Chuck Prince

Chuck Prince
Prince at the World Economic Forum in January 2007.
Born	Charles Owen Prince III 1950-01-13January 13, 1950 (age 76) Lynwood, California, U.S.
Nationality	American
Education	University of Southern California (B.A.; M.A.; J.D.) Georgetown University Law Center (LL.M.)
Alma mater	University of Southern California
Occupation	Banker, lawyer
Years active	1975-2007
Employer	United States Steel Corporation (1975-1979) Commercial Credit Company Travelers Group Citigroup (1998-2007)
Company	Citigroup Inc.
Title	Chairman and chief executive officer, Citigroup Inc.
Term	2003-2007 (CEO) 2006-2007 (chairman)
Predecessor	Sandy Weill
Successor	Vikram Pandit (CEO) Robert Rubin (chairman)
Known for	Chairman and chief executive of Citigroup The "as long as the music is playing" remark of July 2007
Spouse	Margaret L. Wolff (m. 2003)

Charles Owen Prince III (born January 13, 1950), known as Chuck Prince, is an American lawyer and banker who served as chief executive officer of Citigroup from 2003 to 2007 and as chairman of its board from 2006 to 2007.

Prince was a lawyer by training and spent most of his career as the principal legal and administrative adviser to Sandy Weill, following him from the Commercial Credit Company through the series of mergers that produced Citigroup in 1998. Weill chose him as successor in 2003, a decision that surprised observers who had expected a candidate with a background in running a banking business.

His tenure was marked first by regulatory difficulty and then by losses on structured credit. Citigroup faced a succession of supervisory actions in 2004 and 2005, including the withdrawal of its private banking licence in Japan, and the Federal Reserve took the unusual step of telling the bank to defer significant acquisitions until it had improved its internal controls. Prince spent much of his first two years on remediation, and afterwards came under pressure from investors who regarded the company as insufficiently profitable relative to its size.

He is most widely remembered for a remark made to the Financial Times in July 2007, as the market in subprime mortgage securities was beginning to fail. Asked about Citigroup's continued participation in leveraged buyout lending, he said: "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."

Citigroup announced writedowns on collateralised debt obligations and mortgage securities of between $8 billion and $11 billion in the following months. Prince resigned on November 4, 2007. He was succeeded as chief executive by Vikram Pandit and as chairman by Robert Rubin. The market value of Citigroup fell by about $64 billion during his tenure, and the company subsequently required $45 billion of United States government capital. Prince apologised for his part in the crisis when he testified before the Financial Crisis Inquiry Commission in April 2010.

Early life and education

Charles Owen Prince III was born in Lynwood, California, on January 13, 1950, to Charles Owen Prince II and Mary Doyle.

He was educated entirely at the University of Southern California and its Marshall School of Business, taking a Bachelor of Arts, a Master of Arts and a Juris Doctor there. He subsequently took a Master of Laws at the Georgetown University Law Center in Washington, D.C.

The concentration of four degrees at two institutions, all in the humanities and law rather than in finance, is relevant to the later criticism of his appointment. Prince had no training as a banker, no experience as a trader, and no record of running a profit-making business before he was given one of the largest financial institutions in the world.

Career

United States Steel, 1975-1979

Prince began his career as an attorney with the United States Steel Corporation in 1975, remaining for four years.

Commercial Credit and Travelers

In 1979 he joined the Commercial Credit Company, a consumer lender in Baltimore. The decision proved decisive for his career for reasons that were not apparent at the time: in 1986 Commercial Credit was taken over by Sandy Weill, who had been forced out of American Express and was using the company as the base from which to rebuild a financial conglomerate.

Prince became Weill's lawyer and, progressively, his closest adviser on regulatory, legal and administrative matters. As Weill acquired Primerica, Smith Barney, Shearson, Travelers and Salomon Brothers through the late 1980s and 1990s, Prince handled the legal architecture of each transaction and the supervisory relationships that followed. He was promoted to executive vice president in 1996, when the group was known as Travelers Group.

Citigroup

Travelers merged with Citicorp in 1998 to form Citigroup, a transaction that required the repeal of the Glass-Steagall separation of commercial and investment banking, which followed in 1999.

Prince was named chief administrative officer of the combined company in 2000, promoted to chief operating officer in 2001, and made chairman and chief executive of Citi Markets and Banking, the corporate and investment bank, in 2002.

His role in this period was substantially that of the group's problem solver. He negotiated the settlements arising from the Enron and WorldCom collapses, in which Citigroup's investment bank had been closely involved, and from the conflicts of interest between equity research and underwriting exposed by the New York attorney general Eliot Spitzer. The largest of these settlements committed Citigroup to payments of about $2.65 billion in the WorldCom case and $400 million in the research settlement.

Appointment as chief executive

Weill announced in July 2003 that Prince would succeed him as chief executive, with effect from October. Weill remained chairman until 2006, when Prince took that role as well.

The choice was widely read as a signal that Weill regarded legal and regulatory repair as the company's most urgent need. It was criticised from the outset on the ground that Prince had never run a business and would struggle to direct managers who had. Weill's continued presence as chairman for three years compounded the difficulty, leaving uncertainty about where authority lay.

Regulatory problems, 2004-2005

Prince's first two years were dominated by supervisory failures in several jurisdictions.

In September 2004 Japan's Financial Services Agency withdrew Citigroup's private banking licence in the country, finding that the bank had failed to implement adequate anti-money-laundering safeguards and had misled customers about investment risk. Citigroup took an after-tax charge of $244 million on closing the business. Prince travelled to Tokyo and apologised publicly to Japanese regulators and customers, bowing at a press conference, an act that was much reported and that established the manner of his early tenure.

He removed three senior New York executives over the affair: Deryck Maughan, vice chairman and head of Citigroup International; Thomas W. Jones, head of global investment management; and Peter Scaturro, head of the private bank. Twelve executives were dismissed in Japan.

In August 2004 Citigroup's London operation had executed a bond trade known internally as Dr Evil, selling about 12.9 billion euros of European government bonds in a matter of minutes and buying a portion back at lower prices. The Financial Services Authority fined the bank about £14 million in 2005 for failing to control the strategy.

The accumulation of these matters led the Federal Reserve in March 2005 to inform Citigroup that it should not undertake significant acquisitions until it had demonstrated improved internal controls and compliance, an unusual constraint to place on a bank of its standing. The restriction was lifted in April 2006.

Prince responded with a programme he called the Five Point Plan, which emphasised training, talent development, performance appraisal incorporating ethics, improved communications and strengthened controls. He required senior staff to attend ethics training and circulated a shared statement of values. The programme was reported at the time with some scepticism, particularly a training video in which Prince appeared personally.

Strategy and investor pressure

Having restored the supervisory relationship, Prince faced the opposite criticism. Citigroup's expenses were growing faster than its revenues, its share price underperformed its peers, and investors questioned whether the conglomerate Weill had assembled could be managed at all. Prince resisted calls to break up the company and argued that its scale and breadth were advantages.

He pursued expansion instead, particularly in consumer banking abroad and in structured credit at home. Citigroup bought the Japanese brokerage Nikko Cordial, took a stake in the Turkish bank Akbank, and expanded its mortgage securitisation and collateralised debt obligation business substantially between 2005 and 2007.

That last decision proved decisive. Citigroup became one of the largest underwriters of collateralised debt obligations backed by subprime mortgage securities. It retained a large volume of the senior tranches on its own balance sheet, on the view that they were of minimal risk, and it provided liquidity support to structured investment vehicles held off balance sheet. The bank later disclosed that it had retained about $43 billion of such exposures, a figure Rubin told the Financial Crisis Inquiry Commission he had not been aware of before September 2007.

The music quote

In an interview with the Financial Times published in July 2007, Prince was asked whether Citigroup would continue to provide financing for leveraged buyouts given the deterioration in credit markets. He replied:

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing.

The remark became one of the most quoted statements of the financial crisis. It was read as an admission that the bank understood the risk it was taking and was continuing regardless because competitors were doing the same, and it has since been used in academic and regulatory literature as shorthand for the collective action problem facing institutions in a credit boom.

Prince later argued that the sentence had been understood too narrowly. He said it had referred specifically to leveraged lending, a business in which Citigroup's exposure was hedged and where losses proved modest, rather than to subprime mortgages, and that the bank had in fact been reducing its leveraged commitments.

Resignation

Citigroup reported third quarter net income down about 57 percent in October 2007 and disclosed further writedowns. On November 4, 2007, a Sunday, the board met and Prince resigned from both the chairmanship and the chief executive's office. The bank simultaneously estimated additional writedowns of between $8 billion and $11 billion on subprime-related positions.

Robert Rubin, the former Treasury Secretary who had been chairman of the executive committee, became chairman. Vikram Pandit was appointed chief executive in December.

Citigroup's market value fell by about $64 billion over Prince's four years. The company received $45 billion of capital from the Troubled Asset Relief Program and a federal guarantee over a pool of troubled assets, and the government took a substantial equity stake.

Business philosophy and management style

Prince approached Citigroup as an institution to be administered rather than as a set of businesses to be directed. His strengths were legal judgement, negotiation with regulators and the management of litigation, and the early part of his tenure applied them to a company that genuinely needed them.

He believed in the universal banking model that Weill had built, and defended it publicly against repeated proposals to separate the investment bank, the consumer bank and the insurance operations. His argument was that breadth diversified earnings and that the cost of capital advantages of scale were real.

His weakness, by his own later account and by that of most subsequent analyses, was the absence of a practitioner's instinct for the risks being taken inside the trading businesses. He relied on the risk management function and on the judgement of the executives running those units, and the reporting he received did not convey the size of the retained CDO positions until very late. He told the Financial Crisis Inquiry Commission that he had been advised the super-senior tranches were essentially riskless and that he had accepted this.

The episode is frequently cited in corporate governance teaching as a case in which a chief executive lacked the technical knowledge to challenge his own specialists, and in which board oversight failed for the same reason.

Controversies

Compensation on departure

Prince left Citigroup with an exit bonus valued at about $12.5 million, in addition to roughly $68 million in stock and options accumulated over his career, a pension of about $1.7 million a year, and the use of an office, car and driver for up to five years. He also remained a consultant to the company.

The terms attracted criticism given the losses incurred and the subsequent public capital injection, and they formed part of the broader political argument in 2008 and 2009 about executive pay at rescued institutions.

Assessments of responsibility

In 2008 Fortune named Prince one of eight economic leaders "who didn't see the crisis coming", citing his optimistic public statements of July 2007. In January 2009 the Guardian city editor Julia Finch included him in a list of twenty-five people identified as central to the financial collapse.

Financial Crisis Inquiry Commission

Prince testified before the Financial Crisis Inquiry Commission on April 8, 2010, alongside Rubin. He apologised, telling the commission: "I'm sorry the financial crisis has had such a devastating impact for our country. I'm sorry about the millions of people, average Americans, who lost their homes."

He defended the decisions taken at the time as reasonable on the information then available, and said that the collapse in the value of highly rated mortgage securities had not been foreseen by the rating agencies, the regulators or the market. Commissioners pressed him on whether the bank's risk controls had been adequate and on the gap between the exposures held and the board's understanding of them. The commission's final report was critical of Citigroup's management of those risks.

Prince was not charged with any offence and no regulatory action was taken against him personally.

Personal life

Prince married Margaret L. Wolff on September 20, 2003, at The Pierre Hotel in New York City. The ceremony was conducted by Judge Robert W. Sweet.

He has served on the board of Johnson & Johnson since February 13, 2006.

His affiliations include the Financial Services Forum, the Council on Foreign Relations and the Business Roundtable. He has been a trustee of the Weill Cornell Medical College, Teachers College at Columbia University and The Juilliard School. He was formerly a senior counsellor to the Albright Stonebridge Group.

External links

• Charles O. Prince III at The New York Times
• Testimony to the Financial Crisis Inquiry Commission, April 8, 2010