Prince Alwaleed: Why Chuck had to go

In a Fortune exclusive, Citigroup's biggest single investor talks about his disappointment in Chuck Prince, the bank's colossal losses, and his views on a successor CEO.

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By Andy Serwer and Barney Gimbel, Fortune

(Fortune) -- In the midst of staggering losses and intense public scrutiny, former Citigroup CEO Charles O. Prince III could always count on the support of the company's biggest individual shareholder: Prince Alwaleed bin Talal bin Abdul Aziz al Saud. Less than a month ago, the Saudi prince, who owns 3.6% of the company, even dismissed a sharp drop in earnings as a "mere hiccup."

But Fortune has learned that Prince Alwaleed and other major shareholders agreed last week that, if Chuck Prince didn't offer his resignation after the news of the additional $8 billion to $11 billion writedowns, they would publicly call for his ouster. In an exclusive interview, Prince Alwaleed, speaking by phone from the desert outside Riyadh, talked with Fortune's Andy Serwer and Barney Gimbel about the final days of Chuck Prince's tenure at Citigroup (Charts, Fortune 500).

Fortune: When Citigroup first reported the writedown three weeks ago, you said that you supported Citi and Chuck Prince. Do you feel like you were misled? Did the situation change? What happened there?

Prince Alwaleed: Let me tell you the facts. Basically when Citigroup pre-announced the $6.4 billion writeoff, Chuck Prince called me within five minutes of the announcement and informed me of that loss and I told him bluntly and openly, "Is this the end of the story? Did you think of everything?"

His answer was "yes" and he expected normalization in the fourth quarter. I listened to the analyst discussion he had with everybody else and he said there would be normalization in the fourth quarter. So obviously, this gave me comfort that this was a onetime event and only an aberration and I backed off.

Although the writeoff said $6.4 billion, post-tax $3.4 billion, if you compare this to the equity of Citibank and the profits of Citibank in the third quarter, there was a $2.4 billion profit. So it was a hiccup assuming that this was a onetime event. But what happened two or three weeks later, another $8 to $11 billion additional write-off, the situation changed completely.

You cannot come to the public and say that this normalization is expected in the fourth quarter and then three weeks later, not three months later, you come and say there is an $11 billion writeoff. This is unacceptable. That's when the events changed completely. My backing was withdrawn dramatically. You should never commit to something that you can't deliver. Never.

Q: When did you learn about the additional write-down?

A: I got a sense that something big was going to happen when the 10K was delayed.

Q: Did Chuck Prince call you to talk with you about the delay?

A: No, but it was public information.

Q: [Former Citi CEO] Sandy Weill was in town then as well.

A: Sandy was in Riyadh.

Q: Did you meet with him about this? Did he come over specifically to talk to you about Chuck or was that a regularly scheduled visit?

A: Sandy meets me more than four or five times a year. I will meet him in Riyadh or in the United States. We are very close friends. Last week, Sandy was in Riyadh and he met me and we discussed many things and obviously one item on the agenda was the results of Citibank. We discussed the situation, what was wrong and why things are happening like that. But remember, this was before the additional $11 billion was announced.

Q: When you heard that the losses were going to be greater, did you immediately question your support of Chuck Prince?

A: Immediately my support was withdrawn. He got my message very clear that my support has been withdrawn because I cannot really tolerate that, obviously. You can't go publicly and say that our losses are around $3 billion post-tax and then all the sudden add another $11 billion loss.

Q: How did you let Chuck Prince know?

A: I was in touch with him. In the last two weeks, we were in touch almost every two or three days. Four or five calls over the past 10 days.

Q: Did you ask him to resign?

A: No, I did not ask him to resign, but I told him my support is no longer there.

Q: Did you think that Sandy Weill should come back on an interim basis?

A: No, no, Sandy is not seeking to be president. What Sandy likes to do is to be involved in the process of selecting a new boss. Sandy told me, "I have no aspirations whatsoever to be CEO or chairman."

However, he would like to be involved in the process of selecting the boss for Citi because Citi can't afford to have another loss. The situation right now is unacceptable for a bank like Citi with $2.5 trillion in assets and $120 billion of equity, and is in more than 100 countries. It's a pity for Citibank to be in this position. It's not right. We can't afford to have another blunder like that.

Q: Are you concerned about Citigroup's position right now?

A: No, Citibank will withstand everything. Frankly speaking, you can imagine the strength of this company. Even with the $6.4 billion writeoff they took in the third quarter, this company had $2.4 billion of profit. So this company can withstand a lot of pressure and a lot of stress because its equity is so big.

Q: Do you have assurances that there aren't going to be more losses when they reevaluate the debt again?

A: No one is sure of that. The situation right now is they took around $6.4 billion pre-tax losses in the third quarter. They announced another $8 to $11 billion pre-tax loss for the fourth quarter. However, Citibank was able to absorb the $6.4 billion and the $8 to $11 billion -- I wouldn't say comfortably -- but they were able to withstand that.

Q: Are you disappointed in Chuck Prince?

A: I am extremely disappointed with Chuck Prince and I believe that Chuck Prince let down the shareholders completely. Citibank did not conduct itself in the right way. The risk-management situation was very wrong at Citibank.

Q: Who is the right kind of leader for Citi now?

A: I was in touch with the board when they selected Mr. [Robert] Rubin as chairman and Mr. [Winfried] Bischoff as the [interim] CEO. Mr. Rubin called me and I am very close friends with Mr. [Richard] Parsons of Time Warner (Charts, Fortune 500), who was involved in the search process. I am in touch with them on a continuous basis.

Q: Do you have anybody in mind?

A: Frankly speaking, I don't have anybody in mind. I trust Mr. Rubin. I trust Mr. Bischoff. I trust Mr. Parsons. The selection process has to be very careful and they should take their time finding the right guy. My recommendation and advice for them is they don't hire anyone unless this guy has expertise in banking. I told them, next time no lawyer, please.

Q: Do you think Citi is undervalued now? Are you going to buy more of it?

A: Look, frankly speaking, Citibank at this price is ridiculous. Citibank does not deserve that. Citibank deserves a lot better.

Q: You once said that you would hold your Citi shares forever. You still stand by that?

A: I will sell nothing. We are selling nothing. I want to make it clear that I fully support the leadership of Citigroup and think it is a very strong company with a good future.

You remember something very important, that the average [price at which] I bought Citibank was $2.75 per share adjusted for stock splits. That's my average. But still Citibank does not deserve to be where it is right now. It is a pity what is happening, but I hope that a big lesson is learned in the board of directors and the management of Citibank.

Q: What is that lesson specifically?

A: The lesson is that, No. 1, this management has to be at the highest class possible. No. 2, they have to have a succession plan. You can't have a company that size without a [successor] ready. And No. 3, you need a professional who has run a bank.

Q: Was Chuck Prince not going resign without [pressure]?

A: The impression I had is that he was not going to resign at all.

Q: Did Chuck Prince ever offer his resignation to you?

A: No, he did not.

Q: Did you like Chuck Prince?

A: Yes, Chuck Prince was a good man. Honest man. Decent man.

Q: When did you start realizing that he might have not been the right person to lead Citigroup?

A: I gave him the benefit of the doubt for the first two or three years. And the first two quarters of this year were good. But clearly you cannot go public and say we lost $6.4 billion, and then three weeks later say you will lose another $8 to $11 billion.

Q: Does Citigroup need to do a deal now to combine with another institution like Wachovia (Charts, Fortune 500) to become strong?

A: It is not time for that right now, for sure. I am against it now. Not at this price, for sure. It would not be fair for the shareholders of Citibank at all. I mean even after the stock went down, Citibank is still worth $160 billion. It's still a force to be reckoned with. I mean, how many companies in the world can withstand a writeoff of $6.4 billion and another writeoff of $8 to $11 billion three weeks later, and still stand on its own feet? Not many. To top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.