Citigroup banned in Japan

A devastating ruling means that US Bank cannot participate in Japanese government bond options

For almost a year as chief executive of Citigroup, Chuck Prince has been trying to provide the sort of "ethical" leadership that the chairman of the Securities and Exchange Commission says is lacking in much of corporate America. After last week, Mr Prince must be wondering what more he can do.
Despite his best efforts, the world's leading financial services group has continued to be dogged by regulatory and legal problems around the world. The latest setback came on Friday, when the Japanese financial regulator ordered Citigroup to close its private banking operations in Japan within a year following "serious violations" of banking laws.
The decision is a bitter blow. Although private banking in Japan is a relatively small business in group terms, analysts said the closure was a reminder of the risks run by a broad-based financial conglomerate operating in many countries. It provides further ammunition for those who question whether Citigroup's conglomerate model makes sense at all.
The irony is that private banking was one of the businesses where Citigroup argued its conglomerate model gave it a competitive edge. Because the group
includes one of the world's leading investment banks and a large private equity arm, Citigroup's private bankers could offer their rich clients the most sophisticated financial products and the chance to invest alongside the company in choice deals around the world.
Moreover, many private bank clients have corporate interests that can be an important source of business for the investment bank. All of which means that being locked out of private banking in the world's second-biggest economy is more significant for Citigroup than merely the loss of the roughly $90m of net income the business made last year.
Not only could it mean lost opportunities in other parts of the group, the repu-tational damage could harm Citigroup's business elsewhere. Admirers of Citigroup's model say the size and diversity of its business mean that while it will inevitably run into problems with individual businesses in particular countries, these will be manageable for the group as a whole. But in a business where reputation is so important, the fear is that regulatory problems in one area could infect its operations in another.
In the case of Japan, Glenn Schorr, analyst at
UBS, suggests that some of Citigroup's corporate customers might review their relationship with the company following the regulator's damning criticism of its private bank. Private banking business elsewhere could also suffer.
Citigroup has also run into trouble in Europe, where last week it apologised for a recent huge trade that disrupted the electronic trading system for European government bonds. Citigroup's traders made a profit of about €15m ($18m) on the trade. But it angered European government officials concerned at f the effect on liquidity in their bonds.
Citigroup's most financially damaging problems have come in the US, where it has been hit by investor lawsuits related to its alleged role in corporate scandals such as WorldCom and Enron. In May, Citigroup settled the WorldCom action for $2.6bn and set aside a further $5.2bn before tax for other lawsuits.
At the time, senior executives hoped the move would allow Citigroup to put the past behind it. But the size of the charge shocked and angered investors, who asked themselves where the next problem would arise.
As Michael Mayo, analyst at Prudential Financial, said in a note to clients, the ques-
tion is whether such problems are "simply a part of doing business for such a complex firm".
Mr Prince is determined to disprove this. He has made restoring Citigroup's reputation one of his priorities and has taken steps to tighten internal procedures.
Earlier this month, he announced the creation of an independent global compliance unit reporting to Dave Bushnell, Citigroup's senior risk officer. This is designed to increase the independence of compliance officers by making them answerable to the independent unit rather than the businesses they oversee.
Citigroup appears to be paying a higher price for its regulatory problems than some other large US banks. Bank of America has been embroiled in scandals, many involving its private bank. Yet BofA's shares recently hit an all-time high and assets are still flowing into its private bank.
Citigroup executives believe regulatory concerns are a serious drag on its share price, which in turn reduces its ability to make big acquisitions. That is why Mr Prince has made "staying out of the headlines" one of his priorities for Citigroup this year. Judging by last week, he has a bit more work to do.