When Citigroup Inc. chief executive Charles O. Prince III learned of allegations that the firm's private bankers in Japan had violated anti-money-laundering laws and overcharged customers, he could not believe his ears.
"I have trouble understanding how people can do things like that and tarnish the reputation of this great institution," Prince said in an interview in his Park Avenue office on Thursday. "I feel like saying, 'How could you possibly have done that? What were you thinking when you did that? Don't you realize what you are doing here?' "
What the bankers were doing, before regulators shut them down, was making Prince's already tough job that much tougher.
When he took over as chief executive a year ago, Prince accepted a massive challenge: restoring the reputation and transform the results-at-any cost culture of the world's largest financial firm, a global superpower with $1.4 trillion in assets and operations in 102 countries.
So far, it has been a rough ride.
In the past few weeks, regulators shuttered Citigroup's Japanese private bank, and British authorities began investigating a massive bond trade in London that netted the firm a nice profit but violated the unwritten rules of fair play.
The flame-ups caused a high-profile Wall Street analyst to downgrade Citigroup's stock last week and rekindled a few long-simmering questions:
* Can Prince reshape the bank's culture while continuing to atone for bull-market sins committed before his watch -- including Citigroup's involvement with Enron Corp. and WorldCom Inc. and the scandal over tainted stock research?
* Can a firm of Citigroup's size ever hope to stay out of trouble while continuing to produce a steady stream of dazzling results that are the envy of Wall Street?
* Is Citigroup, as Sanford C. Bernstein & Co. analyst Howard K. Mason asked, "too big to control?"
In the interview Thursday, Prince sought to address all those questions. He also tried to answer critics who say he lacks vision by laying out a plan for Citigroup's future that focuses on small, targeted acquisitions in the United States and harnessing the explosive power of emerging economies, especially China, rather than relying on the mega-deals that built the firm into a colossus.
"I think in the first inning of the ballgame, we have had some significant successes," Prince said. Among them, he cited a lack of major management turnover, new monthly monitoring of every business group, a more-open dialogue with state and federal regulators and consistent double-digit earnings growth.
"But there obviously have been some disappointments, and the recent stuff in the newspapers about Japan and the U.K. trade are examples of that."
Prince said he was shocked when he learned that the firm's private bankers in Japan had been accused by regulators of failing to properly protect against money laundering, overcharging customers and helping clients to carry out improper deals.
And he said was deeply disappointed by what he called the "knuckleheaded" trade in London in August in which the firm dumped $14 billion in European government bonds on the market then quickly bought a chunk back at a profit. The move was not illegal, Prince said, but violated ethical standards that discourage firms from flooding the market to drive down prices.
In response, Prince said, all the bankers involved in wrongdoing in Japan were fired. Citigroup formally apologized for the trade in London and sent a memo to all employees saying the trade did not live up to the firm's standards.
Prince also said that he would step up his campaign to inculcate a new standard at the firm in which every employee will make business decisions based first on ethics and second on the bottom line. A new ethics training program for 30,000 managers around the world will begin in the fourth quarter.
"It's not a preachy or moralistic thing," Prince said. "It's, 'Does this make sense for five years down the road? Am I building a long-term business or scoring a quick hit?' And if you think of it that way, I think things pretty much fall on one side or the other pretty easily.
"I tell people, if you have a problem, and you think it's an ethical one, you call me personally. Call me at home, outside the normal chain. Do not suffer in silence. Do not accept that we might have a problem. Struggle against that."
Many Citigroup investors and analysts, however, say that if Prince is to be successful in changing the culture it will mean sacrificing earnings and growing at a slower rate. Several analysts cited British bank HSBC as a giant financial institution that stays out of trouble, grows at a slower rate and has a higher stock price relative to earnings than Citigroup.
"If Citigroup chooses to clamp down country by country around the world, then basically they are going to see a significant setback in profits," said Richard X. Bove, an analyst at Punk, Ziegel & Co., a New York research firm.
Christopher Blum, an analyst at investment firm Edward Jones, said the new culture could mean Citigroup will no longer show earnings growth in the mid-teens every quarter. But he said the firm's stock price would benefit. "Having the right culture, the right standards and serving your customer is the right thing to do, businesswise," he said.
After rising in the first months of his tenure, Citigroup's share price has sagged under Prince's leadership. It closed at $44.12 on Thursday, about 3 percent below where it was at the start of trading on Oct. 1, 2003. The stock trades at a modest 11 times earnings, a level Prince acknowledged was disappointing and needs to change.
But he rejected the notion that in order to stay out of regulatory trouble the firm would have to grow more slowly.
"I don't accept the premise," he said. "When I see our growth rates in our credit card business in Asia, when I see an initiative like the identify theft program on credit cards here, when I see the franchise business we have in fixed income around the world, we don't need to cross the line" to grow at 12 percent.
Prince cited the minuscule contribution the Japanese private bank makes to the firm's bottom line as an example of how acting ethically need not come at the cost of reduced earnings.
He attributed the firm's sagging stock in part to "hangover" from the Wall Street and corporate scandals of the past few years. For instance, he cited Citigroup's decision to take a charge of $4.95 billion against earnings in the second quarter to settle a class-action suit filed by WorldCom shareholders and to increase litigation and settlement reserves for other issues.
"The hangover effect will take a couple of years to get past us," he said.
Prince also said the market continues to believe that Citigroup has to do big deals to grow. After all, former chief executive and current chairman of the board, Sanford I. Weill, built the firm into a global giant by merging his Travelers insurance company with Citicorp and then snapping up such blue-chip businesses as Smith Barney and Salomon Brothers, helping to tear down regulatory barriers along the way.
But if the big-deal days are not over, Prince said, they are at least on hold.
He rejected persistent market rumors that Citigroup would move to acquire a major European bank such as Deutsche Bank AG or Barclays PLC. And he said he was in no hurry to add large numbers of domestic bank branches, as Bank of America Corp., J.P. Morgan Chase & Co. and others have done.
Instead, he said the firm would continue its "string of pearls" approach to branch expansion in key markets, exemplified by its recent acquisition of First American Bank in Texas, hoping to grow from a relatively modest 800 locations to several thousand. "We are not going to wait to harpoon a whale. We will go about building this out on a normal course."
In the meantime, Prince said he is focused on increasing Citigroup's consumer business worldwide, especially in Asia, where economies are booming and incomes are rising rapidly. Prince said he visits China every 60 to 90 days. "I think the emergence of China as an economic power will be one of the signal events of the 21st century," he said. "And we've got to be there."
Both inside and outside Citigroup, many seem willing to give Prince more time to deliver on his promise to restore the firm's reputation while continuing to produce strong results.
"I don't think it's fair to look at Citi in the last year and suggest that [Prince] has failed to meet his objective," said Blum of Edward Jones. "The thing that gives me confidence is that management admits there is a great deal more work to do."
Said one Citigroup insider: "It's going to take more than a year to firmly place your mark on a place. Especially when you spend so much time mopping up from the last three years."
The insider, who spoke on condition of anonymity because most employees are not authorized to speak publicly, said the closing of the Japanese private bank and the rogue bond trade in London are viewed within the firm as remnants of the cowboy culture of Citigroup's past.