- On Thursday, Citigroup announced that its CEO, Michael Corbat, would retire effective February 2021.
- The move took Wall Street by surprise, as many believed the 60-year-old Corbat had several more years at the helm.
- Corbat's departure came after it became clear regulators were losing patience with his inability to fix risk, compliance, and technology systems, according to those familiar with the matter.
- Business Insider spoke to seven current and former Citi employees, all of whom wanted to speak anonymously to describe private conversations, about preparations for Corbat's early retirement.
- The authorities at the Office of the Currency Auditor and the Federal Reserve are now preparing to punish Citigroup for failing to fix its control systems. The Wall Street Journal reported Monday.
- You can find more stories on the Business Insider homepage.
When Citigroup's press release hit the wire at 8:30 a.m. last Thursday, all of Wall Street was unprepared.
The current CEO Mike Corbat, only 60 years old, will step down as head of the third largest US bank in February and hand over the reins to 53-year-old Jane Fraser. The change makes Fraser the first female CEO of a major U.S. bank.
Fraser's selection wasn't what surprised people – as president of the bank since October 2019, she was the obvious heiress – but the timing of the announcement did. When Corbat named Fraser president last October, he was said He looked forward to "running our company for years to come".
Continue reading: Wall Street shatters a glass ceiling when Jane Fraser is announced as Citigroup's new CEO and the first woman to run a major US bank
Instead, he pulled back after it became clear that regulators were losing patience because he was unable to fix risk, compliance, and technology systems, according to those familiar with the matter.
Business Insider spoke to seven current and former Citi employees, all of whom wanted to speak anonymously to describe private conversations, about preparations for Corbat's early retirement.
"It was always Mike's plan to retire in 2021," said a company spokeswoman.
Around the time Fraser was named heir to Corbat, the CEO announced to some board members that he intended to finalize a three-year financial plan that ended on December 31, 2020, according to one knowledgeable person. Whether that meant retiring two months later or staying longer the CEO wouldn't say, the person said.
Under Corbat, Citigroup struggled with compliance and technology
The authorities at the Office of the Currency Auditor and the Federal Reserve are now preparing to punish Citigroup for failing to fix its control systems. The Wall Street Journal reported on Monday. Regulators are expected to issue a consent decree asking the bank to fix its risk systems, the newspaper said.
However, they did not request that Corbat resign, according to a person with knowledge of these conversations.
"Although we never comment on our discussions with regulators, we are fully committed to improving our risk and control environment," said a Citi spokeswoman. "We appreciate the urgency of the tasks ahead."
The decision is the end result of previous efforts to convince Citigroup to set its risk controls. For example, this year Citigroup had a number of open compliance and technology-related issues which, according to one of the people familiar with the matter, were described in regulatory notices known as Matters That Need Attention and Matters That Need Immediate Attention .
Citigroup was long overdue a number of them, the person added.
The notices are issued privately by regulators when they find controls or systems that are not up to standard, and they usually have set deadlines within which the bank is expected to fix the weaknesses or come up with a plan. The Board of Directors is often included in these releases.
As 2020 went on, tension increased with regulators, a second source familiar with the matter. Authorities resented Citigroup's non-compliance on a number of issues and felt unheard, the person said.
In August, Corbat sent a company-wide memo describing some of these challenges.
"We have to look at infrastructure and controls very differently," he wrote in the August 10 message. "We can't see them as something that is important to our regulators. It's not about doing remediation projects or ticking boxes."
Then $ 900 million mistakenly changed hands. The bank sent that amount – enough to repay principal and interest owed – to a group of lenders to Revlon who tried to get paid. The lenders were involved in a legal battle with the company when Citigroup submitted their payment.
The bank is now embroiled in multiple legal disputes to recover the remaining money.
See also: Citi quietly underwent a massive reorganization over the past year. Here are the outdated companies and the executives who left the company.
The episode was just the last reminder that the bank's controls were still out of date in some areas, 12 years after the financial crisis exposed a patchwork of technology systems that weren't talking to each other.
Citigroup is the amalgamation of dozens of companies that glued Sandy Weill and his predecessors together over decades, and the bank has rarely taken the time to harmonize technology systems.
These decisions have come back repeatedly to harm the bank. Seven years after the financial crisis, Citigroup paid hundreds of millions of dollars to meet the claims of an overly loose compliance regime in its Mexican entity. Corbat sent Fraser to rule Latin America from Miami and clean up the chaos.
See more: Citi is reducing its presence in expensive locations to fund its investment in risk technology after the bank's "unacceptable" Revlon bug
Last year the bank paid £ 44 million to settle with the Prudential Regulation Authority of the Bank of England over a lack of regulatory controls and governance issues in some of its European entities.
While many banks have spent years improving their systems, the fines and lack of progress have been evidence of Corbat's focus on cost controls, one respondent said. The CEO, who had made operational efficiency and return on equity a hallmark of his strategy, was often reluctant to spend the money or hire enough people to fix a problem the right way, the person said.
And now Fraser has money to spend: $ 1 billion to improve Citigroup's infrastructure and technology systems.