon Smith Barney until regulators
started investigating it for its involvement in financing Enron
and for conflicts of interest among its stock analysts. Salomon
Smith Barney has agreed to pay $400 million in fines and other
payments as part of a pending settlement of the investigation into
analysts.
Mr. Carpenter
was an industry representative on the exchange's board, as are
Henry M. Paulson Jr., the chairman and chief executive of the
Goldman Sachs Group, and John J. Mack, the chief executive of
Credit Suisse First Boston.
David H.
Komansky, the retiring chairman of Merrill Lynch, has been an
industry director of the exchange for six years. His successor at
Merrill, E. Stanley
O'Neal,
is among the industry nominees this year, as is Philip
J. Purcell,
the chairman and chief executive of Morgan Stanley.
Citigroup's Weill
Nominated As N.Y.S.E. Board Member The New York Times March
22, 2003
Sanford I.
Weill withdrew his name from consideration to be a director of the
New York Stock Exchange last night after Eliot Spitzer, the
attorney general of New York, said he would "wage a vigorous
battle" against the nomination.
--------------------------
But Mr. Spitzer said he was "apoplectic" when he read that Mr.
Weill had been chosen to represent the investing public, not the
securities industry. "To put Sandy Weill on the board of the
exchange as the public's representative is a gross misjudgment and
a violation of trust," Mr. Spitzer said in a telephone interview
yesterday. "He is the chairman of the company that is paying
perhaps the largest fine in history for perpetrating one of the
biggest frauds on the investing public. For him to be proposed as
the voice for the public interest is an outrage."
Weill Declines Board
Seat On N.Y.S.E. The New York Times March 24,
2003
The
management crisis at the New York Stock Exchange (leading to
Grasso's resignation) has raised long-dormant questions about
whether the exchange can continue to be a regulator and presents a
major challenge for the Securities and Exchange Commission.
-------------------
That change will test the regulatory mettle of the
commission's new leader, William H. Donaldson. Mr. Donaldson, who
helped topple Richard A. Grasso and anoint his interim successor,
is now moving gingerly in the debate over the exchange's future
structure.
Publicly, Mr.
Donaldson has given the exchange time to try to fix its own
problems, and he pledged this week to wait a few weeks to hear
proposals from the exchange and its interim leader.
But behind the
scenes, Mr. Donaldson is said to have played a bigger role. He
has, for instance, vetoed some candidates to become interim leader
of the exchange. That job was given last week to John S. Reed, the
former head of Citigroup, whose selection Mr. Donaldson
approved.
---------------------------------------
It was Mr. Donaldson, though, who called for a detailed report on
Mr. Grasso's pay, which led to further public disclosures and his
resignation.
With the
exchange's old leadership swept away, signs are emerging that the
exchange is shedding a deep-seated resistance to realigning its
nearly 70-year-old system under which the same officials at the
exchange oversee both its regulation and its business
affairs.
Edward A.
Kwalwasser, who oversees the exchange's regulatory unit, defended
the track record of his unit and said the changes being proposed
would be more costly and possibly less efficient.
"But it wouldn't
be the end of the world," he said in an interview a few hours
before Mr. McCall's announcement, making a concession that would
have been unthinkable under Mr. Grasso.
Growing S.E.C. Role In
Big Board Reform The New York Times September 26,
2003
The New York Stock Exchange is expected to name Richard Ketchum,
general counsel of Citigroup Inc's (C.N) investment bank, to the
new role of chief regulatory officer, the Wall Street Journal said
on Wednesday.
------------------------------------
The exchange was rocked this fall by the ouster of former Chairman
Richard Grasso over the size of his pay package. The exchange
installed sweeping changes, such as forming a new,
independent board, splitting the roles of chairman and chief
executive officer and proposing the creation of the chief
regulatory officer position.
NYSE to name Citigroup's
Ketchum as chief regulator-WSJ Reuters News January 7, 2004
I have not gone looking to see how many
members of the board have been involved in fraud and unsavoury
conduct. We know that Citigroup and several of the other financial
giants involved in the scandals were well represented on the board
and some have been nominated since the scandal broke.
to
contents
Martha
Stewart
I have not tracked back to see how many
representatives there were from Enron, Worldcom or other companies
that committed fraud but it is likely that these companies were
represented. A case currently drawing attention is that of Martha
Stewart, an icon of the domestic scene who is charged with a
corporate fraud which could earn her 30 years in prison.
From the
apple pie on the dinner table to the dishes, cutlery and
placemats, she has made an indelible mark on the lifestyles of
millions of with her multi-media empire of books, magazines and
television that espouses cooking, decorating and gardening.
Americansd have made her a billionairess - - -
----------------------------
But this month the icon faces the ultimate fall from grace when
she is tried as a corporate criminal in Manhattan Federal
Court.
In a series of
charges that could put her in jail for 30 years, Stewart is
accused of an elaborate cover up that relates to an insider
trading scandal that has already claimed the scalp of family
friend Sam Waksal (CEO of ImClone systems which imploded in a
fraud scandal)
------------------------------
That information. (that Waksal was dumping ImClone stock) it is
alleged led Steweart to follow suit and sell her holding of 3928
shares in a transaction that netted her US $228,000.
--------------------------------
She has been forced to step down from her executive roles at the
company that grew from her home kitchen in Connecticut and resign
from the New York Stock Exchange board.
-----------------------------------
Counted among "America's 25 most influential people" by Time
magazine in 1996, Stewart has a reputation as a quick-tempered
perfectionist, attributes that were fostered in an early career as
a Wall St stockbroker. So
much to lose for such a paltry gain. The Courier Mail January
2, 2004
to
contents
Richard
Grasso
Grasso has been chairman of the NYSE board
since 1995. While he was enormously successful in building the board
he became an arrogant and dominating force bending the system to his
own needs and ideas. He became extremely powerful and rewarded
himself lavishly. It was he who pressured regulators into a far less
than adequate settlement
of the financial scandals of the 21st
century
He was replaced by Mr Reed who ran Citicorp
when it was engaged in money
laundering and when it
was
thumbing its nose at regulators. One
must ask how much will really change?
Richard
Grasso, chairman of the Big Board since 1995, finds himself at the
center of what is fast becoming Wall Street's latest maelstrom.
Once known for his dexterous marketing and political skills, Mr.
Grasso first caught flak for clumsily allowing the nomination of
Sanford Weill, Citigroup's chairman, to the exchange's board. Mr.
Weill, who featured prominently in that bank's tainted-research
case, had to withdraw his nomination in reaction to the public
outcry.
Mr. Grasso is
also being criticized, and rightly so, for serving on the board of
Home Depot. The fact that one of that retailer's co-founders
serves as a director of the stock exchange brings to mind all that
is wrong about corporate America's cozy, interlocking boardrooms.
But the larger point is that Mr. Grasso, who clearly likes to be
thought of as a corporate reformer and a zealous regulator, has no
business moonlighting as a director of any company listed on the
exchange.
It is not as if
he needs the money. Mr. Grasso was paid $10 million last year, an
exorbitant sum to lead a not-for-profit, quasiregulatory body,
especially during a bear market. It does not help matters that
some of the Big Board directors to whom Mr. Grasso reports, and
who set his salary, are the very people he is charged with
regulating: leaders of big Wall Street firms and specialist
trading houses.
That is one of
the inherent tensions in what the law calls a private
"self-regulatory organization." The exchange essentially polices
its own owner-members, as is the case with its inquiry into
allegations of illegal trading by the specialists who control the
matching of buyers and sellers for individual stocks.
William
Donaldson, the Securities and Exchange Commission chairman who ran
the stock exchange in the early 1990's, has begun a review of how
various self-regulatory groups govern themselves. We can think of
a good place for him to start. More
Conflicts on Wall Street The New York Times May 14,
2003
The
departure last week of Mr. Grasso after the disclosure that some
board members had been in the dark about his compensation package
has revived the issue.
Mr. Grasso had
long opposed any changes to the regulatory structure of the
exchange. Mr. Reed has not disclosed his views on the issue, but
is described by advisers as being interested in making significant
changes in the way the exchange governs itself.
Growing S.E.C. Role In
Big Board Reform The New York Times September 26,
2003
The American
Stock Exchange, which was closest to the World Trade Center, was
having the greatest difficulty getting up and running. It was
viewed as imperative that all the exchanges open
simultaneously.
But one key
executive -- Richard A. Grasso, the chairman of the New York Stock
Exchange -- was conspicuously absent during the calls, said Meyer
S. Frucher, chairman of the Philadelphia Stock Exchange, who took
part in all the discussions. "Not only did Grasso never come on
the phone to be part of that collegial network to get things up
and going," he said, "a significant portion of the time, nobody
from the New York Stock Exchange came on the phone."
Then, on Sept.
15, two days before the exchanges reopened, he continued, the
group learned that the New York Stock Exchange would open a few
minutes later than usual. The reason: Mr. Grasso wanted to have
two minutes of silence starting at 9:30, followed by a singing of
"God Bless America."
As a result, the
various exchanges that trade put and call options on both Nasdaq
and the Big Board would be forced to have a staggered opening,
threatening already fragile trading systems. Executives from the
other exchanges objected and argued strenuously for a simultaneous
opening. But it was not to be.
When the Big
Board opened for trading that day, TV viewers around the world
watched Mr. Grasso, first with his head bowed, then joining the
floor in "God Bless America."
"Like Robert
Moses and Lyndon Johnson before him, Dick Grasso was a master at
using all the levers of power available to him," Mr. Frucher said.
"That generates awe and respect, but also resentment."
The controversy
over Mr. Grasso's $140 million pay package may have been the main
impetus for his ouster last month. But the seeds of his downfall
appear to have been planted long before his compensation ever
became public.
Toward the end
of his career, Mr. Grasso seemed to consider himself bigger than
the institution he ran, leading to a series of missteps that
attracted the scrutiny of the Big Board's secretive practices,
according to more than a dozen people who worked with him and
competed with him over the years.
At the same
time, he failed to recognize that the culture outside the exchange
was changing and that practices with even the appearance of a
conflict of interest, like sitting on the board of a listed
company, no longer passed muster.
Because of his
inability to modify his methods, the 211-year-old institution he
ran so ably now faces the prospect of a complete overhaul. His
abrupt departure has created a leadership vacuum, paving the way
for continued chaos at the exchange. Its regulatory arm is
scrambling to appear tough, and the trading floor is
polarized.
Whoever leads
the Big Board next is unlikely to take his cue from Mr. Grasso,
who managed through intimidation and an old-fashioned favors
system that resembles the dealings of a 19th-century ward boss
more than it does the practices of a modern chief executive.
Former colleagues said he required the executives of every
department to report to him, guaranteeing that he alone knew what
was happening throughout the exchange. He wielded the exchange's
regulatory unit like a weapon, some of these people said,
instilling fear in the members and the workers.
For example, a
few years ago Mr. Grasso even became involved in a hiring matter
with a specialist firm, threatening to block an acquisition the
firm had planned if one of his loyalists was not brought on board
in the merger. And the invitations to join the exchange's board
that he extended to executives -- like the appointment of Sanford
I. Weill, chairman of Citigroup, earlier this year, which
backfired badly -- were in many cases strategic, a way to trade
favors to try to benefit the exchange and also himself.
There is no
denying that Mr. Grasso's methods resulted in great success for
the exchange during his 35 years there. Since he rose to chairman
in 1995, the Big Board increased its market share of the nation's
stock trading from 70 percent to 90 percent. More than half of the
companies whose shares trade on the exchange listed them there
during Mr. Grasso's years as chairman. And the value of an
exchange seat has almost tripled since he took the
helm.
EQUALLY
important, the Big Board became an American icon during Mr.
Grasso's tenure, a symbol of the kind of capitalism that can
produce wealth for everyone, not just the high-born.
"No one could
articulate the whole concept of the exchange to the outside world
better," said one high-level trader who has worked with Mr. Grasso
for the past 10 years. "He knew every single nuance of the place
from who opened the front door in the morning to who was
testifying before the S.E.C. The job was well done. The real issue
is whether or not he continued to represent the members or if he
had a different agenda."
Even now, one
month after Mr. Grasso's hasty exit, many of those who knew him
and worked with him remain bewildered by his fall. How could a man
who became a national hero after the terrorist attacks of 2001 and
who was known around the world as the President of Capitalism
flame out so spectacularly?
---------------------------------------
But privately, and unanimously, these people describe Mr. Grasso
as a man who rose to the heights of American business by sheer
dint of hard work.
Once he had
cemented his power, however, he managed the exchange ruthlessly,
and his critics came to believe that the benefits of his work
increasingly were accruing to him rather than to the institution.
The mid-September news of Mr. Grasso's pay was the last straw to
exchange insiders who had long suspected that he was putting his
interests ahead of theirs.
"Dick gave his
life and soul to the exchange, and no one has questioned his
effort, tenacity and success," said James Rothenberg, a securities
lawyer in Manhattan and an exchange member. "The issue is, whether
it is reasonable for a regulator to get that much
compensation."
----------------------------------------
As Mr. Grasso climbed the ladder at the Big Board from his first
job as a clerk in the listings department, he mastered the
intricacies of an operation that was run more like a club than a
corporation. He didn't make the institution that way, but he also
did not move quickly to change it.
By all accounts,
no one was better at persuading companies to list their shares on
the exchange. He was a showman who could get out in front of a
company and inspire great confidence. He was passionate about the
exchange -- and it showed.
----------------------------------------
In return, former colleagues said, he would not hesitate to insert
himself into the regulatory process and even into his member
firms' operations to achieve his ends. "As his years as chairman
went on, he ruled the place as his," said one longtime floor
trader. "But different rules at different times seemed to be the
order of the day. Grasso rules."
-------------------------------
Suddenly, word came down from on high at the exchange that stocks
could be reassigned (previously forbidden) if a
specialist's market share of the trading fell precipitously.
"Specialists came under pressure to up their market share,"
recalled the trader. "And that meant dealing more than they
should. Then we learned that Grasso's bonus was contingent on
maintaining market share. I went ballistic."
Mr. Grasso's
determination to preserve market share may also have been behind
his ill-conceived decision last spring to invite Mr. Weill of
Citigroup to join the exchange's board as a representative of the
public.
-----------------------------------
According to one person involved in the Weill nomination and a
regulatory official briefed on it, Mr. Grasso was warned that it
could generate bad publicity. But he insisted on the nomination,
arguing that it was of strategic importance for the exchange and
could be a way to keep Mr. Weill from moving his firm's huge
stock-trading business away from the exchange to an alternative
trading system.
--------------------------------------
WHILE William H. Donaldson, who once ran the exchange and now
heads the S.E.C., and other former exchange chairmen delegated
authority to subordinates, Mr. Grasso kept control of all aspects
of the business by making every unit report to him, former
colleagues said. "The board and committee structure at the
exchange was fragmented," said a former official at a specialist
firm. "And there was only one guy who knew everything that was
going on, and it was Dick."
One example of
Mr. Grasso's hands-on approach was his tendency to invite
employees for walks around the block to work out disputes in
private tete-a-tetes. On these occasions, his security guards
followed a few steps behind.
----------------------------------------
Because the Big Board chairman was both regulator and salesman,
Mr. Grasso may have considered it well within his purview to get
involved in regulatory matters. Moreover, such meddling did not
begin with Mr. Grasso, according to some of his former colleagues.
For decades, executives at the exchange have used the regulatory
unit to keep people in line, these people said.
Yet on one
occasion in 1997, officials at competing stock exchanges told the
S.E.C. that the Big Board under Mr. Grasso was using its
regulatory unit improperly, putting heightened scrutiny on members
that traded listed stocks on the competing exchanges. Commission
officials sent the Big Board a letter warning it to conduct its
inspections objectively.
-------------------------------
According to one of the working group's (to review regulation)
members, the officials met each week for a year and a half,
analyzing whether there was merit in eliminating regulatory
duplication. The group asked the two largest self-regulatory
organizations for data on what their regulatory units cost. While
the National Association of Securities Dealers provided all the
information it asked for, the New York Stock Exchange
stonewalled.
------------------------------
But in early 2000, the project was quietly dropped. Members of the
working group were never told why, but one who spoke on condition
of anonymity said that Mr. Grasso was angered by the project and
that the S.I.A. decided to shelve it because of his opposition to
the working group's conclusion.
------------------------
Mr. Grasso's iron-fisted management style may have helped stave
off threats to the trading floor's immensely profitable status quo
in the short run. But it carried a high cost.
-------------------------------
"You knew he was working hard; you knew he had the interests of
the institution at heart," Mr. Morris said of Mr. Grasso's tenure.
"He was the closest thing to an irreplaceable person that an
institution could have. I can't see anybody filling his
shoes."
That, of course,
may be the point: that one person should not try to control the
disparate and at times conflicting operations at the exchange.
-------------------------------------
The message could not be clearer: The New York Stock Exchange is
under new management, and the autocratic methods favored by Mr.
Grasso will no longer be tolerated. The
Fall of a Wall Street Ward Boss The New York Times October 19,
2003
to
contents
Corporate
Lobbying and Politics
Probably the strongest situation where
conflicts of interest exist and are exploited for personal and
corporate gain is that of industry lobbyists. They alternate between
being members of government responsible for making laws and
regulating the market, to being lobbyists for corporate groups
wanting to pass laws or defeat proposed laws affecting the
market.
Working within government for a relatively
modest salary gives them inside knowledge, the contacts and
influence. This allows them to demand large fees when they resign and
become lobbyists. This has become a revolving door.
Nicholas Calio and
Thomas Scully
Lobbyists like Thomas Scully (previous head
of the Federation of American Health Systems representing and
lobbying for corporate medicine) and Nicholas E. Calio who is now
lobbying for Citigroup (see extracts) move freely between stints of
employment by government as regulators and advisers, to being
lobbyists for the corporations they were regulating.
Mr. Scully
resigned on Monday as administrator of the Centers for Medicare
and Medicaid Services, part of the Health and Human Services
Department that provides health insurance to more than 75 million
people.
--------------------------
Mr. Scully was the object of a bidding war by law firms and equity
investment concerns. Mr. Johnson said Mr. Scully would be allowed
to work for an investment firm while a partner at Alston &
Bird.
-------------------------------
In May, before either house of Congress had passed the Medicare
bill, Health and Human Services Secretary Tommy G. Thompson
approved a waiver to exempt Mr. Scully from certain parts of the
federal ethics law. The waiver let him negotiate with potential
employers while he helped write the Medicare law.
-------------------------------
A summary of Health and Human Services Department ethics rules
says employees who have begun seeking private work must
immediately recuse themselves from "any official matter" that
involves the prospective employer.
Medicare Chief Joins Firm
With Health Clients New York Times December 19,
2003
Not buying
the car for his son was one of many financial sacrifices that Mr.
Calio apparently made over the last two years of government
service. Last week Mr. Calio resigned from his position to become
chief lobbyist for Citigroup.
What was
refreshing about his announcement was its honesty. Instead of the
time-honored Washington excuse that he was leaving to spend more
time with his family, Mr. Calio informed the president and the
news media that he also wanted to make more money.
"My reasons for
leaving come simply to the two F's," he wrote to President Bush.
"Family and financial." He was even more blunt in speaking to the
press. "I can't pay my bills," he told reporters.
It might seem
churlish to complain about a government job that pays $145,000 a
year, but Mr. Calio, a former lobbyist who favors monogrammed
French-cuffed shirts, is accustomed to making many times that.
During the day he can sometimes be spotted at the Caucus Room, a
Washington steakhouse that caters to lobbyists and members of
Congress and in which he is an investor. At his $1.5 million home
in Chevy Chase, Md., he is known to enjoy relaxing with wines from
his private cellar.
As one of
Washington's premier lobbyists before joining the Bush
administration, this life was easy to sustain. As a Bush staffer,
it became impossible. As his family's only wage earner, he said,
he faced paying tuition for two children in college and another in
private school.
------------------------------------
As happens in every administration at mid-tenure, staffers in the
Bush White House are trading in their government jobs for
high-paying corporate ones. For Mr. Calio, this is only his latest
trip through the revolving door. In the late 80's, he lobbied for
the National Association of Wholesaler-Distributors, a powerful
business group aligned with the Republicans. That job brought him
to the attention of the first Bush administration, and he was
hired in 1989 as President George H. W. Bush's deputy assistant
for legislative affairs. After two years, he returned to a
lobbying firm on K Street, but rejoined the White House in 1992 as
the legislative affairs director.
After Bill
Clinton's victory he and Lawrence F. O'Brien III, a Carter
administration official, founded a boutique lobbying firm that was
billing about $3 million a year by the end of the 1990's. In 2000,
his last year on K Street before joining the new Bush
administration, Mr. Calio's income was $947,671, according to his
financial disclosure form. That means he took an 85 percent pay
cut to work in the White House.
-----------------------------
For career Washington lobbyists, a brief government stint can be a
high-return investment; it enables them to refresh their contacts
and gain a glimpse of how their clients' issues are viewed from
inside the bureaucracy. Mr. Calio suggested that experience as a
lobbyist is ideal for a government employee and objected to the
phrase "revolving door."
"I think that's
a silly criticism," he said. "What do you want? People going into
government who know nothing about it? You need people going in who
know the issues."
In 1998,
according to federal records, Mr. Calio lobbied on behalf of
Arthur
Andersen
(and see
also).
This year, he helped negotiate the legislation that rewrote the
rules for the accounting industry.
In 1999, Mr.
Calio lobbied for Atlantic Richfield, the oil company. As a Bush
official, he pushed an energy bill favored by the oil
industry.
--------------------------------
BUT as President Bush's chief liaison with Congress, Mr. Calio
surely had one of the most resume-enhancing positions a
private-sector lobbyist could have.
"It's almost
like he came back for a refresher course before he headed back to
the private sector," said William Allison at the nonpartisan
Center for Public Integrity.
The Nation: Revolving Doors; Scraping By on $145,000 a Year
The New York Times December 22, 2002
The most
influential adviser of the five leaving the administration is
Nicholas E. Calio, President Bush's liaison to Congress. Mr.
Calio, who is to become chief lobbyist for Citigroup, is close to
the president and Senator Trent Lott of Mississippi, the former
majority leader who was efficiently jettisoned by the White House
last month after Mr. Lott made remarks widely attacked as racist
and damaging to the president and the party.
The President's Team
Changes Some Players The New York Times January 5, 2003
to
contents
Robert E.
Rubin
Rubin was another person who combined
politics and business. He was given a special dispensation by
Citigroup so that he could be employed by Citigroup as an adviser at
the same time as play a political role in government and
international relations.
A Democrat he played an interesting role as
both adviser to politicians and agent for Citigroup. His activities
illustrate the close links between politics and big business and the
major role which business plays in formulating government
policy.
Previously CEO of Goldman Sachs, he was a man
of immense intellect on whom Weill depended for advice. He
consistently rejected offers and suggestions that he might succeed
Weill at Citigroup. He may well be among the more reflective and
balanced people at Citigroup but he has put himself in a position
where he has to negotiate many conflicts of interest.
Plenty of
government officials retire to the private sector to make their
fortunes. Plenty of business executives venture into politics
seeking power and influence. Robert E. Rubin is doing both.
Citigroup gives
him a salary, bonus and stock options valued around $40 million a
year to advise on strategy, which he does in an imposing Park
Avenue office next to that of Sanford I. Weill, the company's
chairman and chief executive.
But, as a former
Treasury secretary, Mr. Rubin has not abandoned his role as a
globe-traveling statesman. He advises the Senate majority leader,
Tom Daschle, on economic policy. He was a sounding board for Gov.
Gray Davis of California during last summer's electricity crisis
even as Citigroup worked for energy companies that were selling
power to the state. He debates bank reform with Prime Minister Zhu
Rongji of China while trying to drum up business there for
Citigroup.
He called the
Treasury Department last fall to see if there was anything the
Bush administration could do to save Enron, a major Citigroup
borrower and client. He spoke as a banker, and also as a former
Treasury chief concerned about the risks to the markets.
----------------------------------
Mr. Rubin, 63, likes multitasking. He drafted an op-ed article
opposing the Bush administration's tax cuts last year while
attending a Ford Motor board meeting. In the stock market-fueled
exuberance of the 90's, he was a master of Wall Street who became
the economic conscience of the Clinton administration -- and he is
not prepared to give up either role.
"One reason I
wanted to come to Citibank," he said in an interview, "is that
being immersed in what is going on -- the financial issues, the
economic issues -- would keep me current in a way that would make
me better equipped to be useful in public policy. It puts me more
at the center of things."
----------------------------------
Mr. Rubin -- who carries the title at Citigroup of chairman of the
executive committee -- masks an overpowering intellect behind
verbal modesty, hedging his views with a courtier's
self-effacement ("Maybe I'm wrong," and "this is just my opinion,
for what it is worth," or "this could be a bad idea") in a way
that disarms bosses and opponents.
His understated
demeanor served him well in his 26 years at the investment bank
Goldman, Sachs, where he rose from running the arbitrage desk to
chief executive. It also made him stand out amid the clashing egos
of Washington.
------------------------------
At a welcome-back-to-New York cocktail party, Mr. Weill learned
that Mr. Rubin was considering a return to Wall Street. The
Citigroup chief called him every day for the next 30 days. He
eventually agreed, with one big condition: "I actually have a
provision in my contract that provides for me to have my own role
in public policy."
When a reporter
described him as "interested" in public policy, Mr. Rubin
interjected a crisp correction. "Involved," he said. "I am
involved in public policy."
In early 2000,
Mr. Rubin delayed a business trip to China when Al Gore delivered
a campaign speech on economics in Cleveland, and wanted him at his
side.
In a year-plus
of the Bush administration, his involvement has only intensified
as he perceives a threat to the Clinton legacy of fiscal
discipline. Seen by some as the wise man of his party, he runs a
nonstop tutorial on economic policy, coaching Senator Daschle and
other leaders on ways to debunk Bush military spending and tax
cuts.
Bush
administration officials, by contrast, view him as a nagging
antagonist, preaching the 90's virtues of budget discipline and
low interest rates when they are fighting war and recession.
-----------------------------
At least sometimes, Mr. Rubin's two roles overlap -- or collide.
When California grappled with an acute shortage of electricity in
2000, Governor Davis, a Democrat, sought his counsel. Here,
though, the conflicts were obvious. Mr. Rubin had Citigroup
bankers check with clients -- the company had relationships with
energy traders like Enron that were profiting from the crisis --
before advising Mr. Davis. His colleagues raised no objections.
But after a few phone calls with Mr. Davis, Mr. Rubin pulled back,
annoyed that the governor had cited him to lend credibility to the
state's aggressive tactics against power generators.
----------------------------------
His ties are even stronger with some foreign leaders, including
Prime Minister Zhu of China. The two bonded during intense policy
debates in the 90's, when Mr. Zhu was overhauling a
state-dominated economy and Mr. Rubin was trying to contain the
Asian financial crisis. "Zhu is not very patient if he thinks you
are not ready to be substantively engaged," Mr. Rubin
says.
The Chinese are
fond of meeting corporate leaders, but they are especially fond of
Mr. Rubin. Mr. Rubin once visited Beijing to find that the prime
minister had traveled to the remote city of Urumqi. Mr. Zhu
provided a military plane to fetch him. As hosts of last fall's
Asia Pacific Economic Cooperation forum, the Chinese pointedly
invited Mr. Rubin to introduce President Bush -- an "old friend"
presenting a president still untested in Chinese eyes.
Yet Mr. Rubin
mixes discussions about the Chinese banks and state enterprises
with a pitch for Citigroup experts. "I think he would be
astonished if I were meeting with him and didn't raise whatever
our particular concerns were," he said.
Mr. Rubin's
peers say he has the judgment to navigate smoothly between his two
worlds. But the call regarding Enron illustrates that even he can
steer astray. "Bob is no longer in the public sector and had the
right and every reason to call," said his friend Felix G. Rohatyn,
the financier. "It's delicate -- the impression is not great when
it is on behalf of a company that has created the worst profile in
the history of capitalism."
ENRON'S MANY STRANDS:
DUAL ROLE; Rubin Relishes Role of Banker As Public Man The New
York Times February 11, 2002
to
contents
LINKS TO MAPS
Central
Map .....
Initial
Map
.....
USA Map .....
Australian
Map
.....
International
Map
.....
Corporate
Practices Map.....
(to
print)
Path
Home
Page .....
US
Health Corporate page
..... Access
Citigroup
Mayne Hospital Links
..
Affinity Health ...
Mayne
Purchasers
Early Citigroup Links
.. Citicorp/Citibank
... Salomon
Smith Barney ...
Citigroup
merged
21st Century Citigroup Links
Marketplace
... Analysts
... Spinning
... Employees
... WorldCom
... Enron
... Health
... Settlements
... Culture
This page created
January 2004 by Michael Wynne
