Difficult Decisions at Citigroup

In the most significant shake-up at Citigroup Inc. in 20 years, Chief Executive Officer Jane Fraser fully acknowledges a difficult reality: Not everyone is going to like her plans. At an investor conference this week, she explained:

We have taken hard, consequential, tough decisions. ... They are not going to be universally popular within our bank. It’s going to make some of our people very uncomfortable. I am absolutely fine with that. I am confident that our strongest performers are going to be fully supportive of these moves, and it is absolutely the right thing to do for our shareholders. So this is the right time to make this next step, and we are fully leaning into it.

Hundreds of people, if not thousands, are likely to lose their jobs. (Citigroup currently has the second-largest employee base of all the Big Five banks.) Fraser says by taking an ax to the first two layers of management, 35 committees are now gone. That’s how bloated the Wall Street giant had become and how burdened it’s been by bureaucracies. At the Barclays Financial Services Conference, she continued:

We’ll continue cascading down the organization as we flatten it out. We have many—we have more layers than we need. We’re going to significantly eliminate a lot of the duplicative and excessive governance and management processes that we’ve got that we don’t need.

Bloomberg’s Jenny Surane points out that Citigroup’s headcount has swelled to 240,000 people in recent years because of the need to hire engineers, consultants and compliance staff to meet a bevy of fresh obligations. Tens of thousands of workers in back-office jobs will be evaluated, she explained.

Citigroup’s shareholders clearly think Fraser is doing the right thing. The stock has risen since her announcement. It’s trading at less than half of its book value, though, a signal that the market believes the bank is burning value every day that it’s alive. Since March 2021, when Fraser took over, the stock has dropped more than 35%, compared with a 15% rise in the S&P 500 Index. Every other Big Five bank has performed better.

It was never going to be an easy job for Fraser, who inherited a lot of the longtime problems at Citigroup. In the latest shake-up, she’s putting new managers in charge and holding them deeply accountable. Among the most consequential leadership changes is the uncertainty around the investment bank.

Peter Babej, CEO of the Asia business, is serving as interim head of banking—a unit that will now encompass the dealmaking team run by Tyler Dickson, Jason Rekate’s corporate banking division (which the firm thinks of as its quarterbacks building relationships with clients around the world) and Tasnim Ghiawadwala’s commercial banking business. But Citigroup is conducting a search for a permanent head, keeping open one of the most powerful positions in global banking.

Long a giant in the world of deals, Citigroup faces stiff competition. In 2019, it had a healthy lead as the No. 4 bank in mergers and acquisitions. It’s fallen to No. 6 so far this year, according to Bloomberg data. That puts it behind a rival that’s a fraction of its own size, boutique investment bank Centerview Partners. Citigroup has dropped either one or two spots when it comes to underwriting on the most prolific types of bond deals, traditionally an area where it has been among the most competitive players.

It’s a tough balance, making strategic decisions for the bank to improve profitability and keeping bankers incentivized to win, which is traditionally an expensive endeavor. That’s Fraser’s challenge for 2024: revamping Citigroup and putting it in a position to win.

Apollo Dances With the Banks

It wasn’t long ago that Apollo Global Management agreed to buy a unit of Credit Suisse—now called Atlas SP—that focused on originating loans. Within six months of the deal, that unit extended financing to PacWest Bancorp during the March banking meltdown. “We came up with $1.4 billion in 24 hours,” said John Zito, who ultimately oversaw that deal. “I suspect that anything that looks like that, we’re in the room on.”

Zito, Apollo’s deputy chief investment officer of credit, thinks there’s a “huge hole, a white space to fill” in the world of asset-backed lending, which extends from properties to music royalties. He believes Atlas can help. For Apollo’s broad credit business, “We’ll be growing at somewhere between $70 and $100 billion a year. We have extreme amounts of demand,” Zito told me Wednesday in a Bloomberg Television interview.

We’ve talked here lately about how Apollo is becoming the god of the nonbanks. With the banking system about to face much stricter regulations, recall that even JPMorgan Chase & Co.’s Jamie Dimon said he expects that the private credit giants will be “dancing in the streets.” To which Zito responded, “I always think we’re dancing with the banks.”

Maybe the rivalries between the banks and nonbanks are starting to ease. That’s especially true as the banks raise money to start their own private credit businesses—realizing, slowly, that it’s the only way to stay on the map.

Arm Windfalls

The big banks had a lot riding on Thursday’s initial public offering of Arm Holdings Plc, the largest since 2021. The top four underwriters—Barclays Plc, Goldman Sachs Group Inc., JPMorgan and Mizuho Financial Group Inc.—were responsible for thawing the market for new listings, which has been all but frozen for the better part of 2023.

Japanese banking giant Mizuho has big ambitions going forward. “We want to be solidly positioned in the top 10 of investment banking,” says Michal Katz, head of investment and corporate banking. It’s already a top 10 bookrunner on IPOs globally, worked on roughly a half-dozen equity deals beyond Arm this week, and is an underwriter on next week’s Klaviyo Inc. listing.

Arm “knocked open the IPO doors for high-quality issuers that have developed a sustainable, profitable business model, or a path to profitability,” Katz says. The deal from Mizuho’s perspective “is not an overnight success. This is an overnight success years in the making.”

Monday comes the Instacart IPO, and Tuesday brings Klaviyo. Both deals are led by Goldman Sachs and its head of equity capital markets, David Ludwig. This is also a big moment for Kim Posnett, named just a few months ago as Goldman’s global head of the technology, media and telecommunications investment banking group. Her rivals at Morgan Stanley often lead on these types of deals, but they’re missing out this round.

Upstarts to watch in next week’s debuts include SoFi, which is an underwriter for the first time on an IPO, with its place on Instacart’s deal. It made a decision years ago to work on IPOs given its base of retail investors, serving as an allocator to almost a dozen IPOs including the Rivian listing in 2021—the last time we saw a technology deal so large. Being an underwriter now, as opposed to merely an allocator, means SoFi is ready to put up capital and therefore some risk for fresh deals. Anthony Noto, the fintech firm’s CEO, is an ex-Goldman banker trying to make SoFi into an incumbent of big Wall Street.

Who’s News

Gilles Dellaert is tapped as the new credit boss at Blackstone in a bid to amass $1 trillion in credit assets within a decade. Dwight Scott becomes chairman of that business in a changing of the guard. … Lazard’s Peter Orszag, who takes over as CEO at the turn of October, is setting a goal to double revenue by 2030 and named the leaders who will help him pursue the strategy. … Ray Dalio pushes for a comeback at Bridgewater less than a year after retiring, seeking to start a fund within Bridgewater, but the plan was turned down by the board, according to the New York Times. ... More changes at Citigroup amid the overhaul: Kristine Braden, the head of Citigroup Inc.’s Europe unit, is exiting, while Manolo Falco is named vice chairman of the investment banking business and Dickson becomes sole head of the unit. … Over at Goldman, Ericka Leslie is tapped as chief operating officer of the global banking and markets business, its largest division. Separately, Goldman fired transaction banking leaders including Hari Moorthy over compliance lapses, sources told Bloomberg. ... The bond guys are at it again: Bill Gross blasts Jeffrey Gundlach, and Gundlach swings back. … UBS CEO Sergio Ermotti says he’s committed to finishing the job of integrating Credit Suisse, and that means staying on through the end of 2026.

If you want to read this newsletter online, you can do that here. To sign up for Bw Daily, for which I write every Friday, you can do that here. Next week, I'll be interviewing the dean of Wall Street lawyers, Rodge Cohen, at The M&A Advisor's Leadership in Dealmaking Summit. We'll also have an interview with Pretium CEO Don Mullen on Wednesday in the 1:00 p.m. hour. Obviously we'll be all over the next set up IPOs. But before then, I'm headed to the Poconos for some R&R, which I hope you're getting too.

All the best,

Sonali