(FORTUNE Magazine) – CHARLES O. "CHUCK" PRINCE has been CEO at Citigroup for just over a year--he succeeded the larger-than-life Sandy Weill on Oct. 1, 2003. And we can think of him as having endlessly fought a war, on three separate fronts, with a wide range of results. Prince, 54, talked forthrightly to FORTUNE about those campaigns on Nov. 10, settling his big frame into an easy chair in his office and speaking, as he always does, confidently.

The first front for Prince, of course, has been scandal--one embarrassment after another. Citi has been a serial sinner, seldom out of the news.

The second front is Citi's bottom line, which in 2004 has been beaten down by an amazing $8 billion in scandal-generated charges but has still come through triumphantly. If Citi manages to earn in the fourth quarter what it did in the third, it will have no less than $17 billion in profits for 2004. That would be its second-best year, close behind the $17.8 billion earned in 2003.

The third front is the company's stock, which they live and die for at Citi and which during Prince's reign has been a rank disappointment, rising by a mere 3%. Meanwhile the U.S. banking companies closest to Citi in size have done much better over the same period: Bank of America gained 22%, and J.P. Morgan Chase 14%.

The low-class state of the stock--Citi sells at about 12 times trailing earnings--suggests that the market has been more impressed by the scandals than Citi's powerful profits. That's no wonder, considering the large amounts of newsprint Citi's sins have consumed. The huge charges the company took in May are the residue of the Wall Street scandals--WorldCom, Enron, and the like. Next, the Federal Reserve fined Citi $70 million, a record in the consumer-lending field, for abuses in its consumer-finance division. And in China Citi suspended two executives who, it says, lied to regulators and to the company (about matters it won't reveal).

Then there are the two really notorious episodes of 2004. One of them, an August bond scandal in Britain, did not involve illegalities. Instead, Citi's London office, using an electronic trading system, aggressively dumped $11 billion in Eurosovereign bonds on the market, swooping in a little bit later to rebuy--at lower prices, of course--about a third of that total. Citi's competitors were outraged, and Britain's Financial Services Authority is investigating whether the trades interfered with its goal of an orderly market.

Still more notoriety--because we have unarguable illegalities here--has attended Citi's problems in Japan, mostly centered on its Private Bank. This bank made Citi $84 million in 2003, or about 15% of Private Bank profits worldwide.

Regulators in Japan, though, recently characterized the operation as basically out-of-control and have ordered it closed. Among the bank's transgressions, said regulators, were laxity in screening customers, including one suspected of money-laundering; the sale of unsuitable and even legally prohibited products to customers; and a general sloppiness in the way the business was run. Overall, said the regulators, "Bank Headquarters"--that would be at 399 Park Avenue in New York City--asked annually for too much in revenues and profits from the operation, meanwhile "deprecating compliance."

For all that, very big heads rolled at Citi. After a two-day meeting of Citi's board in mid-October, a bare-bones press release announced that "Thomas Jones, Deryck Maughan, and Peter Scaturro will be leaving the firm." In Citi's matrix organization, all three had some responsibility for Japan. Scaturro, 44, who had been highly regarded for his profit-making abilities, was head of the global Private Bank. He reported to Jones, 55, who ran global Investment Management. And Maughan, 56, was head of International. An indication of just how extraordinary those firings were can be grasped by the fact that, in the period before Chuck Prince was named CEO, both Jones and Maughan were sometimes mentioned as possibilities to get that job.

So what does Prince, the man who instead became boss and carried out these public hangings, say about all this? Lots. (And, eventually, he even gets around to really answering our first question.)

LOOMIS: One thing that struck me is that in all that's been written about Citigroup's problems--and if I overuse the word "scandals," I'm sure you'll correct me--there's been very little mention of the fact that more than two years ago, Sandy loudly decreed that henceforth Citi was to be a model of clean living. We even had a big article in FORTUNE about this. Naturally, Citi's people were to operate legally, but also with the highest ethics--and in ways that Sandy described as "more socially acceptable." Given the run of scandals, what are we to think about those lofty ambitions? Was that just public relations?

PRINCE: No. I think you have to think of the actual problems we've had. There have basically been two in recent times. We've had the Japan problem and the U.K. problem. They came together contemporaneously, but they're radically different.

In Japan we had bad people on the ground, doing bad things, flouting the law. We had an audit in 2001 by Japan's Financial Services Agency that said stop doing those bad things. So we stopped, got a piece of paper from PriceWaterhouse in 2002 that confirmed we had, handed it to the FSA, and it said, "Thank you very much."

And then almost immediately we went back to doing A, B, and C again. As soon as the lifeguard left, we went right back into the pool.

Under the same managers?

Yes, same managers. Long-timers. And then when the FSA came back a year and a half later and discovered we had gone right back to doing these things again, they felt they had been misled. And that's a very bad place to be with a regulator.

Do you agree they were misled?

I think the regulators were appropriately unhappy. And I think we could have then easily handled things better than we did, but the fundamental problem was that we had fair warning not to violate certain rules and procedures and our local people, I would say, were not respectful of that regulatory environment. Fundamentally, when you have that kind of conflict, you're always going to lose.

So that's one example. This was a multiyear problem involving people who, if not consciously, then almost consciously, violated the rules.

The trade in the U.K. is entirely different. Our people there came up with some ideas on how to utilize a system. Over a week or so they got somebody to build technology that would allow us to hit all of these open positions at once. And we did that. And it's being looked at by regulators, of course. But it's not violative of any direct rule or legal standard. It doesn't follow any kind of regulatory warning. It's not a repeat, recidivist kind of a problem. It obviously upset the trading patterns on this particular system, and we take very seriously the notion that we shouldn't go around doing that. But these things are apples and pineapples. They're completely different.

I know that. But you haven't mentioned the charges you took back in May, and the $70 million Fed fine, and then the mysterious suspension in China of two executives.

But there's a right way to think about that. No organization is going to be perfect all the time. No organization--let me mix the negatives--is never going to have no problems. The key is to have a structure in which problems are aberrations, outside normative practice, and then for that to be dealt with quickly and decisively. And I think the example you've mentioned of China--that was a good example where we took action very quickly, not based on regulatory input, not based on someone holding a gun to our head. We simply responded there to something that doesn't fit Citigroup's standards.

I believe that a lot of people out there would have trouble thinking of the spate of problems you've had as aberrational. There have just been so many, and they don't seem to stop. Now perhaps part of what's happening is that Citi is so big and therefore headline material. But even so, what people are seeing doesn't look aberrational.

I think there are two things going on with that. First, it's clear that Citigroup has tremendous reputational assets. We have the best brand in financial services, and by the measurements I see, the 13th-best brand among brands of all types. We've got by far the biggest platform around the world. We've got an almost 200-year history. We've got the biggest balance sheet, the most revenues, the best returns.

You can't have those positives and not have prominence. Those things go hand in hand. I tell my colleagues, you can't take the good stuff and not deal with the corollaries, like headlines.

But what we do have to recognize is that we have special responsibilities that come with all those leadership aspects. Some of these responsibilities are to the franchise itself. I tell my colleagues you have to think of us as taking our lap in the relay race, and at the end of the lap handing the baton to someone else. None of us are entitled to consume the franchise--chew it up--or use it in a way that diminishes it over the long term.

Let me come back to the Japan Private Bank. The regulators' findings, with their criticism of headquarters, got me to thinking that Citi, and Travelers before it, have always pressed for earnings, earnings, earnings. So what responsibility do you think top management bears for setting budgets--we're talking now about budgets vs. behavior--that say what counts is you make your numbers?

Yep. I've thought about this a lot. What I believe after an intense period of self- reflection is that we have, and have had, a culture that celebrates financial performance. And I was part of building it. I didn't just arrive from Morocco.

John Reed told me once that culture is a set of shared, unspoken assumptions. And when we were a smaller company, those unspoken assumptions had great weight. I think that the larger the company has become, the more we need to speak about those unspoken assumptions. We need to add to our celebration of financial performance a focus on long-term compliance activities, long-term franchise building, being in it for the long term.

So one of the things we're going to put into place, starting in 2005, is a series of activities--training, communications, performance appraisals --that will lend a little more balance to the aggressive financial culture that we have always celebrated, and that I still do. We're not going to turn ourselves into a charity. I don't believe we have in any way a corrupt organization or a bad organization. But I believe the celebration of financial results causes a few people at the edges to act in ways that are singular.

Well, the changes you're talking about might bring balance to the discussion. But if the financial demands are still there, and if they are known to be important in this company, as they obviously are, then the pressure on the people who have to meet these quarterly targets continues to be very, very strong.

I worked with Sandy for 18 years. I was part of celebrating that we were going to grow aggressively. I never thought for any of those 18 years, and I know the rest of the team never thought, that you had to say to people, "We want to grow aggressively, and don't forget not to break the law." You don't have to say those things to people. Of course you can't do things that break the law. Of course you can't do things that damage the franchise on a long-term basis. Short-term growth at the cost of long-term growth is a very bad trade. And some people make that bad trade when they only hear one instrument in the orchestra. If they hear the full orchestra, the full panoply of messages, then people have "no excuses"--that's the sign on my desk--for acting in an inappropriate way. Will some people still act inappropriately? Sure. But I don't believe that fundamentally our 300,000 employees are driving over a cliff because of earnings targets. If I did believe it, I wouldn't come to work tomorrow.

You sent a strong message to the organization with your ouster of three very senior people. Now I'm going to ask a really rude question: If you demand that your senior people take responsibility for wrongdoing that occurs in their operations, why shouldn't that responsibility extend to you?

It should extend all the way up and down the line. But I want to make sure that I'm clear about one thing: We do not live in a zero-defect environment. The standard for management in Citigroup is not that if there is a problem in your organization, you have to leave. The standard is that if you are a manager you have to take responsibility and accountability for fixing problems.

That's the real nub in Japan--that this problem got fixed once and then occurred again?

I'm going to stay away from talking about individuals. But the standard for Citigroup managers is that you have to effectively and efficiently and crisply--in furtherance of protecting the organization--deal with problems as they come up. And I myself expect to be held to that standard.

So how does your board feel about Japan and, to a lesser extent, the British problem?

I think the board feels much as I do, which is that it is profoundly embarrassed when an institution with Citigroup's history is dragged through the mud.

I would say that what you were trying to do two years ago, insofar as shaping up Citi's behavior, was pretty close to what you're trying to do now. Certainly there was a change then in the paradigm. Nobody at Citi had talked before about living a totally clean life. And it didn't happen.

I agree with that. And I was part of that, right? Now, why didn't it happen? The lesson to be learned is that no matter how strong the tone at the top--if it's only me giving a speech or Sandy sending out a memo--it's not enough. We're too big a place. You've got to cascade things down, so that they get inside the organization and real things happen differently.

You've talked about changing your compensation metrics. How?

We're in the process of finalizing how this is going to work, so it may change a little bit. But first, we have a diversity of historical legacies--Citibank, Smith Barney, Travelers, Schroders--that we ought to celebrate because of the strength they give us. So we can't homogenize everything.

But if you run a consumer-finance branch in Ohio or you're on a trading desk in Hong Kong--wildly different businesses, wildly different performance metrics--there still ought to be something that is common to being part of Citigroup. We're all connected. If the person in Ohio does something bad with the name, it can impact somebody on a trading desk in Hong Kong. Recognizing that fact is important.

So I would expect that starting in 2005, one part of our performance appraisal process will be three to five questions that get at the franchise issues that are implicated when you put on the Citigroup jacket and come to work in the morning. Some of those will be qualitative. Does the manager making judgments think that the employee being appraised is doing a good job with this or that? And some of it will be quantitative. What do your audit results look like? What do your self-assessment results look like? How many problems have you had or not had?

The other part of the performance appraisal would be individual to your business unit but might have franchise factors in it as well. There could be customer satisfaction data, for example.

It's clear that we have to actually change something. If it's just making speeches, people will forget it in the first quarter. And cynicism will be brought into the organization.

A question related to what you've been saying: In Japan what effect has your problem with the Private Bank had on your other businesses? I see, for instance, that the annuity business in Japan is down.

Doug Peterson, our new CEO in Japan, tells me that there was a natural and perceptible decline in our business activity--different in different pieces, but across the board--as a result of the profound embarrassment of the Private Bank situation. That, of course, is a negative. We don't want to shrink our business in Japan. But when something happens that is as remarkably bad as what happened in our bank there, I think it's very natural that our reputation will be tarnished.

What Doug also tells me is that the actions we've taken--including our acceptance of responsibility and our public apology--have had a very positive effect. And so I would hope that within a relatively moderate period of time we would be able to resume not only our growth in Japan--in the rest of our business, not in the Private Bank, of course--but also our reputation for being very top level. In most places in the world, Citi is a premier brand.

You've also made it clear how important the whole of Asia is to your future. What repercussions have there been in the rest of Asia because of what happened in Japan?

I think it's like anything else: The closer you are to the center of the earthquake, the more damage there is. But I think whether it's next door to Japan or in my office with you asking me questions, the Japan situation has gotten noticed around the world.

When did you find out about the Japanese problem, by the way?

Our president, Bob Willumstad, and I began to sense problems early last spring. After that, the noise level accelerated. We put Doug Peterson in as CEO in June, but by then most of the damage had been done.

Let me completely switch subjects: In my articles I have quoted John Reed a couple of times questioning whether, over the long term, Citi can ever make money on the corporate side of its business. What are you thinking these days about that proposition? I know you ran Citi's Global Corporate & Investment Bank (GCIB) for a while and worked hard at figuring out how to make money in equity trading.

I've said often that corporate banking as a slice, on its own, is not particularly attractive. But overall, I think GCIB is a good business to be in. You do have to think about this business as a continuum. You have to lead the target and think about where the business is going to be in three to five years.

So, viewing GCIB as a whole, one thing is we're at a low point in the cycle. But if you look back over two or three cycles, the capital markets business is a pretty good business. It will always be there because you need an intermediary between the users of capital and the providers. But what's happening is that through a natural process, I believe, of consolidation, and of transparency, things are becoming more and more commoditized. So that means if you're going to be in that business, you have to have much more value added and have absolutely state-of the-art technology and be prepared to work on a big scale. That's where we already are in fixed-income. We have the best fixed-income franchise in the world, hands down.

In the equities business, we missed the turn four or five years ago when things moved from an agency business to more of a principal business. We were slow on the uptake. So we're going back to building a business that can compete at the premier level in the capital markets business. I think the trading business has moved to a business where scale is important and also the ability to move quickly.

You certainly did that in Britain.

With respect, Carol, that was a cheap shot. I was really talking about being able to deal on behalf of the large institutional customers quickly and effectively, and being able to commit a billion dollars of capital overnight, which is what the market is moving toward.

Two questions: How would you sum up your first year plus a month and some days? And as part of that, what have you done that you're proudest of?

I'll give you what I'm proudest of and what I wish I'd done better. On the first point, I think we had a good transition from Sandy to me. You see a lot of places where a founder kind of person retires, and the place falls apart. We haven't had that.

Also, I think turning the organization to an organic-growth focus was a very positive thing. We used to have a model where we'd wait for Sandy to shoot a moose and drag it home, and we'd all feed on it. That model doesn't work anymore because the family's too big. We have to grow our own food.

In what I wish I had done differently, I wish I had been more public with everyone, especially our teammates around the world, in terms of leading this discussion of franchise. I think I was slow to recognize the need for doing that, and it's partly because I was part of what we built. I was part of celebrating that.

Through it all, you're still maintaining your goal of having double-digit earnings growth?

Over time. We've always said over time.

Of course, double-digit ranges from 10% to 99%.

If it gets to 99, I'll let you know.

You wouldn't allow your picture to be taken for this article, and you've said you don't want to be a celebrity CEO. What's your thinking there?

I think that way too much effort goes into personalizing the CEO. I'm uncomfortable with that. There are enough pictures of me around.

How do you feel about the level of your stock?

There are three things about our stock that have kept it relatively low. One is that big global companies are out of favor. Another is that people are uncertain about us because they don't want us to do a big capital markets deal--which I don't want us to do either. Every time there's talk about our doing that kind of deal, our stock goes down.

And the third reason is that every time there is a reminder of our past problems, that is a natural depressant on the stock. Take the second quarter, when we made those additions to our reserves. That occurred after we went through a huge process to arrive at the right number. And when we then established the reserves, we got rid of a huge part of our liabilities. They're settled, gone, off the table. But obviously, when you do something like that, you remind people about all the Wall Street scandals.

I believe personally that if we can have even as few as four or five quarters of solid organic growth, with nobody rattling around that we're about to do some big deal, and with us making it clear that we're dealing quickly and effectively with a low incidence of human problems ... if you put all that together, then I think the stock ought to have a good year. I believe people would then see us correctly as being the natural leaders in financial services. ■