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Former Citi Chief Regrets Associates Deal

Review of The Real Deal: My Life in Business and Philanthropy

March 7, 2007


photo of Paula Parisot
Paula Parisot

The former Chairman and CEO of Citigroup considers the company's 2000 acquisition of Associates First Capital Corp. one of the worst acquisitions of his career, according to his biography.

The Real Deal: My Life in Business and Philanthropy written by Sandy Weill and Judah S. Kraushaar includes a 528-page detailed journey through the super-CEO's life and business ventures that began with the risk of his family's savings and another $30,000 borrowed from his mother.

Weill said he spent the first 10 years of his life in a modest three-story home in Brooklyn, and doing poorly in school in his teen years was sent to Peekskill Military Academy, where the discipline paid off -- he graduated near the top of his class -- and was accepted at both Harvard and Cornell.

He graduated from Cornell and later landed a job as a runner at Bear Stearns. Weill's attention to the inner-workings of the company set him up to be a successful stockbroker -- and the rest is history.

Weill discusses loyalty issues with partners and colleagues, risky financial moves both good and bad, and how his wife, Joanie, helped him stay strong through all of it.

One such financial decision that proved to be a disappointment to Weill was the acquisition of Associates First Capital.

Citigroup announced the acquisition of Associates in September 2000, even though its lending practices were already under scrutiny.

"Once owned by Ford Motor Company, Associates had overextended itself and had fallen prey to consumer activist groups who questioned whether the company had taken advantage of uneducated customers," Weill writes. "As a result, Associates' stock price had fallen nearly 50 percent from its high."

Sensing a value and with the encouragement from colleagues that the merger would "catapult" Citigroup into a leading position in U.S. consumer finance, the book says the deal was sealed for $30 billion.

In hindsight, Weill says he underestimated the "rising power" of consumer activists who had charged Associates with predatory lending.

Seemingly taking blame for the financial losses and mismanagement Weill writes, "We weren't especially familiar with the business, and I mistakenly left the unit autonomous rather than assign one of our executives to take responsibility."

He references the "common" practice of requiring low-income borrowers to buy life insurance and how regulators were soon investigating company practices. But that appears to be just the tip of the iceberg.

A complaint filed by the Federal Trade Commission in March 2001 alleged "Associates First Capital Corp. employed deceptive marketing to induce consumers to consolidate debts into high-cost, high interest rate home-loan refinancing, and consumers were also persuaded to buy expensive credit insurance."

Weill said the company extracted itself from Associates but not until it suffered "two costly settlements including one for $215 million."

"Ultimately, we paid a very big price both financially and in loss of reputation," Weill writes. "I consider it one of the worst acquisitions of my career since actual earnings results missed our forecasts by so much and diluted our return on equity."

review and buy book

Citigroup reported in a recent Securities and Exchange Commission filing that the agency is conducting an investigation into the treatment of certain specific tax reserves and releases related to accounting for the Associates acquisition.

A Citigroup unit will provide working capital to Ameriquest-parent ACC Capital Holdings as well as become the primary warehouse lender for the subprime lender, according to an announcement last week from ACC. That deal provides an option for Citigroup to acquire ACC wholesale subsidiary Argent Mortgage Co.

Paula Parisot is a MortgageDaily.com feature reporter and a blogger at CloserBlog.com who has also worked in the mortgage industry.

e-mail Paula at: [email protected]

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