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Insight: Corbat faces ghost of Weill's deals in Citi's machines

A man walks past a Citibank branch in lower Manhattan, New York October 16, 2012. REUTERS/Carlo Allegri
A man walks past a Citibank branch in lower Manhattan, New York October 16, 2012. REUTERS/Carlo Allegri

By Dan Wilchins, David Henry and Nadia Damouni

(Reuters) - When Vikram Pandit was abruptly ousted as Citigroup Inc's chief executive late last year, senior bank employees speculated for weeks about who would follow him out the door.

Chief Operating Officer John Havens had already left with Pandit, and the employees bet the new CEO, Michael Corbat, would push out other Pandit loyalists. High on their list was Don Callahan, who headed operations and technology.

But when Corbat named his new team in January, he kept Callahan, albeit in a reduced role. People familiar with the matter said Callahan survived because he oversees an effort critical to both Corbat and bank regulators - simplifying and standardizing thousands of Citigroup's information technology systems. The process, which ramped up in the aftermath of the financial crisis, will take at least two more years to complete, they said.

Corbat's choice highlights how some 15 years after Sanford "Sandy" Weill merged Travelers Group and Citicorp to create Citigroup, the bank is still trying to integrate all its operations. For example, it still uses different account opening procedures and systems in different countries.

If Callahan gets it right, Citigroup will better track risks and satisfy U.S. regulators who have been pressing it to improve its systems for more than 10 years, and will more efficiently sell products to retail, corporate, and institutional customers. It will help bring down costs and raise revenue, potentially adding $750 million to annual profits starting in 2015 from improvements in consumer banking alone.

The bank spends around $18 billion a year - or about a third of its operating expenses - on operations and technology, including facilities, systems and hardware, making it a major area of concern for the board as well, two sources said. The board is considering hiring a new director with technology expertise to help monitor and assess management's efforts, they said.

Citigroup spokeswoman Shannon Bell said that the bank is simpler than it was before the financial crisis, having sold more than 60 businesses and $800 billion of assets that were not central to its strategy.

"We have worked diligently to integrate and modernize or replace legacy systems while investing in their safety and soundness," Bell said. "The continued integration and consolidation of our technology platforms will improve productivity and client service across the company, improving results for all stakeholders."

Weill, who retired as Citigroup CEO in 2003 and as chairman in 2006, told Reuters he was tireless in integrating companies he acquired.

Over about a dozen years, Weill built Citigroup into the largest U.S. bank, starting with a small consumer lending company in Baltimore and using it as a platform for a series of mergers and acquisitions with companies, including Primerica and Travelers.

"I don't want to sound cocky, but I think I managed it (Citigroup) very well," he said.

To Citigroup's critics however, its lingering technology problems are a sign of how the bank is too unwieldy for anyone to run.

"These institutions are too big and complex to manage effectively," said Gary Stern, former president of the Federal Reserve Bank of Minneapolis and co-author of "Too Big to Fail: The Hazards of Bank Bailouts," a 2004 book policymakers often cited during the financial crisis.

"It is a daunting challenge to effectively integrate systems," Stern added.

The technology issues have had a real impact on the bank's business, current and former executives said. As markets cratered during the financial crisis, for example, it took days for the bank to gather data about risks from different trading desks, according to a person involved in the quest to figure out the bank's exposure to particular securities, derivatives and counterparties.

"We were flying blind," said another former executive.

These problems also affected day-to-day operations of the bank. In 2005, for example, a customer service representative at a Citibank branch needed to know how to operate 89 different systems to sell every product the bank offered. At one point, the bank employed 30 people whose sole job was to help branch staff reset passwords to these systems, a former official at the bank said.

Corporate clients complained that they felt like they were being called on by hundreds of Citigroup sales people, each of whom was oblivious to the efforts of their colleagues, one of the former bank officials said.

‘TWO OF EVERYTHING'

The systems problems that Citigroup faces are, in varying degrees, issues for every major U.S. bank, most of which also arose through acquisitions. JPMorgan Chase & Co , for example, says it spends more than $8 billion a year on systems and technology, but generated some $6 billion of trading losses last year from the "London whale" scandal that were in part due to flawed valuation systems.

"A lot of these banks have grown through mergers, so they have a Noah's ark of platforms: they have two of everything and they have to all come together," said Ray August, a senior executive at CSC, which helps banks rationalize their systems.

Citigroup's problems may be worse than many of its rivals, say executives who have worked there and at other major banks.

Shortly after the turn of the century, the Federal Reserve Bank of New York demanded the bank integrate its credit risk management systems globally as well as its market risk management systems, a person familiar with the matter said.

A 2008 report by the New York Fed, that was made public through the Financial Crisis Inquiry Commission, found that almost a decade after the huge bank was cobbled together, Citigroup was still engaging in "significant integration efforts" in information technology, and characterized the bank's tech risks as "high."

The New York Fed declined to comment.

ONE BANK, TECHNICALLY

For Citigroup's management, technology is one of its biggest opportunities to cut costs and win new business, which is where Callahan comes in. He now oversees bank-wide operations and technology, and helps ensure that when businesses upgrade or build their systems, the result is compatible with what the bank already has.

He is also spearheading a five-year project, known as the "Global Data Roadmap," to create standards for different businesses to share information with one another. Citigroup is more than three years into that project.

Under a separate multi-year effort known as "Project Rainbow," the bank is moving its retail systems to a common platform that can be tweaked to fit local laws, but can still communicate with other parts of the retail business.

Corbat has said technology improvements will be responsible for much of the targeted efficiency gains in the consumer businesses. The improvements, a 2015 goal, could add as much as 25 cents per share, or some 6 percent, to the company's 2012 adjusted profits, according to Reuters estimates checked by two stock analysts. The efficiency goals for the whole company would bring Citigroup roughly in line with what other banks deliver.

Corbat said at a March investor conference that he is counting on Project Rainbow.

"Today, for example, we run different account opening procedures in almost every country," Corbat said. "We have to ensure that this process is identical for both our customers and our employees, whether it's happening in New York, Mexico City, or Warsaw."

(Reporting by Dan Wilchins, David Henry and Nadia Damouni in New York; Editing by Paritosh Bansal and Leslie Gevirtz)

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