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Profile: Eliot Spitzer on the warpath

Published by The Straits Times, Singapore on 2004-10-21

MOST weekdays in New York City, many corporate chieftains, political mandarins and media mavens break bread at The Four Seasons, a pricey restaurant in midtown Manhattan where the American concept of "power lunch" was supposedly invented some two decades ago. Its owners, Mr Julian Niccolini, an Italian, and Mr Alex von Bidder, a Swiss-German, determine the seating arrangements with great deliberation, ushering guests to their tables with genial deference.

They know that multi-million-dollar deals are often secretively sealed over these lunches, and they know, too, that some of the boldface names in the Philip Johnson-designed landmark restaurant would rather take cyanide than utter cheery words to their competitors. That is why, in the last few days in particular, Mr Niccolini and Mr von Bidder have taken special care to ensure that New York State's Attorney General, Mr Eliot Spitzer, is seated nowhere near the top brass of Marsh & McLennan, the world's biggest insurance broker, or from the broker's associates, the Hartford Financial Services Group, American International Group, ACE Limited, and a unit of Munich Re.

That's because the hard-charging Mr Spitzer - who has made a reputation as a vigilant monitor of US financial practices, especially on Wall Street - is suing Marsh & McLennan, contending that the company engaged in market manipulation by accepting "contingency fees" from insurers in exchange "for steering business their way," according to his office. The company's shares fell by 50 percent within days of Mr Spitzer's announcement, especially generating distress among thousands of Marsh & McLennan employees who had invested in their institution for retirement purposes.

Now other states like Connecticut and North Carolina have joined the investigation. The accused, of course, deny all charges. The lawsuit has shaken investor confidence in the US$3 trillion global insurance industry, which represents nearly a tenth of all world business annually.

Neither do Mr Niccolini and Mr von Bidder bunch together Mr Charles O. Prince, Chief Executive Officer of Citigroup - the world's biggest financial services company by virtue of its market capitalization of US$225 billion - with Sir Deryck C. Maughan, Mr Thomas W. Jones, and Mr Peter Scaturro.

That's because just this week the 54-year-old Mr Prince fired them all over Citigroup's debacle in Japan, whose Financial Services Agency, in one of the toughest penalties ever handed down against a bank in the country, has forced Citigroup's profit-making private bank to shut down immediately. The FSA said that the bank failed to stop money laundering and other fraudulent practices by Citigroup's Japan-based employees.

The FSA's action was in response to a request from the Securities and Exchange Surveillance Commission of Japan, the nation's stock market watchdog, which recently inspected Citibank Japan's private banking operations and identified violations by the bank and its employees. Earlier, the Commission had also opined that Citibank had misled clients in a series of private bond placements last year.

And illustrating the aphorism that when it rains it pours, Citigroup said that it regretted a sale of government debt on 2 August of US$13.5 billion in Britain. There was upheaval in the bond market, and now UK regulatory authorities are looking into whether Citigroup flexed its formidable marketing muscle in a competitively unfair fashion. According to thee New York Times, Citigroup essentially orchestrated a large sale of European government debt and then repurchased that debt shortly afterward at depressed prices.

To his credit - and I use the word advisedly - Mr Prince apologized this week in a conference call with analysts. "When things happen that cause that legacy and history to be tarnished a little bit, it hurts all of us. It hurts me personally," he said. "I just want to make it clear to all of you that for all of us examples like that are simply not acceptable."

Precisely because Mr Prince himself raised the question of his behemoth's legacy and history, financial analysts the world over have begun reading between and under his lines. Was he undertaking a power ploy within Citigroup by pushing out Sir Deryck, perhaps signaling that under Mr Prince the institution would be paying more attention to domestic growth in the US, where its operations contributed significantly to the institution's US$17 billion profit in 2003?

Or was Mr Prince, by dint of his prominence, suggesting to fellow CEOs all over the world that - as a former top executive of HSBC told The Straits Times on Wednesday - "in the financial world, money doesn't count as much as your reputation."

Mr Jeffery Harte, an analyst who monitors Citigroup for the US financial firm of Sandler, O'Neill and Partners, told The Straits Times yesterday: "Because Citigroup has 300,000 employees in 100 countries across six continents, Mr Prince has to show that he's pretty serious about corporate integrity. What he's saying is that no matter who you are at the bank, if you're viewed as having crossed the line, that won't be tolerated."

With the ejection of Citigroup's private bank - which had some 10,000 customers in Japan, with assets of more than US$5 trillion - Japan has now essentially tossed out the world's three largest private banks on charges of unethical practices and related infractions. Credit Suisse is out, and Deutsche Bank decided to pull out when it was becoming apparent that Japanese regulators would hound its private bank out.

"We're seeing a renewed 'Age of the Regulators,' Mr Harte said. "That's a good thing to be happening in corporate governance. Corporate executives should be held accountable for their actions - for everything that happens on their watch. But it's also importance that regulators don't engage in excessive zeal."

There's considerable sentiment that Sir Deryck, at least, may have been a victim of excessive corporate zeal for in-house cleansing. He was the chairman of Citigroup's sprawling global operations, and a particularly admired figure in Asia; his wife is Japanese, and he's a trustee of the prestigious Japan Society in the US. Mr Jones was the head of the bank's asset management division. And Mr Scaturro was the chief executive of private banking. All were members of Citigroup's powerful management committee, which decides on overall corporate policies.

The fact that Mr Prince - who succeeded his friend and mentor, Mr Sanford I. Weill, as CEO just about a year ago - took the extraordinary state of publicly dismissing men who were his long-time colleagues and friends as well, highlighted how rough corporate politics can be. Mr Weill - another regular at The Four Seasons - was also a target of Mr Spitzer, who successfully prevented him from joining the board of the New York Stock Exchange as the investing public's representative. Because of various allegations concerning questionable practices, Citigroup paid nearly US$500 million in fines on Mr Weill's watch. However, he remains Citigroup's Chairman.

On Sir Deryck's watch, Citigroup's income in Japan rose 43 percent, to $264 million, in this year's third quarter, "with improvement in the corporate and investment bank's results, which included a $13 million after-tax gain on the sale of shares in Nikko Cordial," according to a bank report. It also said that Citigroup's consumer bank income of $164 million increased 57 percent primarily, with strong double-digit revenue and income growth across cards, retail banking and consumer finance.

In fact, all three dismissed executives could be said to have contributed substantially to growth of Citigroup's income in Asia by 47 percent to $686 million in the third quarter. The corporate and investment bank's income grew 58 percent, reflecting exceptionally strong performance in transaction services, a full quarter's benefit of the KorAm acquisition, and lower credit costs due to lower write-offs and several credit recoveries, Citigroup's report this week said, adding that branches increased 316 over the same period in 2003, reflecting the acquisition of KorAm and significant growth in India.

Asia, of course, is only one part - albeit a major one - of Citigroup's vast global presence. But there's a piquant irony in the humiliation suffered by Sir Deryck and his colleagues. Notwithstanding all the bad publicity last year and earlier this year over various incidents of alleged malpractice, Citigroup reported net income for the three months ended 30 September 30 of US$5.31 billion and earnings per diluted share of US$1.02, each increasing 13 percent from the third quarter of 2003.

It was the highest net income recorded by the company for any quarterly period. Go figure.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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