Citigroup turns to Robert Rubin

By Steve Rosenbush

updated 5:00 p.m. ET Nov. 5, 2007

Former Treasury Secretary Robert Rubin will attempt to steady the ship at Citigroup while it seeks a replacement for Charles Prince III, who was ousted as CEO after the nation's largest bank disclosed that its losses in the credit markets may reach $17 billion — nearly three times more than the company estimated just weeks ago.

Prince stepped down at an emergency board meeting on Nov. 4, joining Merrill Lynch CEO Stanley O'Neal as the second top Wall Street executive in a week to lose his job amid stunning losses in the subprime lending debacle.

Rubin, a Citi board member and former co-chairman of Goldman Sachs, will succeed Prince as chairman. The board named Win Bischoff, the head of Citi Europe and former chief of the investment bank Schroeders, as interim CEO. Speculation in recent days about Prince's possible successors has included NYSE Euronext CEO John Thain, a former president of Goldman Sachs. On Nov. 5, Citi's largest individual shareholder, Saudi Prince Alwaleed bin Talal, said on CNBC that he favors bringing back Sanford Weill, the firm's longtime chairman and CEO, to lead Citi on a temporary basis.

He's not the only one raising the possibility. Last week, as speculation of Prince's resignation flared, Mario Gabelli, the activist mutual fund manager, voiced a similar opinion. "They should issue a recall on Sandy Weill [as chairman]," he said. "Challenges like this require someone with gray hair."

Prince was undone by the mounting losses on securities backed by risky mortgages and loans to borrowers with poor credit histories or little collateral. Citi disclosed in mid-October that it suffered a $6.5 billion loss on the value of those subprime-related securities during the third quarter.

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The company now estimates its subprime portfolio has suffered an additional $8 billion to $11 billion in losses that will need to be recorded in the fourth quarter. The writedowns involve "direct exposures" to subprime debt valued at $55 billion on Sept. 30. The value of those securities has fallen because of rising foreclosure rates, declining market prices, and downgrades by ratings agencies. On an after-tax basis, the falling value of the securities will reduce Citi's fourth-quarter net income by $5 billion to $7 billion.

The question is whether Rubin can lead the company through a credit crisis that's by no means over and may get worse before it gets better. Some experts believe the mess could bring down a major bank or create systemic problems for the financial markets. It already has caused huge losses at Merrill Lynch, which forced out former CEO O'Neal on Oct. 30.

Some would argue Rubin himself is at least partly responsible for Citi's dire straits. As chairman of Citi's executive committee, he was in a position to advise the company on strategy and execution. He was paid $17 million last year, but had no operating responsibility, according to financial adviser and former Federal Reserve economist Ed Yardeni, of Yardeni Research. It's also not clear whether Rubin will remain with Citi very long or even stay in the private sector. There's speculation he could join Senator Hillary Clinton's Presidential campaign or serve in her administration if she wins the 2008 Presidential election.

Rubin's statements gave no indication the company was planning a strategic shift. "The Board and I have tremendous respect for Chuck's leadership and his accomplishments over the years in helping to develop the Company's culture and direction and honing its formidable competitive advantages. I intend to work closely with the Board, Win, and the operating and executive leadership to maintain the momentum of our business," Rubin said in a prepared statement.

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