Citi's CEO joins others caught in the credit crunch

— -- With firm determination, Citigroup CEO Charles Prince declared earlier this year that 2007 was going to be the "year of no excuses."

Now he's run out of them.

Amid growing losses from subprime mortgages at the giant financial services firm, Prince, 57, retired under pressure on Sunday. He said it was "the only honorable course for me to take." Former Treasury secretary Robert Rubin, a board member and chairman of the company's executive committee, will serve as chairman of the board. Sir Win Bischoff, chairman of Citi Europe, will serve as acting CEO, the company said.

Citigroup c also is lowering the value of some of its securities tied to subprime mortgages. It estimates the value of those securities, at fair market value today, would be $8 billion to $11 billion less than it expected just Sept. 30. That write-down would be in addition to a $6.5 billion write-down it has already taken. The company also said a special unit has been set up to handle the subprime mortgage problems. Citi said it has no plans to reduce its dividend.

Rubin, 69, may be a reluctant leader for Citi. A senior executive at Goldman Sachs before he joined President Clinton's Cabinet as Treasury secretary, he has resisted calls to head Citigroup since joining its board in 1999.

In this new role, he'll be part of a committee to find a new permanent CEO. Rubin said the group intends to complete the search "as expeditiously as possible."

Prince's departure was not a complete surprise. It was the second major resignation at a Wall Street firm in a week, and is part of a tightening crunch for those at the top of financial services firms.

Companies have come under increasing pressure from shareholders for underestimating losses from complex securities tied to bundles of risky mortgage loans made during the run-up in housing values. But now home values are dropping, and an increasing number of borrowers are defaulting on their loans. Merrill Lynch merCEO Stanley O'Neal was pushed into retirement last week following the worst quarterly loss in his firm's history.

The purge is not likely to stop there, some analysts say.

"There's a newfound sense of accountability at these boards, but where have they been before?" asks Jeffrey Sonnenfeld of the Yale School of Management. "Only now, with a sense of public pressure and a sense of liability that they haven't had before, are they acting."

Prince has come under fire as losses from so-called subprime mortgage lending have skyrocketed. Last month, the company announced that third-quarter net income fell 57% from a year ago, to $2.4 billion, amid more than $6 billion in charges and write-downs. At the time, Prince said the quarter's figures were "frankly, surprising."

Citigroup's stock has fallen nearly 30% this year, below the price of the stock on the day that Prince became CEO on Oct. 1, 2003. Yet during Prince's four-year reign as CEO, stocks of other financial services firms have grown robustly.

Prince is not without defenders. Richard Bove, bank analyst at Punk Ziegel, says it would be "obscene if this guy gets thrown out."

Others say the time is right for Prince to go.

"This is a necessary move," says Bill Fitzpatrick of Johnson Asset Management, which holds Citigroup shares. "The stock is basically in free fall. There needs to be a change at top."

Other CEOs hit hard

Change at the top is becoming somewhat common in the financial services industry.

UBS, ubs the Swiss banking giant, deposed its CEO Peter Wuffli last summer after it had to shut a hedge fund that invested in mortgage-backed securities.

Bear Stearns bscCEO James Cayne barely survived the implosion of two hedge funds this summer by firing a number of his firm's top executives, including the co-president.

Other executives who have been tarnished by the collapse of the subprime mortgage industry and the evaporation of value in derivative securities built on subprime mortgages or other risky investing strategies include Countrywide Financial's cfc Angelo Mozilo and Bank of America's bacKenneth Lewis.

The open season on bank and brokerage CEOs follows a period of unprecedented growth in the nation's financial sector. From 2004, Wall Street's financial giants posted record earnings and then topped those records in succeeding years.

It's now apparent that some of that record-setting growth, particularly in 2006, was fueled by outsized returns generated by bets on the frothy subprime mortgage industry. When the mortgage bubble popped early this year, the collapse in value of collateralized debt obligations based on those loans exposed the nation's biggest banks and brokerage firms to billions of dollars in potential losses.

Bank analyst Bove takes a dim view of the musical chairs being played on Wall Street.

"Maybe they're going to fire every person who runs a financial institution in the U.S.," he says.

A tough first act

When Prince took over as CEO of Citigroup in 2003, he followed his friend and mentor Sanford "Sandy" Weill into one of the most powerful executive seats in the world.

Weill had built the world's largest financial institution through a combination of gutsy mergers and acquisitions, challenges to government regulation, and a tempestuous personality. He was a dealmaker, a talker. His famous temper and huge pay packages — he made more than $1 billion during the 1990s — made him the epitome of the imperial CEO.

Prince, on the other hand, had been Citigroup's top lawyer and had virtually no operating experience in the institution. But he had led the company out of a maze of financial scandals — and record-setting government penalties — that were the result of its involvement in the collapse of Enron and WorldCom early this decade. The company paid $2.6 billion to WorldCom investors in May 2004 and $2 billion to Enron shareholders in June 2005 for its part in aiding those companies in massive accounting fraud.

In business circles, Sandy Weill was a rock star.

But Prince, well, Prince was a lawyer.

Trouble with a turnaround

Bove says Prince inherited a mammoth company with a lot to fix. With $2.4 trillion in assets, it is the largest U.S. bank by assets. It operates in retail and commercial banking, credit cards, investment banking and, through its Smith Barney unit, stock brokerage. Citigroup employs about 300,000 people in more than 100 countries around the world.

"If you look at how much difficulty Citi had gotten into in the period before he took over, it was a five-10 year job to turn the company around," Bove says. "To assume you can wring out problems because you put one guy in charge doesn't make sense."

Bove says the losses from Citigroup's bets on the subprime mortgage business were bad, but on other fronts, Prince made progress.

Fitzpatrick of Johnson Asset Management says he never viewed Prince as more than a five-year CEO. Fitzpatrick hopes the next CEO moves quickly to sell some Citi assets, such as Smith Barney. He was glad to see the company taking additional action other than a management change. "That's indeed what I was hoping. The Prince resignation by itself was not enough to ease concerns of investors."

The company's latest write-down of its subprime mortgage-backed securities is "an indication of how severe the subprime problem indeed is." But he added, the company is far from being out of the subprime mess. "There are still some more shoes to fall," he says.

Jack Ablin, chief investment officer at Harris Private Bank, doesn't want Citigroup broken up.

"As a shareholder, I still like the strategic direction of the firm," he says. "It would be a shame for someone to take a quick turnaround, trading mentality to have the stock pop for the next six months. This is really an organization that needs long-term focus."

Contributing: Chris Woodyard