By Christina Rexrode
Citigroup Inc. Chief Executive Michael Corbat last spring sent
out invitations for a retirement party at an Italian restaurant in
midtown Manhattan for Gene McQuade, a veteran banker with a
reputation as a behind-the-scenes troubleshooter and peacemaker.
Soon after, Citigroup failed the Federal Reserve's annual stress
test.
Not long afterward, Mr. Corbat sent flowers to Mr. McQuade's
wife, Peggy, with an implicit message: Sorry, but we need Gene to
stick around.
Mr. McQuade, now 66 years old, was previously the head of
Citigroup's banking subsidiary, Citibank, but Mr. Corbat asked him
to take on arguably the most important job at the global bank:
making sure that this year it passes the stress test, which is the
Fed's annual assessment of banks' ability to endure a severe
crisis.
Citigroup, the biggest bank to have its plans rejected twice,
has much at stake. Another stumble would surely rile shareholders
anxious for bigger returns--the banks have to pass the test to get
permission to raise dividends or buy back shares--not to mention
provide fodder for politicians and other critics who wonder whether
Citigroup is simply too big to manage. Mr. Corbat has said he would
step down if Citigroup fails this year. The stress tests, to put it
simply, are seen as a proxy for whether Citigroup can continue in
its current form.
"This," Mr. McQuade has told others at the bank, "is our
existential question."
The first set of stress-test results are slated to be released
Thursday, to be followed by a separate disclosure on March 11 in
which the Fed will rule on the bank's plan to return capital to
shareholders.
In tapping Mr. McQuade, Mr. Corbat chose a straight-talking
commercial banker who grew up in the housing projects of New York's
Lower East Side and put himself through college driving a taxi. He
is well-liked by both regulators and fellow bankers, according to
people on both sides, and is known as a go-to person for managing
through a crisis.
"He's absolutely the person you want in a conflict situation
where the stakes are high. Smart, ethical, keeps his cool," said
Dick Kearns, a senior adviser to Zurich Insurance who went to St.
Bonaventure University with Mr. McQuade and served with him as a
university trustee during a 2003 recruiting controversy that saw
the coach, athletic director and president leave the school.
"If he were an airline pilot, he'd be Sully Sullenberger," who
safely landed a passenger jet in the Hudson River in 2009.
The stress tests measure how the big banks would fare in a
severe recession. But the problem last year wasn't Citigroup's
projected capital levels--which were well above what regulators
required--and so the solution isn't as straightforward as tinkering
with the balance sheet. Instead, the Fed told Citigroup it had
concerns about the bank's general ability to assess risk. Mr.
McQuade over the past year has led Citigroup's efforts to try to
discern what the Fed wants and how best to deliver it.
Under Mr. McQuade's guidance, Citigroup has renovated its risk
models to better assess various types of risk and how they might
affect the bank, and hired more compliance employees, according to
conference calls and speeches that bank executives have made to
analysts.
It has attempted to address a complaint from the Fed that its
risk procedures were too centralized at headquarters by pushing
more decision making to bankers closer to the ground. And it has
tried to adjust the view that the stress tests are just an annual
exercise, instead urging workers to ask themselves, "How will this
affect the stress tests?" when making day-to-day decisions.
Citigroup declined to comment on its stress-test procedures,
beyond information it has made publicly available in conference
calls and speeches.
"We really need to turn this into an A-plus paper," Mr. McQuade
told others at the bank, according to people who have worked with
him.
Mr. McQuade previously held senior roles at FleetBoston
Financial, including president and chief operating officer, and was
known for management-committee meetings at which he handed out
reports showing each business with a red, yellow or green ranking
for the month. Executives with red scores--the lowest of the
three--had to stand up and explain the results, a tactic meant to
make them stick to the facts without time to make excuses.
When some would complain, "he would say, 'No, this is how we're
going to do it,'" said Bob Hedges, who worked with Mr. McQuade at
Fleet and now is a bank adviser at consulting firm A.T. Kearney.
"[The process] vetted out squirrely things. It made sure people
gave a simple explanation."
When Fleet was sold to Bank of America Corp. in 2004, Mr.
McQuade was slotted to be president of the combined institution but
left soon after the deal closed, indicating he wasn't happy with
being asked to focus on operations, instead of banking, according
to interviews he gave at the time, and said he wanted "a bigger
challenge."
Mortgage-finance company Freddie Mac then tapped him to help fix
an accounting scandal. At one point, he caused an internal uproar
by suggesting that the firm cut the amount it spent on lobbyists,
according to Mr. McQuade's former colleagues. When the board
offered him the chance to be CEO, he turned it down.
Mr. McQuade joined Citigroup in 2009, a bank still reeling from
the financial crisis. Sheila Bair, then the head of the Federal
Deposit Insurance Corp., made it clear that she thought Citigroup
was run by risk-loving hedge-fund managers and investment bankers,
and that it needed a commercial banker--if not in the top job, then
at least in its executive ranks.
Ms. Bair calls Mr. McQuade "one of the few instances regarding
Citigroup where Tim and I finally agreed," referring to Timothy
Geithner, then the president of the Federal Reserve Bank of New
York. Mr. Geithner declined to comment.
When he became head of Citibank in 2009, Mr. McQuade ruffled
some feathers by shutting down trades that were inappropriately
being routed through Citibank, an unpopular decision among the
traders who were doing so, according to regulators and colleagues
who worked with him. "They said, 'You can't tell us what to do,'
and he said, 'Well sorry, I'm the CEO of the bank,' " said one
former colleague.
Citigroup also shuttled Mr. McQuade around to other problem
spots like Citi Holdings, where it stores bad assets it wants to
sell, and Japan, where the bank has had run-ins with regulators and
is now selling its consumer bank.
Mr. McQuade has indicated that he is ready to leave the bank no
matter the outcome, according to people close to him. He doesn't
plan to have a retirement party.
Write to Christina Rexrode at christina.rexrode@wsj.com
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