How To Solve a Problem You Didn't Create -- WSJ

The turnaround specialist and outgoing Citigroup chairman on malicious leakers, failed retirement attempts and why the megabank model no longer works: 'We are history'

By Telis Demos 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 24, 2018).

Citigroup Inc. was nearly four years removed from its near-death financial crisis experience when Michael O'Neill became its chairman in 2012, but its problems were hardly behind it. The bank had just failed the Federal Reserve's stress test, and billions of dollars of toxic assets remained on the books.

Mr. O'Neill came to Citigroup without the baggage of having himself led a bank into the crisis, thanks to an earlier attempt at retirement. He arrived with a reputation as perhaps the country's foremost turnaround banker, having first earned that status at Continental Illinois National Bank And Trust -- at the time, the biggest-ever U.S. bank failure -- then at a predecessor of Bank of America Corp., and then as chief executive of Bank of Hawaii Corp.

Within months of Mr. O'Neill taking over as chair, the board replaced the bank's crisis-era chief executive, Vikram Pandit, with Michael Corbat, who had been working closely with Mr. O'Neill on the process of divesting unwanted assets.

In early November, Mr. O'Neill announced he was leaving Citigroup at year's end, just after reaching the board's mandatory retirement age of 72. The bank has doubled in value over his tenure, virtually eliminated the "bad bank" that houses the assets it deemed toxic, and hasn't failed a stress test in four years, though it still lags peers such as JPMorgan Chase & Co. and Bank of America in the crucial return on equity metric.

The Journal met with Mr. O'Neill -- a Princeton graduate who served in the U.S. Marine Corps -- early in the morning at Citigroup's new headquarters overlooking Manhattan's Tribeca neighborhood. The interview has been edited and condensed for readability.

WSJ: So what distinguishes a career as a turnaround banker from just being a banker?

Mr. O'Neill: It started at Continental. I was just a normal sort of banker. I, like many other people in the bank, was posted to workout jobs. I was remarkably unsuccessful trying to get money back from people who either didn't have it or wanted to keep it. I ended up being the chief of staff for the chairman, and was involved in lots of restructuring there. It was the first major bank bankruptcy, I learned a lot along the way there. ... What's nice about it is, typically you're brought in to resolve a problem you didn't create. I think it's very tough to create a problem and then work your way through it. Not impossible, but you spend a lot of time saying, I was right at the time and I was unlucky. But that's irrelevant at that point. So it's nice to have free run.

WSJ: You weren't at Citigroup prior to the crisis, a period for which bank boards were blamed for letting management run amok. When you became chairman, the perception was the opposite -- that you were the person really running the bank, not the CEO. Was that true?

Mr. O'Neill: No, it was not true, and I did not like the perception. I'm a non-executive chairman, which means I don't make day to day decisions. We made a lot of changes in the board, and one of the things that boards do is make sure the management running the strategic plan is appropriate for the time. But I never felt like I was running the company.

WSJ: The abruptness of Mr. Pandit's resignation seemed to play into the perception of Citi as a mess at the top. Are there things you would have done differently?

Mr. O'Neill: Well, your characterization I think is fair. [Mr. Pandit] and I had a conversation -- which he has said publicly, I've not talked about this before -- in which he said it was time to go. The job had gone from being strategic and firefighting to essentially continuing to cleanse the bank of bad assets and to begin executing the new strategy. That was not as much of interest to him as what he had done prior. ... There were internal breaches that effectively negated the discussions Vikram and I had. There were leaks that were not always factual, generally not factual. That were malicious. The way it played out was unfortunate. I think well of him. He did a great job for us when he was here.

WSJ: You've proposed bank breakups before, notably when you were considering returning to Bank of America in 2009. But that's not the direction Citigroup has gone.

Mr. O'Neill: Excuse me. Eight hundred and fifty billion and 70 businesses [were divested]. Citi broke up. We did more than anyone ever has done before, alright? We basically purged the bank of troubled assets, or businesses that were not appropriate to the new conditions. We have replaced $850 billion of very questionable assets with $850 billion of what we think and hope are good assets. I don't know how much more one needs to do to say that restructuring has occurred. Now, have we kept two major lines of business? Yeah. Consumer and institutional. To be sure, those are bedrock businesses. But they're run very differently than they used to be run.

WSJ: Other banks have recombined their chairman and chief executive roles since the crisis, though against some vocal shareholder objection. Why isn't Citigroup doing that?

Mr. O'Neill: I understand full well that the chairmanship is a trophy for CEOs. I also believe that the non-executive position is probably the right way to govern when you start from scratch. I don't think the chairmanship should be given as a reward, or taken away as a penalty. What I said to Mike [Corbat] is, you've done a great job, you're well perceived by the board, we understand the nature of American banking. Do you want to be considered for it? Mike, in his usual way, very unemotional, basically concluded it wasn't worth the calories we would have to burn to get it done. He puts the company first.

WSJ: Do you believe the megabank model spawned by Citigroup -- spanning commercial, investment, and consumer banking -- still fundamentally works?

Mr. O'Neill: Today I would not want to try and create Citigroup or any of the other large banks. We are -- I won't say we are an accident of history -- we are history. And unfortunately time changes and the environment changes, and so today we've got other challenges. We've got fintech, potential disruptors. We've got cybersecurity. We've got all sorts of risks that we did not have before. Do I believe that the basic model can be made to work? Yes. But with constant mid-course corrections, and those need to happen more frequently than they did in the past.

WSJ: You've spent a lot of time dealing with Washington issues, from stress tests to anti-money laundering. Your successor as chairman, John Dugan, is a former top regulator. Is the way that the biggest banks and the government are entwined today a good deal for banks?

Mr. O'Neill: Well it is what it is. To pretend it away, or to try and make it go away, would be very, very difficult. Occasionally those relationships are tense, less so today than they were in the past. The AML job that we have been given to do is a complex one. We spend $1.3 billion on that every year. We have not declared victory. It is a complicated job, we are likely to spend similar amounts going forward.I think it is appropriate to be regulated, given the consequences when there are bank failures of this size. I've got no complaints.

WSJ: What are the systemic or financial risks that your successor will be dealing with?

Mr. O'Neill: People talk about the problems of leveraged lending and the growth of collateralized lending obligations. Gosh, these look like CDOs. When you look at who owns those assets, it really isn't the banks. The difference is, in the dirty old days of 2005 and 2006, if-we-built-it-they-would-come was sort of the model. Now, we basically react to client requests.Unregulated entities could potentially threaten the financial system. The banks are large intermediaries, and so will it come back to the banks? Potentially. But it's not going to start here.

WSJ: You've spent a lot of time recruiting for Citigroup's board, and on the diversity of the board. After you retire, about a third of the directors will be women. How did you go about that?

Mr. O'Neill: The way I started was to say, what are the risks this company faces? When you start counting, there are a lot of them. We needed, in my view, subject matter experts to face off with management. People who did not need, like I did in business school, remedial training. People who came to the job with specific knowledge. So we didn't look for 12 or 15 Leonardo da Vinci's who could turn their hand to everything, nor were we looking for people who were our best clients and therefore supportive. We really went out and said risk management is the principal thing we're looking at. Every risk that I think we face we've gone out and specifically looked for somebody who has those skills. We've got a balanced board that is made up of subject-matter experts. We didn't say, we'll check a box there.

WSJ: Are you retiring from Citigroup, or from the banking industry entirely?

Mr. O'Neill: I failed retirement twice before. I'm determined to pass it this time. After retiring from Bank of Hawaii, I moved to the U.K. and enrolled in a graduate program in early modern European history. I was about to begin work on my dissertation when the call about possible Citi board duty came in late 2008. I decided to take on the directorship, never really began work in earnest on the dissertation, and moved back to the U.S. I'm giving consideration to picking up the loose ends and restarting my research after an interruption of ten years. We'll see?

(END) Dow Jones Newswires

November 24, 2018 02:47 ET (07:47 GMT)

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