The New York Times, December 18, 1998

Puzzling it Out at Citigroup
Commercial and Investment Bankers Try Working Together

By Joseph Kahn

Citigroup, shaken by leadership turmoil in its early days as America's largest financial services company, has sped up the integration of its banking units in a headlong effort to prove that commercial bankers and investment bankers can mix.

In the weeks since the co-chairmen of Citigroup- the financial giant formed by the merger of Citicorp and Travelers Group- ousted their heir apparent, Jamie Dimon, from his post, the investment bankers from Traveler's Salomon Smith Barney investment banking unit have been ordered to find a way to merge most of their operations with the corporate banking side of Citicorp. Michael A. Carpenter, one of the two people charged with leading the combined bank, calls this "the third way, the Citigroup way."

It's certainly a new way. Investment bankers from New York to Sidney are moving in with their commercial-bank counterparts, putting their product lines together and making joint calls on corporate clients like the News Corporation, the Seagram Company and the Monsanto Company. The Citigroup merger became a formal reality two months ago, but executives are already talking about 100 potential banking deals made possible by closer cooperation between Citicorp and Salomon bankers.

Integration appears to be happening faster — and reaching deeper into the organization — than envisioned in the earliest days of the merger. Like fingernails dragged across a chalkboard, the ouster of Mr. Dimon and one of his chief deputies, Steve Black, has silenced the open squabbling that divided Citibank executives from their counterparts at Salomon Smith Barney, many at the bank said.

But in the rush to meet a self-imposed year-end deadline to resolve outstanding conflicts, the merged company had also muffled important questions about how to balance vastly different commercial and investment banking cultures.

The fast pace of unification has pleased some within the company, who said they were surprised by how well the bankers from both sides had learned to work together despite leadership turmoil. Spirits are also higher as word filters out that Salomon bonuses, which many feared would be slashed from last year's levels, will probably keep pace with 1997. Others, though, said that the discord at the top confirmed their worst fears about the financial supermarket envisioned Sanford I. Weill and John S. Reed, the co-chairmen. Some predict that the forced-march cordiality disguises smoldering battles, such as a continuing clash about the fate of the entity's derivatives units. Many there are also consumed by nuances, such as whether the London-based Salomon bankers will move to Citibank's offices in Canary Wharf.

"My impression was that to make the firm a success, they would never try to mush the two sides together," said Susan Webber, a finance industry expert with Jaquish Advisors and a former investment banker. "I am surprised they are trying to do it."

David Berry, a banking expert at Keefe, Bruyette & Woods, said he saw the pitfalls in a quick marriage of the banking divisions, but also the opportunities.

Many analysts said that the most obvious synergies in Citigroup were on the consumer side of the business. The consumer banking, credit card, mortgage, insurance and retail brokerage units do not overlap much and open the possibility of cross-selling products through new distribution channels.

But Mr. Berry predicted that successful integration of corporate banking would initially add to Citigroup's profits faster.

"Four big, new corporate deals would have an immediate impact on the bottom line," he said. "If they can resolve the philosophical issues about how to organize the group, I think it has real potential."

Whatever the outcome, Citigroup appears determined to challenge conventional wisdom. The company is crossing one of the oldest fault lines in the business, the one dividing banks that lend money to customers from banks that help customers raise money in the financial markets.

The two types are known generically as commercial banks and investment banks. These days, those descriptions do not do justice to companies that fall somewhere in between. But there are still many in the industry who think of commercial and investment banks as East and West, the twain never to meet.

Traditionally, commercial banks provide loans and help manage their clients' capital. Investment banks swoop in for big stock and bond offerings. Commercial bankers get paid a salary each month. Investment bankers depend on annual bonuses for most of their income. There is some overlap, but year after year the biggest lenders are all commercial banks and the biggest underwriters are investment banks. From the start, Citigroup had to confront those doubts. But this merger seemed a better match than some previous ones. The acquirer was Mr. Weill, the Travelers group chairman who grew up on Wall Street.

Many saw Mr. Weill as unlikely to allow his company's freewheeling investment-bank culture to be swallowed by the by-the-book traditions of the larger Citigroup. The departure of Mr. Dimon, a protégé of Mr. Weill for 15 years, shook that assumption.

One former Salomon Smith Barney official described it this way: "In the early days, the Citi people thought they had been bought. They were the Russians when the Germans invaded. Then came the long hard winter. Now the Russians are counterattacking."

A senior Citibank banker did not disagree with this analogy. He said that many at the bank believe they recently edged out longtime Salomon executives in one subtle, but key contest: Citibank's relationship officers will often take the lead in presenting a united face to their clients, offering them a full range of services available from the combined entity, everything from loans to advice on mergers and acquisitions.

Though they will often work side by side with their Salomon counterparts, it's still an important victory. The Salomon bankers would have preferred to forge their own relationship with the 1700 multinational companies in Citibank's prized global relationship-banking list. That's because the best-compensated investment bankers tend to be those with the tightest client relationships. Salomon bankers say their worst fear is to become merely "product providers" for Citibank clients.

"The distinction is blurring between Citibankers and Salomon people, that's where we are going with this thing, " the Citibank executive, who spoke on the condition of anonymity, said. "I am not saying that there will be no distinctions. But the Solly guys who think they can continue doing things the old way will be looking for jobs."

Mr. Carpenter and Victor J. Menezes, the executives named to manage the Citigroup's corporate banking unit, dismiss such complaints. In a brief interview in Citibank's hushed Park Avenue headquarters, the two said they had taken a pragmatic approach .

No one model prevails, they said, adding that the degree of integration varies depending on the product and the geography. They would not impose a solution on corporate consumers, they stressed, but allow customers to decide how they want their bankers to deal with them.

Mr. Carpenter carries around a progress report on the merger. On the plus side: A plan to unify the bank's trust businesses has been reached, a compromise between Salomon's sales driven organization and Citibank's big, but slow growing style.

On the other side of the ledger, he acknowledged that resolving how to combine Citibank's autonomous derivatives unit with Salomon, where derivatives experts are meshed with the stock and bond teams, is proving politically tricky. Still, he predicted a swift resolution.

The two executives claim to get along famously. Mr. Menezes, a Citibank career officer, is an avuncular Indian-American schooled in the bank's textbook corporate culture. Mr. Carpenter, who briefly presided over the failed Kidder, Peabody brokerage firm before joining Mr. Weill at Travelers, is a London native who sat sideways on his chair in the library, legs dangling over the arms.

After scores of hours together, Mr. Menezes said, the two now think the same thoughts. "We can finish each others sentences," a challenge Mr. Carpenter took up by answering s question asked of Mr. Menezes. The two sometimes commute together to Manhattan from their suburban homes.

The closeness is not just cosmetic. The two executives said Citigroup was already generating more business than Citibank and Salomon Smith Barney would have alone. One example is Monsanto, a longtime Citibank customer for bank services, but a client of Goldman, Sachs & Company when investment banking was called for it. It recently invited Salomon to join Goldman in managing a $1 billion stock offering.

The harmony extends to bankers on the front lines, people at the company said. One unified team is the consumer products group, run by Christina Mohr, a managing director at Salomon, and Natica von Althann, a managing director at Citibank. "Our working relationship is seamless," Ms. Mohr said. Agreeing, Ms. Althann added that "we have been this for a few months and already we have repeated successes."

The two teams handle clients together as long as clients want it that way, they said. They described a recent approach that led to business from one big client, the Rite Aid retail drugstore chain. "It's a perfect example of 2 + 2 + 5, how we can build on the strength of each relationship," Ms. Althman said.

Still other Salomon bankers describe the need for cordination as a distraction from client work. Some said that the Citibank structure, in which the people who handle clients are sometimes junior to executives who run the operation from behind the scenes, results in regular mismatches with Salomon's lead relationship bankers, who tend to be more senior.

And in some industries, others said, a unified Citigroup team can be a big disadvantage. Salomon investment bankers who work on deals for big commercial banks that Salomon would keep client business secret form Citibank. "Our new company is competing with virtually all our clients," one banker said.

But perhaps the biggest problem is compensation. Salomon relationship bankers say they often make two or three times as much money each year as their Citibank counterparts — a disparity that becomes more glaring as the two gain the right to offer clients the same full line of Citigroup banking products.

Indeed some rival bankers regard compensation as the weak link when commercial banks are merged with investment banks.

"No one has ever resolved this puzzle: How do you have high-priced bankers selling low-margin products and ordinary bankers selling M&A advice?" asked one executive at a competing bank. "It looks good on paper, but it blows up when bonuses are paid."

Citigroup official said they would resolve this issue as it arose, but played down its significance. "If we are generating big new fees," one said, "how to divide them is a luxury."