May 9, 2008: 4:55 PM EDT
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Citi promises to rein in risk

Wall Street will be looking for proof that Citi can follow through on plans to build its business without increasing risk.

By Carol J. Loomis, senior editor at large

NEW YORK (Fortune) -- A high-up Citigroup executive, chief administrative officer Don Callahan, had predicted that Citi's Investor Day, held Friday morning, would have to deal significantly in "promises," and that turned out to be the case. Citi is expecting to cut close to $500 billion from its $2.2 trillion balance sheet; to exit unprofitable client relationships; and to overturn its "silos" and really complete the 1998 merger of Citicorp and Travelers. Said CEO Vikram Pandit: "We're finally going to merge it all."

Perhaps Pandit's most important statements had to do with risk, the mishandling of which has led Citi (C, Fortune 500) to take around $35 billion in writedowns within the last year. "If we can't get risk right," Pandit said, "nothing else I'm saying will matter."

Taking up where Pandit left off, chief risk officer Brian Leach talked about the "sheer vastness of the Citi franchise" and explained the elaborate risk structure he's set up to deal with it. The structure focuses in turn on regions, businesses (such as wealth management) and risk products (such as real estate). The whole kit and caboodle, Leach said, "must avoid negative outcomes that destroy value."

An analyst familiar with Citi's aggressive ways later questioned whether the company has a culture capable of scrupulously avoiding risk. Pandit and Leach both spoke of making sure the culture is changed. The important thing, said Pandit, sounding intense, is that "the risk manager has an ability to say no."

Chief financial officer Gary Crittenden spoke about the determined efforts that the management team is making to cut costs, including the rationalization of its randomly-designed technology. But analyst Guy Moszkowski of Merrill Lynch questioned whether technology improvements weren't going to chew up a lot of money and impede Citi's return to good earnings levels. Crittenden answered that Citi's intention of substantially increasing its revenues would generate the funds needed for spending on technology and other essentials.

Some of the revenue gains, said John Havens, head of the institutional clients group, should come from businesses that Citi wants to expand in - prime brokerage, for example, which serves such clients as hedge funds. That's a business that Havens, Pandit, Callahan and Leach all know from Morgan Stanley, where each was an executive before making his way to Citi.

In general, the analysts asking questions sounded skeptical, as if they'd heard - true! - an awful lot from Citi in the past about cutting costs, increasing efficiencies and containing risk. Pandit himself acknowledged that his management team is singing an old song, but asked his audience to believe that this time the words will be backed up by action - which is still another promise waiting to be delivered on. To top of page

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