At a time when The New York Stock Exchange is paying-off National Association of Securities Dealers members to take over its compliance responsibilities, private firms are seeking to reduce oversight evern further. For decades the securities industry has insisted its self-regulatory structure works best to protect the public. Yet, after massive fraud was discovered on Wall Street and billions lost by investors, instead of tighter reins on the industry oversight is shrinking.
The latest to reduce compliance may be Citigroup, now the largest financial firm on Wall Street, culminating with the amalgamation of Smith Barney and a number of other fiancial firms. According to the New Yok Times, after “a series of messy scandals”, including questionable research and alleged participation in such failures as Enron and WorldCom, Citigroup increased its compliance efforts. Yet, in an article this week, the Times states that that firm is now poised to reduce oversight of its operations.
Under pressure from investors, Citigroup CEP Charles O Prince, III will soon to release plans for a cost-cutting overhaul. Prince’s plan is reportedly to eliminate or reassign more than 26,000 jobs, or about 8 percent of the work force, as part of a broad effort to streamline the bank’s unwieldy global operations and get its costs under control. Citigroup’s consumer and investment banking businesses are expected to face severe cuts, but legal and compliance departments are likely to also take a hit, according to those who have been briefed on the plans.
Wall Street firms have not only managed to survive the rash of scandals, thanks to a friently court system, but have actually posted record profits. Meanwhile, while Citigroup has itself joined in the prosperity on Wall Street, its investors apparently beleive compliance is actually an “unnecessary evil”. WIth less threat of regulation and lawsuits, perhaps Citigroup’s gamble to reduce compliance will pay-off.
Citigroup officials insist that changes would be an effort to improve efficiency and coordination, not relax controls and that any effort to “optimize compliance” was distinct from the expense review. “We remain utterly committed to a strong control environment,” said Christina Pretto, a Citigroup spokeswoman. “It’s about getting things to work as efficiently and effectively as they can.” Observers note that one would hardly expect the firm to admit otherwise.
More recently, a series of rapid, huge eurobond trades by Citigroup bankers, referred to as a “Dr. Evil” trading strategy, roiled markets in Europe in August 2004. That fall, Citigroup’s private bank had a run-in with Japanese regulators over lax money laundering controls. For more than a year, Citigroup was banned by the Federal Reserve from making a big acquisition until its financial house was in order. Some suggest that the firms compliance has made it difficult to be competitive.
While Mr. Prince laid out a strategy to deliver internal and international growth, signs of progress on the financial front, so far, have been hard to find. In the face of growing investor pressure, Mr. Prince has cut back on some planned investment spending and placed a greater emphasis on acquisitions, including a $427 million purchase of the Bank of Overseas Chinese, based in Taiwan, that it announced yesterday.
But investors are also looking to see whether Mr. Prince can get the bank’s high costs in line. Alongside the expense review that Mr. Druskin is leading, Citigroup’s new chief financial officer, Gary L. Crittenden, is reviewing the company’s overall finances and operations.