Tuesday, September 05, 2006

Citigroup's Thomas Maheras

Bloomberg, Justin Baer, 5 September 2006

Thomas Maheras was in his New York office at Citigroup Inc. one August morning in 1999 when he got an urgent message from Co-Chief Executive Officer Sanford Weill. The bank's arbitrage trading desk in London had made bad bets on long- term U.K. bonds and was hemorrhaging money. ``I had to get on the next plane,'' Maheras says. ``It was a command performance.''

Maheras, then the 36-year-old head of fixed income for Citigroup, didn't even supervise the arbitrage traders, who were wagering millions of dollars of the bank's own money to profit from small differences in the price of similar bonds.

Maheras says he arrived at the firm's offices atop Victoria Station the next day and quickly studied the traders' positions. While employees flocked to windows to watch the last total solar eclipse of the millennium, Maheras sat across a conference-room table from Weill and Co-CEO John Reed and presented his plan to minimize losses at the arbitrage desk by making new trades that hedged its losing positions.

Citigroup would eventually close the arb desk by setting it up as a free-standing hedge fund.

Maheras, 43, is now Citigroup's global head of capital markets. And Charles Prince, Weill's successor, is counting on him and his colleagues at the company's corporate and investment bank to come to the rescue again and help restore the pace of 10 percent-plus annual profit growth that Citigroup produced in the Weill era.

Though Maheras supervises just 8,500 of the company's 307,000 employees, his capital markets division accounted for more than $9 billion, or almost a quarter, of the bank's $44.4 billion in revenue for the first half of 2006 and for $2.6 billion of its $10.8 billion in first-half net income.

No Excuses

``Tommy is intensely competitive,'' Prince says. ``He has a no-excuses approach to management and is focused on driving success. These are exactly the kinds of attributes we want on our leadership team.''

Glenn Schorr, an analyst with New York-based UBS AG, says Maheras is playing a key role. ``Maheras is very well regarded,'' Schorr says. ``He's one of the best managers at Citigroup. They keep giving him more responsibility because he keeps executing.''

Prince, 56, Maheras and Citigroup's other managers will have a hard time matching Weill's record. Starting as CEO of Baltimore- based lender Commercial Credit Co., Weill made more than 100 acquisitions to build what would become Citigroup. His targets: underperforming or underappreciated companies he could whip into shape with management shake-ups and heavy cost cuts.

Weill's Strategy

Investors cheered; from the moment Weill took Commercial Credit public in 1986 until his last day as Citigroup's CEO in October 2003, stock in Weill's companies rose 28-fold, according to data compiled by Bloomberg. Weill, 73, retired in April as chairman of the world's largest financial services company by market capitalization -- and the most profitable, with $24.6 billion of net income in 2005.

Weill's strategy for building Citigroup had little to do with taking big trading risks, Maheras says. Weill drove up profits, and his stock price, by stripping the fat out of the companies he acquired and sticking to businesses that would generate safe, steady growth.

When Prince took over Citigroup in 2003, the bank was engulfed in crisis. Ten Wall Street firms, including Citigroup, settled Securities and Exchange Commission and state allegations in 2003 that they had published biased stock research. Citigroup paid $400 million, the steepest fine, while admitting no wrongdoing.

In 2004 and 2005, the bank paid $4.7 billion to resolve lawsuits by shareholders who accused it of contributing to the fraud that brought down Enron Corp. and WorldCom Inc. Citigroup denied wrongdoing in both cases.


In September 2004, Japanese regulators ordered Citigroup to close its private bank in that country for failing to prevent customers from laundering money. The scandal led to Prince's well- publicized bow of contrition before the head of the country's Financial Services Agency in October 2004.

Maheras's own traders were involved in an August 2004 episode that roiled the European bond market. Six traders used Europe's MTS electronic trading system to sell a huge block of debt that drove down prices. It then bought back bonds at the lower price and pocketed an $18.2 million profit. The trades resulted in a $26 million fine by the U.K.'s Financial Services Authority (FSA) and a sharp drop in Citigroup's share of the European government debt underwriting market.

James Angel, a professor of finance at Georgetown University in Washington, says the European trades were foolish. ``Reputation is extremely important in financial markets,'' Angel says. ``Anything that damages a firm's reputation is going to cost it business somewhere down the road.''

Fed Takes Action

In March 2005, the U.S. Federal Reserve took the unusual step of telling Citigroup it could not undertake any large acquisitions until the bank tightened its internal controls. The Fed lifted that ban a year later.

Today, Prince finds himself under pressure to improve Citigroup's profit and stock price. Citigroup shares have climbed 8.5 percent since he took over in October 2003, compared with gains of 33 percent for rival JPMorgan Chase & Co. and 32 percent for Bank of America Corp. Citigroup shares closed Friday at $49.37, up 1.7 percent for the year.

Prince Alwaleed bin Talal of Saudi Arabia, the bank's biggest individual shareholder, with a 4.3 percent stake, predicted in a November 2005 interview with Bloomberg News that Citigroup shares would soar 50 percent in 2006. He has since told the press how sorry he is that he was wrong.

Challenging Prince's Strategy

Alwaleed and other investors want more evidence that Prince's strategy of pursuing organic growth is working. ``I'm not a Saudi prince, but I do think their board will come under pressure if we don't see a noticeable increase in their revenue growth,'' says Marshall Front, chairman of Chicago-based money manager Front Barnett Associates LLC, which owns 574,000 Citigroup shares.

``Citi is always in the league tables, but it's very much considered a jack of all trades, master of none,'' says Shaun Springer, a London-based executive recruiter. ``It's a lumbering juggernaut.''

Lifting revenue, at least in capital markets, sometimes means taking more chances. That's where Maheras comes in. An ex-Salomon Brothers Inc. trader known to friends and colleagues as Tommy, Maheras is no stranger to risk. ``You have to stick your neck out in trading,'' he says. ``And in management.''

Maheras has an instinct for both, says ex-U.S. Treasury Secretary Robert Rubin, now chairman of Citigroup's executive committee. ``When Jon Corzine was running all of fixed income at Goldman, he would walk the trading room and just know this stuff,'' says Rubin, who preceded Corzine, now governor of New Jersey, as Goldman Sachs Group Inc.'s co-chairman. ``He had it in his bones. He had it in his fingers. And so does Tommy.''

Short-listed for CEO

Maheras is on the short list to one day take over the bank, say Citigroup colleagues who choose not to be identified.

The better Maheras and his investment banking peers perform, the less pressure on Prince. ``Investment banking is one of the workhorses,'' Front says. ``They're going to have to produce.''

Prince promoted Maheras, son of a Greek immigrant who settled in Chicago, to his current post in February 2004. The division encompasses all of Citigroup's securities trading and much of its underwriting.

Prince has spent more than $1 billion in the past three years to strengthen the bank's equity and fixed-income units, which are Maheras's bailiwick. He's added more than a thousand employees, partly to push the bank further into fast-growing ventures like energy, commodities and credit and equity derivatives, which are instruments whose value is based on the price of underlying stocks or bonds.

Fixed-Income King

Prince and Maheras say the investment is paying off. Once an also-ran in managing new stock issues, Citigroup topped the rankings in global equity underwriting for 2005, according to Bloomberg data. Revenue from equity trading rose 33 percent to $3.1 billion from 2004.

Citigroup also finished first in 2005 in global fixed-income trading, a traditional strength, with $9.6 billion in revenue.

The bank is trailing its peers in trading so far this year. Revenue for the first half was up 30 percent, to $8 billion, which put the bank fourth, after Goldman Sachs, Deutsche Bank AG and Morgan Stanley.

Citigroup today has $1.63 trillion in assets and offices in 98 countries. The bank earned $19.8 billion from continuing operations last year. It took in $83.6 billion in revenue, 40 percent of it from outside the U.S. Though Citigroup is still the world's biggest bank by market capitalization, the static stock price helped its closest rival, Bank of America, come within $2 billion of the company's $239 billion market value earlier this year.

Paid to Take Risk

Merrill Lynch & Co. analyst Guy Moszkowski says it's about time Citigroup spent money to improve its existing businesses and loosened its approach to trading risk. ``They probably underinvested in a lot of areas,'' he says. ``The world has changed a lot. Wall Street doesn't get paid not to take risks.''

The bank's value at risk (VAR), which measures how much capital a firm could lose in one day if all of its trading strategies failed, averaged $109 million in 2005, up from $63 million in 2001. That's because clients, especially hedge funds, demand that their brokers put up their own capital to back their customers' loans and trades, Prince says.

Citigroup is still more risk averse than many of its peers, given its massive size. Its VAR amounts to 0.15 percent of its shareholders' equity, according to Fitch Ratings. That compares with 0.58 percent at Goldman Sachs and 0.35 percent at Deutsche Bank.

If Weill shunned risk throughout his career, Maheras has courted it since he was a teenager. He started investing in stocks at age 14 and discovered options as a finance major at the University of Notre Dame.

Born to Trade

Within months of graduation, he was trading junk bonds on Salomon Brothers' storied fixed-income desk, at a time when that firm employed celebrated traders like John Meriwether, whose exploits were later chronicled in the 1989 Michael Lewis book Liar's Poker (W.W. Norton, 249 pages, $21.95).

Maheras grew up blocks from Midway Airport on Chicago's South Side. His father emigrated from southern Greece to the city in the 1950s. The older Maheras opened a restaurant, eventually owning five. The family moved to suburban Orland Park when Tommy was 12. His father played the stock market, and by high school, Tommy had found his calling.

At 14, Maheras poured his savings from several summer jobs -- a few thousand dollars -- into an account with his father's broker, betting it all on one stock: Bally Manufacturing Corp. He tripled his money.

An Early `Stinger'

Maheras says he discovered stock options a few years later at Notre Dame. Not all of his trades were winners; Maheras says he lost his entire $2,500 student loan check his sophomore year to options trades that turned sour. ``I did have that one stinger,'' Maheras says. With less than two weeks before his tuition bill was due, Maheras scrambled to borrow money from friends to avoid telling his parents about the loss.

Undeterred, Maheras spent the summer of 1983 as a clerk for Shatkin Trading Co. at the Chicago Mercantile Exchange, an apprenticeship that sealed his career choice. Maheras says he assumed that after college he'd return to Chicago to speculate on commodities as an independent trader. ``I was passionate about markets and trading,'' he says.

Then Salomon Brothers discovered him. Bill McIntosh, a senior Salomon executive who interviewed Maheras at the firm's Chicago office, recalls the young Midwesterner exuded the self-confidence that would later help him risk millions of dollars daily. Maheras turned down an investment banking job offer from Morgan Stanley to sign up with Salomon, spurning the advice of his parents and a favorite finance professor.

Out of the Midwest

When Maheras arrived at 1 New York Plaza in 1984 for training, all but four or five of his 75 classmates came armed with work experience and an MBA from Harvard University or another top school, he says. ``I grew up in the Midwest and didn't have any friends who came out here, save one,'' Maheras says. ``There were all these highly educated and worldly people in the training class. It was probably motivating.''

Maheras landed a seat on the high-yield desk of Salomon Brothers' fixed-income department. In 1988, McIntosh transferred to New York to find Maheras had met his expectations. ``He became one of the top two or three high-yield bond traders in all of Wall Street,'' says McIntosh, 67, who retired as head of fixed income at Salomon in 1995.

One of the men Maheras impressed was John Gutfreund, Salomon Brothers' CEO. ``I had a lot of people who were smarter and nicer than I, and he was one of them,'' Gutfreund, 76, says.

Maheras was working on the high-yield corporate desk in 1991 when Salomon Brothers' world turned upside down. Its government bond traders were accused of rigging the U.S. Treasury market.

Salomon in the Dock

Gutfreund, Vice Chairman Meriwether and President Thomas Strauss lost their jobs after regulators found they'd failed to supervise traders who had violated Treasury auction rules. Warren Buffett, a major shareholder, stepped in as chairman for 10 months. The incident swept away the top echelon of Salomon executives, leaving a leadership void for younger men like Maheras.

McIntosh recruited Maheras as a troubleshooter in 1994, moving him out of his junk bond post and putting him in charge of Salomon's troubled mortgage desk. In the 1970s, the firm had pioneered the market for bundling home loans into mortgage-backed securities and selling them to investors. In 1994, the Fed's decision to raise short-term interest rates triggered a drop in the value of Salomon's securities and losses of hundreds of millions of dollars.

Maheras says he unwound the desk's unprofitable positions, stemming losses within a year. The bigger challenge, he says, was convincing gun-shy traders to take new risks that would boost profit.

Seeing the Big Picture

Keith Anderson, chief investment officer for fixed income at BlackRock Inc., one of the world's biggest bond investors, says Maheras made the jump to management with ease. ``He became a person you wanted to call,'' says Anderson, who's worked with Maheras since the 1980s. ``Tom saw the big picture in terms of how his firm played a role between issuer and investor.''

Deryck Maughan, Salomon's former CEO, agreed, naming Maheras head of the entire fixed-income unit in December 1996. His ascent to senior manager complete, Maheras nevertheless kept a seat on the mortgage desk after his promotion.

In 1997, Weill's Travelers Group Inc. bought Salomon for $9 billion. Weill assured his new colleagues he wouldn't rein in the risk-taking culture that made star traders like Meriwether among the wealthiest men on Wall Street.

The honeymoon ended in 1998, when financial crises spread throughout Asia and Long-Term Capital Management LP, the hedge fund that Meriwether started after he left Salomon in 1991, fell apart, worsening the worldwide upheaval.

Weill Shuns Hedge Funds

By July 1998, Weill had seen enough; he ordered his deputies to shut down the bond-arbitrage trading desk in New York. The job fell to Maheras, who inherited the desk's positions. A year later, losses in London led to the decision to dispose of the European arbitrage desk.

When Rubin joined Citigroup in 1999, he said he found the firm in some instances was taking too little trading risk.

The LTCM fiasco also darkened Weill's view of hedge funds, Maheras says, adding that it's one reason Citigroup has fallen behind some of its peers in the now lucrative area of prime brokerage, or clearing trades for hedge funds and lending them money for their heavily leveraged bets.

``Sandy made it a bit harder to deal with hedge funds,'' Maheras says. ``The market events of 1998 definitely slowed us down.''

Kudos from Dimon

After Salomon became part of Citigroup, Maheras continued as head of fixed income for its Salomon Smith Barney unit, which in 2003 became Citigroup Global Markets. At Citigroup, Maheras's colleagues included President Jamie Dimon, who's now CEO of JPMorgan Chase. ``We developed a great relationship,'' Dimon says. ``A quality guy. He's a consummate pro.''

Dimon says he raised some eyebrows at Citigroup when he chose an office adjacent to Maheras's on the trading floor after being promoted to president.

Maheras's trial by fire came in August 2004. In a scheme they labeled Dr. Evil, after a character in the Austin Powers movies, six traders working for Maheras in London sold 11.3 billion euros ($14.5 billion) of European government bonds on the MTS market, plus 1.6 billion euros more in other markets, all in 18 seconds, according to an investigation by Britain's FSA.

The total exceeded the amount that changes hands on the MTS market in an average day. Seven minutes later, the traders started buying bonds back, accumulating 3.8 billion euros worth that netted them an $18.2 million profit.

A $26 Million Fine

Regulators from Britain, France, Germany, Italy and Portugal opened investigations into the trades, which they condemned as a violation of market protocol. The FSA assessed its $26 million fine against Citigroup for failing to supervise its traders and failing to consider the consequences of its actions.

The real financial penalty came later. In the past two years, the bank has lost most of its share of the market for underwriting European government bonds, Bloomberg data show. Citigroup's slice has shrunk to 2.3 percent from more than 10 percent in 2003. The bank now ranks 14th among advisers on European privatizations, down from third in 2003.

For a company already besieged by controversy and regulatory complaints, the timing of the MTS scandal couldn't have been worse. Prince recalls hosting a conference call on the crisis from the kitchen of his home with 20 of his lieutenants. ``I remember not believing that this could be happening,'' Prince says. ``It was beyond belief that this could all be happening at once.''

Dr. Evil

Maheras says he wasn't told about the London traders' plans until after they executed Dr. Evil. He says he never believed they violated any laws, and he refused to fire them, though four have since left the company. ``It was the straw that broke the camel's back,'' he says. ``And it was a straw.''

In February 2005, Maheras and William Mills, CEO of Citigroup's European investment banking unit, issued a statement. ``We regret having executed the trade because we failed to consider its potential impact on our clients and other stakeholders,'' they wrote.

Maheras's defense of the traders drew tough questions from fellow executives in Citigroup's consumer bank, who had to let go a team of employees earlier that year for coaching branch workers on how to handle questions from a regulator, people familiar with the episode say.

Georgetown's Angel says he is not surprised by Maheras's defense of the trades. ``Salomon, in days of old, had a reputation for swashbuckling traders,'' he says. ``If someone did something they thought was reasonable, and someone criticized them, they might say, 'Hey, what I did was legal.'''

`Cool Under Pressure'

``It wasn't a fun period,'' says Robert Druskin, head of Citigroup's corporate and investment bank and Maheras's boss. ``But Tommy is always cool under pressure.''

Prince hopes all of the controversy is behind him. ``In 2004, the rocks were falling on our head,'' he says. ``In 2005, we were digging out from the rocks. 2006 is the year we're focusing on growing the business.''

Prince has said he'll spend whatever it takes to make the bank's capital markets division more competitive in both fixed- income and equity trading and underwriting. ``It really represents a sea change for this place,'' Maheras says. ``The idea is that we're going to spend money.''

Maheras's capital markets department underwrites and trades stocks, bonds, currencies, commodities and derivatives from desks in 84 countries. Three of his top executives have been with him since his Salomon days. ``If you look at his management team, there's a lot of stability and knowledge and experience,'' Dimon says.

A Stable Team

Randy Barker and Geoffrey Coley, who co-head the fixed-income division, joined Salomon in the mid-1980s. So did James Forese, who now runs equities. Paco Ybarra, 44, a 19-year Citicorp and Citigroup veteran, runs emerging-market trading. Howard Marsh, 54, who joined Smith Barney, another Weill acquisition, in 1973, heads municipal bonds.

``It's a band that's been together very successfully for a long period of time,'' Barker, 47, says. ``Each person might go on to have very successful careers in different places, but I doubt the music would be quite the same.''

``Well said, Ringo,'' Coley, 46, quips.

The biggest part of Maheras's empire remains fixed-income trading. Last year, he and Rubin sought Prince's support for a new investment plan for the fixed-income department. The CEO agreed, and the three executives, along with Barker and Coley, developed a strategy to ramp up Citigroup's trading in newer markets such as credit derivatives and energy commodities.

Fixed Income Investment

The cost, says Maheras: $300 million this year alone, to hire traders and investment bankers and install new computer systems. ``Obviously, fixed income is key,'' Prince says. ``We cannot lose our pre-eminence in fixed income.''

Citigroup was Wall Street's top underwriter of bonds for the first half of this year, Bloomberg data show, and it was the No. 3 trader of fixed-income instruments by revenue, after Goldman Sachs and Deutsche Bank.

One business in which Citigroup has sought to expand is the trading of credit derivatives and structured products, or securities derived from bonds, mortgages and other debt. The market for one type of those instruments, credit default swaps, in which the seller guarantees to pay the buyer the par value of the bond in the event of a default, has expanded eightfold, to $17 trillion, since 2002.

Citigroup still trails banks such as JPMorgan and Deutsche Bank in trading those derivatives, according to research firm Aite Group LLC. Maheras hired Deutsche's Michael Raynes earlier this year to run the structured-credit unit and improve its position. Citigroup doesn't break out numbers on CDS trading, spokeswoman Danielle Romero-Apsilos says.

Building Up Energy

Maheras is also eager to build up energy trading. Outbid by Merrill Lynch for New Orleans-based Entergy Corp.'s trading unit in 2004, Citigroup opened its own energy desk in Houston last year, and plans to open another in Calgary.

While Citigroup's fixed-income department already ranks among Wall Street's biggest, equities has lagged. In the 20 quarters ended in June, Citigroup averaged $608.2 million in equity-trading revenue, according to UBS. Goldman Sachs produced an average of $1.59 billion a quarter in that same period, while Morgan Stanley averaged $1.06 billion and Merrill Lynch averaged $884 million.

Worse, its employees had grown accustomed to mediocrity, Forese, 43, says. ``Our fixed-income managers and employees come to work every day thinking they're going to win,'' says Forese, a former managing director in the fixed-income group. ``When I came to equities, people came to work just hoping to compete.''

League Table Champ

They're competing now, with Citigroup topping the league tables in 2005 in the underwriting of equity issues. In that year, the firm helped arrange 230 stock sales valued at $41.7 billion, according to Bloomberg data. In 2000, it handled 119 sales worth $32.9 billion.

Prince and Rubin spearheaded an overhaul of the entire equities department in 2003, when Maheras was still running fixed income. They put Forese in charge of the unit, hired more bankers and traders and made several small acquisitions.

In a bid to win more business from investors who have migrated to electronic trading, Maheras says the equities unit will unveil its own electronic communications network later this year. The ECN will help Citigroup hedge against the possibility that established exchanges will raise their commission costs as they consolidate power.


``You've got a duopoly with the New York Stock Exchange and Nasdaq,'' Maheras says. ``Who knows what they're going to do with their pricing over time?''

Citigroup may even open its own competing exchange. ``That's certainly a scenario, over the long run,'' Maheras says.

With new technology in place, Citigroup has increased its trading in equity-based derivatives. In 2004, the bank paid $237 million for a unit of Knight Trading Group Inc.'s options business. Revenue from equity derivatives rose 80 percent last year, Maheras says, partly because of the acquisition, and is on pace to climb 50 percent in 2006. He declined to provide specific numbers.

The company also aims to strengthen prime brokerage for hedge funds. ``We think that's one industry that's proven itself,'' Maheras says. ``It is growing and becoming more institutionalized. There are people who think the next market dislocation will completely upend that client set; we don't buy it.''

Citigroup has built up its hedge fund sales force, freed up more capital for the use of hedge fund clients and made its in- house holdings of stocks and other securities available to them for borrowing, Maheras says.

Guarding the Capital

Making more of the bank's capital available to its clients is the kind of risk Maheras and Prince are convinced is necessary. Citigroup, he notes, is still not in the business of risking capital on the kind of proprietary trading for which his alma mater, Salomon Brothers, was best known.

``What we're not going to do is become overly dependent on that part of the business,'' he says. ``We're not going to do what the old Salomon did with the arb unit.''

Even so, Merrill Lynch's Moszkowski says Citigroup remains conservative. ``The consistent results the firm has been able to have has emboldened them a little bit, but they're still cautious,'' he says.

Maheras says that right now there's good reason to be careful. ``Firms just haven't been through any significant volatility since the summer of '98,'' he says. ``Memories are short, and the next time you see real dislocation in the markets, the volatility in these trading businesses will be revealed again.''

Citigroup will continue to take on more risk for clients, Maheras says. And when the next market crisis hits, his traders will be ready to extend even more capital. ``We'll view that as an opportunity again to go into the market, use our resources to give capital to clients who need it,'' he says. ``We'll win market share during those tougher times.''

As always, Maheras is willing to sink millions into a calculated risk.