Citicorp's chairman taking heat for bank's woes Despite warnings, Citicorp failed to see collapse of real estate market.


NEW YORK -- Last autumn, morale was sinking at Citicorp faster than its stock price, which was about to reach an eight-year low. Profits were slumping. Layoff rumors were spreading. Bonuses were in doubt.

Just when the troops needed a boost, the Harvard Business Review published a lengthy interview with Citicorp Chairman John S. Reed that left many feeling deflated.

In the wide-ranging interview, Reed discussed abstract concepts like "globality" and "textured competence." He compared professional pride to lining up socks in a drawer. And he admitted that he had disregarded the warnings that the commercial real estate market was about to collapse.

"Now I'm damn embarrassed because the critics were right and we were wrong," Reed said.

To some, Reed's remarks seem too uncertain and cerebral to wrestle with the ugly realities confronting the nation's largest bank.

"I pictured him in his Japanese motif office, lost in meditation, while the real estate portfolio was coming unraveled," one Citicorp executive said.

Citicorp has never looked worse.

Loans to everybody from corporate raiders to consumers are going sour. The most glaring problems are in the real estate portfolio, where $4.98 billion worth of bad loans have dragged down Citicorp's profits. In December, the company cut the dividend in advance of a $382 million fourth-quarter loss. In this year's first quarter, Citicorp's profits plunged 81 percent to $70 million.

Citicorp has a work force of about 3,300 in Maryland. The operations include a bank subsidiary with 15 branches, the administrative and service office of Citibank Choice/Visa in Towson and a national service center for Citibank MasterCard and Visa in Hagerstown, according to Citicorp spokesman Bill Ahearn.

"Citicorp is a weakened competitor," said David Cates, chairman of Ferguson & Co., a consulting company. "It doesn't have

resources to compete. It doesn't have capital. It doesn't have liquidity."

As a result, more than at any time in Reed's seven-year tenure, his leadership is being questioned, both inside Citicorp and on Wall Street. While Reed continues to have his admirers, some analysts and bankers believe it is only a matter of time before he is replaced.

NB Citicorp's board of directors might already be losing patience

with Reed. In February, American Banker, a trade publication, reported that the bank's slipping performance had prompted the directors to place Reed on "probation."

"It's absolute rubbish," said Thomas E. Jones, a Citicorp executive vice president, of the probation report. He said that the board is solidly behind Reed. Reed himself declined to be interviewed for this article, and the board members aren't commenting.

When Reed was tapped to succeed Walter Wriston as chairman in 1984, he took over an organization that was already in crisis. A huge portfolio of underwater loans to Brazil, Argentina and other Third World borrowers threatened its survival. But it had some important strengths.

For one, it was the world's largest bank. It was also regarded as the industry's leading innovator, a bank with grand ambitions and the money to execute them.

Since then, Citicorp has lost its standing. It now ranks ninth in size behind banks in Japan and France. The leading innovators, some argue, are now crosstown rival J.P. Morgan and Banc One in Columbus, Ohio. As banking enters a new era of deregulation, some fear Citicorp will be left behind.

Among the 50 largest banks in the United States ranked by Keefe Bruyette & Woods, an investment company specializing in banks, Citicorp places first in only one catego

Size. It ranks 41st in quality of its loans, 43rd in profits and dead last in risk-adjusted capital, a key measure of bank health. Overall, no other New York bank fares as poorly.

Jones said that the numbers don't tell the whole story. He said some banks have improved their balance sheets in part by reducing their core businesses. "We don't want to be so extreme in our focus on the short term that we jeopardize our basic business," he said. "We're protecting our ability to generate revenue."

But as Citicorp prepares to release its second-quarter earnings, many analysts are bracing for more bad news -- perhaps another fall in profits.

At a time when Reed most needs to build credibility -- both inside and outside the bank -- he has become the butt of jokes. Last month a Daily News gossip columnist reported that Reed, 52, who is married and has four children, was having a love affair with a 33-year-old flight attendant employed on the company jet.

Citicorp had no comment on the gossip, but it is well known within the bank that Reed and his wife have separated, and Reed is seeking a divorce.

Reed is arguably the most important banker in the United States. He rules over an institution that, despite its weaknesses, is still nearly twice the size of its nearest domestic rival, Bank of America. The company boasts that it does business with one in four Americans.

The complaints that dogged Reed at the outset, that he had never made a commercial loan and was weak in financial expertise, now appear to have some validity. "He is a partial and incomplete manager," Cates said.

Then there are the setbacks in Citicorp's vaunted retail operation, which produces most of the company's profits. Its home mortgage loans, for instance, are going bad at a rate 10 times faster than the average bank, according to Salomon Brothers.

No one doubts that Reed is brilliant, unselfish and dedicated to Citicorp. With 551,842 shares, he is one of the largest individual stockholders. Last year, he earned $1.2 million in compensation -- a healthy amount, but down nearly 26 percent from the prior year.

In January, Reed unveiled an ambitious plan to raise capital quickly, cut costs and focus on the immediate problems. "We're a different Citicorp today because the world we're dealing in seems to require it," Reed told a gathering of analysts.

But a month after launching his new plan for Citicorp, Reed announced a deal to raise $590 million in capital from a Saudi prince. The move outraged the investment world because it diluted the ownership of existing shareholders. It also made some feel that Reed was desperate.

To cut costs, Reed has eliminated 7,000 jobs, reducing the nTC worldwide staff to 90,000. The goal: to slash $1.5 billion in expenses by the end of next year. Some observers believe Reed's job is secure, and that by cutting costs and raising capital he is taking the right steps.

Others are not so sure. "I don't think he'll be around at year end," said a veteran Wall Street analyst who covers bank stocks.

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