Citigroup's confused chemistry


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When Citibank and the Travelers Group merged, the hype was about cross-selling retail products. Citi's distribution network and Travelers' products would be a potent combination, claimed Sandy Weill and John Reed. The investment banking brew had less to offer and was expected to be more troublesome. But so far it isn't working out like that. The investment bank is the success story. Meanwhile, cross-selling isn't working. Antony Currie reports

Sandy Weill

Citigroup is in big trouble. A strange thing to say given its great results, exceptionally strong capital base and its avoidance, thus far, of too many debilitating conflicts of ego. How tempting it must be for co-CEOs Sandy Weill and John Reed to portray this as a smooth ride well planned. But the merger was sealed with a handshake and not much else. No detailed business plans were drawn up, no decisions were made on who'd run what. It was close to flying by the seat of one's pants.

Short-term success has caused many to forget this. But it is blinding insiders and outsiders alike to the problems that are developing.

An unhappy future

Consider this projection. Within five years Citigroup will have to be broken up. Weill will have had to continue his acquire-and-cut-costs strategy to keep earnings up, all the while causing more cultural problems and increasing bureaucracy. Investors hoping for a banking play will be increasingly irritated at the volatile returns from the investment bank and the low returns from insurance underwriting. And they will not be at all impressed with the slow, haphazard progress in retail cross-selling making any significant impact on returns and earnings per share.

So far, only the integration of the corporate and investment banking divisions - Citibank's global relationship bank and its capital market effort with Travelers' Salomon Smith Barney - is going well. The integration of Citicorp's commercial bankers with Salomon's untamed investment bankers was always the wild card. It seemed unlikely that executives from these starkly different cultures would ever do more than lob missiles at each other.

It still bears the scars of three mergers within two years. And it is not the division that Reed and Weill expected to be the star of the group. Indeed, at Citicorp Reed had avoided investment banking and said openly that he didn't particularly like investment banking nor did he have any plans to acquire his way into it.

But with Salomon Smith Barney achieving a 31% return on equity in the last quarter, way up on the firm's usual 10% to 15%, and income for 1999 estimated to approach $4 billion, the nay-sayers have been silenced. Cynics might argue that a decision to keep Citi and Solly managers separate is the key to this success.

There is a more profound reason. Clients were hungry for the creation of a single platform for loans and bonds, and its has led to a slew of equity and M&A mandates. While pure investment banks have struggled to develop their lending capabilities the new Citigroup could provide this service at a stroke. But putting loans and bonds together was almost an afterthought, a decision taken at a managers' meeting on a show of hands.

Yet it is not envisioned as the vehicle for growth. For that Citigroup will have to rely on cross-selling consumer finance products, something that has yet to be achieved with any degree of success by a US firm.

Mike Carpenter

The Citibank side was riddled with bureaucracy and the Travelers side, which is driving the merger, has yet to prove its mettle. Travelers was successful in creating value for its shareholders in its 12-year life span. But mainly because Weill was adept at spotting companies ripe for cost-cutting. Its record in top-line business revenue growth was less stellar and not enough to drive Citigroup's desire to double revenues every five years. The merged entity is following the same path. "The early economics of this deal rest heavily on cost-cutting," says Merrill Lynch's banks analyst Judah Kraushaar. "They have cut at least $2 billion this year, mainly from the consumer businesses, especially from managing Citicorp's end more efficiently. There's probably another $1 billion to strip out next year."

Citigroup is relying on the apathy of customers for its business to grow, assuming that retail customers prefer to have all their products under one roof at a time when they can get better, nimbler, cheaper service from a host of competitors and bundle them together themselves. The internet is making this process even easier, making Citigroup's strategy looks dangerously complacent.

It is evident in other divisions. Citi sells mainly just its own products. But more and more customers want to shop around for themselves. And who can blame them? Bank-run mutual funds have not been the best performers; there are cheaper credit cards; loans and mortgages are available on-line more cheaply.

The retail broking side provides an even better example of complacency. The US market has been awash with criticism for the past 18 months about how full-service brokers are ill-prepared for the internet, with Merrill Lynch bearing the brunt. Yet the only substantive difference between Merrill's retail brokerage and Salomon Smith Barney's is simply that SSB is not quite as big. Both charge a lot more per trade than on-line discount brokers, and the service they typify as value-added - extensive research and advice - can now be found more cheaply on the net. Merrill had started to see accounts migrate to on-line supremo Charles Schwab and others. In June last year it changed its model to offer both full-service and discount broking.

SSB sounds like Merrill in the old days, denying the trend to on-line broking, claiming its clients would never go for such a service. Salomon Smith Barney seems to be more worried about keeping its brokers happy, as Goldman Sachs analyst Richard Strauss reported after a meeting with joint Salomon Smith Barney CEO Michael Carpenter last October where he said: "He feels a one-price-fits-all strategy would not be effective for his organization, as brokers will resist such a mandate." This refers to Merrill's decision to charge customers $1,500 a year for nearly unlimited trading.

The group does, at least, have a viable alternative: Citibank has on its website a discount broker, Direct Access. But for some reason there is no link to it from the SSB site. Citigroup defends this by claiming that its clients are discerning, looking for research and service not just the transaction. This comes close to making the same mistake Merrill did.

Weill shunts Reed aside

And it is Weill's to rectify. For there is no question that this is now Sandy's show. He approached Citicorp, where his counterpart John Reed was more interested in linking up with American Express. He is visible and more approachable. Reed is not, and has been shunted aside.

That this has happened without serious ructions or the departure of Reed is a success. Banks like to play this issue down but ego clashes at the top are the most common reason for failure. In choosing to make these two heavyweights joint chief executive Citigroup was running a big risk. Reed and Weill were the embodiment of their separate institutions, and unlikely to yield to the other without a bitter struggle, most observers thought.

And such power-sharing was replicated in almost all the major businesses. In part it made sense: neither knew much about the other half. But it also looked like a call to turf warfare. Yet with the notable exception of the first joint CEOs of the investment bank, this has been largely avoided.

Nonetheless, Weill, and the Travelers side, has won out. For confirmation, look to how the two divided responsibilities last summer. For the previous year, joint decisions had been required on everything - necessary but cumbersome. In July, Weill took effective control of the business and financial running of his behemoth. Reed returned to his first love, technology, including the effects and uses for e-commerce. Oh, and he is responsible for legal issues too.

Look also at the 20-strong senior management group. Robert Rubin and new senior risk manager Petros Sabatacakis were appointed from outside after the merger. Seven are former Citicorp executives. Eleven are from Travelers, including chief financial officer Heidi Miller, asset management CEO Tom Jones, and Robert Lipp, head of consumer banking.

Capital to spare

Deryk Maughan

What Citigroup has in its favour is its financials. Unlike other US financial services mergers of recent years, it has hit its cost savings target for 1999 ($2 billion). Its stock stood at $56 at the end of the first week of December, up 166% from its opening price of $21 in October 1998 (a more modest 25% on the composite stock price when the merger was announced). The group made $2.5 billion in the third quarter of 1999. "We have $52 billion in equity, which is more than any other institution, and much of it is tangible," says Miller. "And we have very strong capital ratios [9.5% tier one]. That puts us in a very strong position to handle any upheavals around the world as well as to leave us with enough space to grow the businesses and take advantage of opportunities when they come along, whether by building or buying."

The Glass-Steagall Act has been effectively repealed, and Citigroup has somewhere in the region of $9 billion in excess capital to splash out on new acquisitions. Weill and Reed even managed to win the services of the patron saint of US financial markets, former US Treasury secretary Robert Rubin.

The group's diversity and its strong capital base bring benefits, says JP Morgan's banks analyst Catherine Murray: "Their big advantage lies in their ability to tap into business opportunities as they present themselves among the various businesses they have."

Reed and Weill have an ambitious target: by 2010, they would like to command 20% of the global consumer finance market. That's one billion people to supply with credit cards, bank accounts, loans, mutual funds, insurance, the lot. It's not a new target: Reed had set it for Citicorp, which had 65 million customers after having tapped the consumer sector in just 42 of the 100 countries in which it had a presence. Travelers adds a host of insurance, retail broking and other financial products.

But that figure of one billion should be seen as a declaration of an aggressive outlook, rather than taken literally. "It's an indication that we want to grow the top line of the business," says group CFO Miller.

It doesn't take a genius to work out that emerging markets are where much of the growth in consumer numbers will have to come from. Although there are a variety of opportunities in the US, it has too many banks. Citi's US retail branches have not been particularly profitable. They are in the process of being revamped to become financial services centres. And Citi faces a huge amount of competition from other commercial banks, such as Chase and HSBC in New York and BankAmerica elsewhere. Other rivals in consumer services include Merrill Lynch, whose cash management account has a strong nationwide presence. And Charles Schwab makes much better use of technology.

Europe, another overbanked market, is no fertile hunting ground either. That leaves mainly Latin America and Asia, where Citi has operated since the start of the 20th century. Citigroup aims to expand the number of countries in which it has a consumer business and to turn those banks into respected local players. The precedents are Argentina and Brazil, where Citi is the third and seventh largest retail bank respectively. It is a well-respected name in Asia and Latin America, and benefits from being seen as a safe pair of hands. In the financial crises of the last two years, Citicorp/Citigroup branches in many emerging countries reported large rises in the number of new accounts.

At present the group's revenue split is roughly 6% to 8% from asset management, 46% from corporate and investment banking, 46% from consumer finance, and the rest from venture capital. Seventy per cent of revenue comes from the US. The foreign share is predicted to increase, but the US market will prove the real testing ground for the merger in the next three years.

Any buyers at the one-stop shop?

It's 8pm on a midweek evening, and he's sitting in class, something this man in his mid-50s thought was behind him. He's not studying computer science so that he can keep up with what his kids are doing. He's a branch manager for Citibank, and has been sent back to school to learn how to be a manager of the future. This means having to pass tests about advising on the array of products that Travelers' Group brought to the merger. He and his colleagues are studying for the Series 7 general securities representative licence (without which you can't sell stocks and bonds), Series 63 (to be able to sell to clients in other states), and other qualifications.

Citibank has spent 1999 retraining its branch employees as foot soldiers in Weill's grand cross-selling scheme. Travelers concentrated on domestic financial products from insurance to retail brokerage until it bought Salomon Brothers in 1997. "Weill loves the consumer side of financial services," says Kraushaar at Merrill Lynch. "And that's the side he wants to drive revenues."

History is not on the side of cross-selling. The US has hardly been its best testing ground, being a heavily regulated and segregated market. But there have been previous attempts. "I was at Norwest in the mid-1980s when we launched a huge cross-selling effort," says one banker who now works for the M&A group at one of the top investment banks. "I'm sure they'll admit that it has been a very tough experience for them."

Another discouraging precedent is First Union, which has bought over 80 franchises of differing business lines in the last 12 years and tried to market a variety of services to its customers. In 1997 it discovered that 43% of its customers used only one product. A study by consultants Booz-Allen & Hamilton has found that the average customer uses 2.3 bank products: the main ones are the ubiquitous cheque and savings accounts and a credit card. And a survey of 125 global institutions by Ernst and Young discovered that 67% of them had no idea whether they were cross-selling more or fewer products than 10 years ago.

Cross-selling requires mining information about customers, their spending habits and financial needs. That's difficult in a resolutely cheque-based society like the US. Deciphering habits from written cheques is time-consuming and relatively fruitless: it tells you nothing about what customers have bought and why, just that a certain person or business has received money. Information from credit and debit cards offers offers only slightly more insight, as much of it is retrieved and kept by data-processing companies rather than the banks.

Compare that to the data-gathering opportunities at on-line consumer sites. " is the ultimate cross-seller," says one analyst. "It knows its market, and can make great use of the data it gathers. If it starts selling mutual funds the banks and brokers ought to be worried."

Add on the insurance business and it's even more complex. Already, some analysts are concerned. Says Brown Brothers Harriman banks analyst Ray Soifer: "No-one at Citigroup has ever been able to prove to me how these synergies [between banking and insurance] will positively affect return on equity. And I've been pressing them on it since the merger was announced."

Miller is quick to set out the Citigroup take on cross-selling: "What we can offer is the ability to bundle products for companies and consumers, but that does not mean we're trying to be some kind of financial supermarket."

Instead, Citigroup's cross-selling efforts are trying to be more focused. For example, Citicorp's mass-market mortgage product has been offered to the Salomon Smith Barney retail brokerage clients and brought in roughly $500 million in new business in 1999. This product is not as suitable for the mainly lower-middle-class client base of Primerica Financial Services, a Travelers business of 170,000 contract agents who sold insurance over the kitchen table, but are now being told to sell Citibank products as well. For this market Citigroup is offering a secondary mortgage product: Miller claims it's bringing in $500 million revenue a quarter.

But cross-selling involves changes for staff and customers. Employees will have to change their way of working. Warburg Dillon Read analyst Tom Hanley was at the launch last February, held in New York's Madison Square Garden, of Primerica's programme to cross-sell Citibank products. The 8,000 sales reps present were fired up, reports Hanley: "The atmosphere was characteristic of a World Wrestling Federation event, complete with a smoke-filled stage and blaring rock-and-roll music. We were struck by the cross-sell opportunities presented to the Primerica reps and their very enthusiastic reaction to them."

That bodes well, but these are commission-based reps, happy with anything that can increase their take. Bank staff are different, and changing their method of compensation is never popular.

Then there is the challenge of the internet. All financial services are faced with the same issues. Technology is saving on infrastructure, costs, and time and allowing a quicker and greater flow of information than ever before. In short, the customer is finally becoming king. This means that Citigroup runs the risk of offering exactly what customers wanted 10 years ago: a full range of financial products, exclusive to the institution, just as more and more customers are looking to bundle products from a variety of places for themselves.

Miller remains convinced by the logic of Citigroup's strategy. "The easier cross-sell is in the investment bank," she admits. "The Citi-Salomon Smith Barney link has been very successful so far. Much harder is cross-selling consumer products, but that's where the big bucks are." When and where they will start coming through, she doesn't say.

Others are sceptical. "You can come up with some fantastic statistics on how much Primerica is selling Salomon Smith Barney's mutual funds to its customers, or the number of insurance policies you sell with a car loan," says Kraushaar. "But just how significant is the impact on earnings?" Kraushaar is not suggesting that there is no money to be made in consumer services, but he is not convinced by consumer cross-selling as a big money-earner. "There are intangible factors out there, and if you allow for those it can be profitable. But it's hard to track. The cross-sell on the wholesale side is far more meaningful."

Back to the big league?

Investment banking was the part of the merger most people expected to flop. Early on, the corporate bankers at Citi barely seemed able to work with their new Salomon brethren. A banker at another institution witnessed the disarray. He was considering candidates for the mandate to create and structure a synthetic collateralized loan obligation. He had a few banks in mind, with Citigroup his preferred choice. He invited over a loans banker and a credit-derivatives specialist, one from Salomon Smith Barney and one from Citibank. One of the pair arrived an hour late and had to make his pitch without the presence of his new counterpart. "He gave a completely different analysis and offered a completely different solution," says the banker. "There was no co-ordination at all." He gave the deal to another institution.

That happened in the second half of last year, a time when co-ordination between Citibank and Salomon Smith Barney was allegedly improving. Proof of the impossibility of bringing the two together? Perhaps not. Derivatives and structured products is one of the only areas of product overlap. It is embarrassing nonetheless, given that such products provide the higher fees investment banks need. Still, this time last year most observers expected such howlers to be regular

When Victor Menezes and Michael Carpenter took over as joint CEOs of Salomon Smith Barney in November 1998, it was in a terrible mess. A month earlier
Citigroup had announced that Citibank's corporate operation would be integrated with the investment bank.

Lines of responsibility had still not been finalized. Guidelines for which half would call clients were non-existent. And the only reason Menezes and Carpenter had been appointed was that the previous pair, Jamie Dimon and Deryk Maughan, didn't get on with each other, and had nearly come to blows at a dinner-dance. Maughan was kicked upstairs as group strategist, Dimon, Weill's presumed successor, was kicked out.

Menezes is a career Citibanker, most recently CFO, and not an investment banker, although he has built up a series of rewarding corporate relationships. Carpenter, an Englishman, was previously in charge of Travelers' life and annuity company. He is best remembered as the man who presided over Kidder Peabody as it went belly-up over $350 million trading losses in 1994. "When I joined Travelers Group, this [running an investment bank] was not something I had in mind," said Carpenter at the time of his appointment. "It wasn't something I had in mind a week ago."

It had all the makings of a collapsing franchise. Commercial and investment bankers could never work together, said the received wisdom. Bankers would get frustrated, business would fall off, bankers would leave, more business would fall off. But the vicious circle didn't happen. Despite a number of defections and some mistakes on deals, the integration has far exceeded the benefits yet to flow through to the consumer-banking division which drove the merger.

Carpenter says: "At the start of 1999 I thought I'd be happy if, by year-end, the operation was running relatively harmoniously and if we hadn't lost market share. In fact, we've increased it." There are more than 300 deals in the past year where the firm wouldn't have participated, or would have had a more junior role, without the merger of Citi and SSB, and of SSB with Nikko Securities in Japan. "Revenues are up 60% on deals related to the Global Relationship Banking franchise, up 60% in Europe, we're in the top three in international bonds and number one in US debt beyond 13 months." An end to Merrill Lynch's dominance, perhaps?

At Citigroup's head office in mid-town Manhattan, former Salomon CEO Maughan gives his own appraisal. "The three-way merger has elevated the whole profile of the investment-banking operations. It's got an implied market capitalization of $60 billion, and we'll have close to $4 billion in net income this year, against $1.5 billion or so at the major competitors."

Maughan is now one of Citigroup's three vice-chairmen, and has responsibility for overall group strategy including asset management and consumer banking, new territory for him. His survival in the firm owes as much to Weill as does Dimon's departure. A gruff Englishman, Maughan placed the call to Weill in 1997 that led to the latter buying Salomon.

Former colleagues describe him as surly, at times condescending. As an investment banker, he was not readily accepted by the trading-dominated firm. Salomon staff had a much warmer relationship with Dimon. When Dimon made his final tour of the dealing room in New York, he received a standing ovation. "He really understood and cared about the business," says one former colleague. "And about those who worked there." Maughan got no such send-off.

Nonetheless, Maughan is the man most responsible for Citigroup's biggest coup since the merger: the link-up with Nikko in Japan. Citigroup bought a 9.5% stake in Nikko Securities for $1.8 billion, including convertible bonds worth a further 15.5%, and set up a joint investment bank, Nikko Salomon Smith Barney, with Nikko holding 49%.

The investment bank started operations last March, and has made rapid progress. It advised Ripplewood, on buying Long Term Credit Bank and Japan Tobacco on buying RJR International, also syndicating the $5 billion loan to Japan Tobacco and underwriting its bond issue.

And then there is the deal Maughan is most proud of, winning the lead slot for NTT's $15 billion equity offering which he takes as a seal of approval from the Japanese government, which awarded the mandate.

Maughan claims he has no complaints about being relieved of command at the investment bank in late 1998 and put in charge of developing group strategy. Nor would he want to return. "I enjoy what I'm doing, especially the liberation from the day-to-day running of Salomon Smith Barney," he says. "I still work with Victor [Menezes] and Mike [Carpenter] to develop the strategy and facilitate the integration with Citicorp's corporate bank. But I have also enjoyed learning about the consumer side of the business. Sandy and John said to me: 'It's a great canvas, go and paint on it.'"

His replacements, Menezes and Carpenter, moved quickly. "We felt we had to establish clarity throughout the organization," explains Menezes. "There was little point us trying to force a 60,000 foot view on everyone. So we went for a more measured, client-centred approach."

This meant a refusal to force Citi's and SSB's corporate calling teams into unification. Instead, they asked customers what they preferred. The divide is being maintained, explains Carpenter. "We've got a parallel structure for our corporate relationships. The Citi and Solly managers will remain separate for business purposes, while the senior executives each take a role in maintaining relationships at a Citigroup level." He, Menezes, Reed, Weill, Maughan and Rubin will each take responsibility for a certain number of clients.

This approach appears to be working. Cross-selling has succeeded. There has been little overlap, either in business lines or indeed in customers

It makes for a powerful mix: on the one hand, a commercial bank with great relationships in 100 countries, and on the other a near-top-tier investment bank with the missing products. And, says Charles Berman, Salomon Smith Barney's debt capital markets head in Europe, the investment bank has already been given a leg-up by an earlier merger. "Since the Travelers acquisition, there has clearly been a shift of resources towards our client driven businesses, the benefits of which can be seen from our performance." In other words, Salomon is no longer perceived as carrying the risk profile of a hedge fund.

The firm moved away from proprietary trading because Weill wanted to reduce the risk profile. Carpenter now claims the prop trading book stands at $7 billion, down from $100 billion before Travelers took over. As events in 1998 were to prove, scaling down was a shrewd move, which made it feel all the worse to the traders. "The crisis in 1998 made Weill look clever," says one former Salomon employee. "That just made the takeover even harder for us to swallow."

A distinctive culture

Debt capital markets suffered less than equities from the Travelers takeover. The prop book is all but gone, but resources are now available for Berman and others to invest in their businesses. There was little overlap with Smith Barney. But in equities, the merger was painful, and Smith Barney managers seem to have won out over the Salomon Brothers dealmakers. "We had a distinctive culture, aggressive and risk taking." says a former employee of the equities division. "We'd take the ball and run with it. Smith Barney [culture] was one of mediocrity, and that was a terrible mix. They've diluted the gene pool. To be a managing director at Salomon was hard work. At Smith Barney, it was a joke. If you could breathe, walk, and chew gum, you could be a managing director no problem."

Market share doesn't come overnight. You don't suddenly get mandates because you can offer a strong capital base, deep client contacts and a product range that you never had before. A look at the equity and M&A markets in the US and especially Europe shows that it's tough going. Debt products are the easiest target, the low-hanging fruit as Carpenter puts it, especially for a bond specialist such as Salomon.

Clients want to see research and commitment first. Nowhere is this more evident than in Europe, where Salomon has always been an also-ran outside of Eurobonds. In part this was a chosen profile. "We used to commit a significant proportion of our resources to proprietary trading," says Michael Klein, managing director, vice-chairman, and co-head of Salomon Smith Barney's European investment banking division. "Since July 1998, we've focused on reducing the risk profile of global arbitrage activities and committing resources to customer-focused operations instead." Klein moved from New York to London in early 1999 along with several other key bankers to beef up the firm's non-debt products in Europe.

Klein reels off numbers to support his firm's commitment to Europe: 800 people were added to the operation in 1999. There has been a big increase in staff for equity sales and trading. There are now more than 180 research analysts, compared with 80 in 1996. And 125 bankers have been added, some of whom have been transferred from Solly's US operations. They bring expertise in telecoms and financial services, two areas where Salomon has traditionally been strong
in the US. "These two sectors make up 45% of European M&A at present," says Klein. "We're the top telecoms bank in the US, and have this year been hired by Deutsche Telekom, Telecom Italia and France Télécom."

Will the firm buy Warburg Dillon Read? Menezes and Carpenter don't deny outright that the idea has piqued their interest, but they don't feel it's a necessary play. "We are confident in our European build-out strategy, but there is no obvious, single answer. So we have looked at various operations there," says Menezes. "But none of them bring us exactly what we want - a pan-European presence."

Most analysts and competitors view Menezes' and Carpenter's tenure as temporary, and expect a single CEO soon. "They don't have the same charisma as Dimon did," says an employee. "And in the long run that's what you need to run an investment bank." So are the CEOs aware that they're viewed outside as caretaker managers? They won't comment.

Keeping the investment-banking unit on track is crucial at this stage. If indeed the group does fail to make retail cross-selling a viable money-spinner, then investment banking will continue to account for a large portion of Citigroup's earnings. And if there is another market calamity, be it in the US or emerging markets, Salomon Smith Barney will be hit hard, and Citi's stock will plummet. Reed and Weill claim to intend to limit SSB's downside to 10% ROE in a bad year. Even if it is that manageable, it will hit hard. Reed, the banking industry's chief opponent of investment banking over the last decade, will not be impressed; Weill, Salomon's saviour and patron, will be forced to make some unpalatable decisions. In the meantime Citi's much-trumpeted plans for retail will remain unfulfilled. Time to start rushing after those emerging market retail accounts, Mr Weill, or get prepared for the messiest divorce in financial markets history.

Rubin's appointment affirms Reed and Weill's
conversion to investment banking

Where the rubber meets the road

Ann Lane

There's one major problem with making your views known. If they're anywhere near half decent, you might be asked to act on them. That is exactly what happened to Ann Lane and Chad Leat in late 1998.

The pair were brought into a high-level meeting to discuss how to manage the new group's strengths in loans and capital markets. Neither was particularly interested in getting saddled with the loans department: Leat in fact had worked in Chase's loans division before the merger with Chemical Bank, and had moved to Salomon Brothers so he could join the high-yield desk.

But nor did either of them see the need to keep loans separate. So they proposed forming a single business platform for all loan and debt products, to be run from the Salomon Smith Barney side rather than Citibank. An integrated leveraged loans platform, they argued, would be a great sales tool, and it would steal a march on the competition. "We told them that all the major bulge-bracket firms aspire to have something like this," says Leat.

A quick look around the market in recent years confirms that. Merrill Lynch, Goldman Sachs, Morgan Stanley and Lehman Brothers have all made concerted efforts to develop lending capabilities to increase the flexibility of their services. Whether in basic corporate finance or complex M&A transactions, leveraged loans can be a great way of winning business. How else would Chase, a bank that lacks a significant equities division, be able to muscle its way into the top 10 league table for M&A in the US?

Predictably, some on the Citibank side were not convinced, choosing to believe that separation was still the best strategy. They said that Citi had turned its lending business into a niche strategy, concentrating on lending to large multinationals in OECD countries and the major emerging-markets companies. They argued that US leveraged lending was no longer in its repertoire by the time of the Citigroup merger. If they had already decided to get out of the business why would the merger make it any different?

These sceptics were voted down, and it was decided to give the leveraged loan brief to Leat and Lane, who used to run Citbank's corporate debt restructuring before moving to head up the bank's global aviation industry group in 1996.

Behind their strategy lies the simple observation that the bond and loan markets are not as distinct as they used to be. "The process of making a loan and issuing a bond has become increasingly similar," says Leat. "Yet they still have different uses. So by combining them under one business we can focus more on offering solutions rather than hawking products."

The combination of Citi's relationships and loan product, with Salomon Smith Barney's fixed-income prowess could prove to be the foundations of a very powerful business. Already, others are noticing its potency. "It's a very strong argument they can put forward in pitching for deals," says a debt capital markets banker at a rival US firm. "I've seen a couple of their presentations, and they're impressive. We're already noticing that on head-to-head pitches they are increasingly winning more than we are."

Notable deals have included a mandate from Rohm & Haas. Usually a Goldman Sachs client, the company came to Citi-Solly looking for a loan. "We showed them some alternative suggestions, and they gave us the business," says Leat. That was a $2 billion bank facility, a $2 billion bridging loan, a $2 billion multi-tranche bond offering, and $4 billion in commercial paper. Joint bank and bond deals were done for DaimlerChrysler and Wells Fargo. And M&A mandates have followed too, such as for Japan Tobacco in its acquisition of RJR International and the financing package for Repsol's takeover of YPF.

It is, says Lane, proof that leveraged lending "is where the rubber meets the road, in terms not just of where loans and bonds meet, but also where Citi and Salomon Smith Barney meet."