On the day Citicorp and Travelers Group announced their merger proposal in April, Wall Street celebrated by bidding up the stocks of both companies. And many others away from Wall Street hailed the idea of a new kind of financial services company.

Drowned out by the instant applause, however, have been notes of skepticism or caution from some prominent observers.

While the deal continues to have many strong supporters, the stocks have since retreated.

What follows is a look at the kinds of risk involved in the Citigroup proposal, as seen by various experts.

ECONOMIC RISK

Henry Kaufman, the economist who heads his own New York-based firm, believes the present long-term economic expansion is bound to suffer a setback that will test the optimistic assumptions behind the megamerger.

"In such a changed environment, some of the mergers in banking and finance may not look as glittering as they do when the prevailing mood is one of exuberance. . . . It is hardly a foregone conclusion that every one of the large mergers that have been done can be carried off successfully," he told a banking conference recently.

Pitfalls he sees are diseconomies of scale, poor personnel decisions, excessive loss of customers, internal frictions, and growing pricing competition among the megacompanies.

Ed Furash, who heads Washington-based Furash & Co., said assumptions on how Citigroup would make money should not be based on today's conditions. He emphasized that electronic banking would be a dominant force in coming years, and that new investments that combine deposits and insurance could emerge that nobody has yet thought of.

OPERATIONS AND TECHNOLOGY RISK

But the big risk facing Citicorp and Travelers, according to Mr. Furash, is overly ambitious efforts to merge operations.

"This is an unbelievably difficult thing to do," he said. "Banks that have done much smaller regional consolidations have been merging their operations very, very slowly."

Ron Dembo, president and chief executive of Toronto-based Algorithmics Inc., a risk management software company, takes an even stronger position.

"It's initially an operational problem," he said. "You have two diverse groups with different operational skills trying to merge two systems together. Their risk management systems have very different standards, and you're likely to have two groups infighting for control."

He added: "It's going to take a lot of doing to get it to work. Citicorp has spent a tremendous amount of money trying to install an enterprise-wide risk management system" but so far has not succeeded.

He said it was "the norm" for megaprojects to fail. "Often, companies build things they shouldn't be building. They build plumbing when they should be adding to the value of the existing plumbing."

Given the burden of fixing the Y2K problem and adjusting for the new euro, Mr. Dembo said, the companies will have their hands full. "Outsourcing of risk management may be a blessing for Citigroup," he said. "Any bank that tries to build a system from scratch is going to have a very tough mistake on their hands."

"First thing they have to do is, don't break it," Mr. Furash said. "These are good companies; they can continue to make strong profits the way they were. Selectivity in bringing together pieces of the business will more than pay off in making it work. It's the rush to judgment that will be harmful."

CUSTOMER RISK

Hollis Fishelson-Holstine, senior vice president of North American markets for Fair, Isaac & Co., San Rafael, Calif., sees plenty of challenges for mergers such as that of Citicorp and Travelers, but is inclined to see big opportunities as well.

One of the fears of many observers was that the two companies could lose many customers as a result of the merger.

"We are really seeing a shift," Ms. Fishelson-Holstine said. "In the past, mergers were about increasing efficiency ratios. But the real opportunity is managing customers to build shareholder value."

Her colleague Sue Simon, vice president of strategic development, concurs. "We're seeing with our clients a very different level of thoughtfulness about merging portfolios. For example, what do we know about whether the dynamics come together?"

Ms. Simon said merged companies needed to capitalize on their information to create opportunities for customers and the company. "A lot of people out there are trying to reach that goal, spending huge amounts of money pulling data together. It has been more of a challenge than people thought." Echoing Mr. Furash, she said, "The real opportunity right now is to phase it in, to realize shareholder value in chunks."

She declined to say whether Fair Isaac, which specializes in data management and analysis, had worked with Citicorp, but another source confirmed that Citicorp was a Fair Isaac client.

Ms. Simon said Fair Isaac had done a lot of work on the relationship between underwriting risk and credit risk in the insurance business, something that could prove valuable to Citigroup in its cross-marketing efforts.

PORTFOLIO RISK

Ronald R. van Deventer, founder and president of Honolulu-based Kamakura Corp., a risk management consultancy, also looks favorably on Citigroup's opportunities. But he sounds a warning about hidden risks.

"The risks of one institution may be offsetting or increasing the risks of the other institution," he said. He pointed to trading operations and a bank's basic deposit franchise as an example.

When interest rates are low, he said, trading profits can be very high. But when rates are high, trading desks tend to be less profitable. At the same time, high rates lead to a runoff of deposits into higher-yielding assets, and the deposits must be replaced by expensive purchased money.

So a combination of trading and a deposit franchise could add volatility to earnings.

But Mr. van Deventer added, "Most of the volatility in share value has come from credit risk. I'm very bullish on consolidations as reducing volatility in credit risk."

REGULATORY RISK

Mr. Kaufman believes increased regulation is inevitable as institutions grow larger. "There is no question in my mind that the kind of institution that is envisaged in the Travelers-Citicorp amalgamation is going to be treated as too big to fail," he said.

He said Citigroup and others would have to be made "too good to fail," and that can only be done by a much higher and probably more intrusive degree of regulatory supervision.

The Fair Isaac executives also said privacy was an issue arising from the Citigroup merger. Questions such as whether insurance data can be used in credit decisions can be problematic, they said.

STOCK MARKET RISK

Meanwhile, some on Wall Street appear to have great expectations for Citigroup. "In our judgment," Thomas H. Hanley of UBS Securities, New York, wrote in a recent report, "most of the retrenchment in CCI's stock price has been due to initial euphoria, as well as to concerns that the new Citigroup will be unable to fully realize the cross selling opportunities that have been outlined.

"We believe the combined organization can exceed intially outlined goals, generating $2.5 billion in synergies, and adding roughly $1.7 billion to incremental earnings."

But the consensus among the other experts is far from clear.

"I've got a strange feeling that in a decade there will be a lot of breakups," said Mr. Dembo. "The mergers will be viewed as a mistake, and it will be expensive to shareholders."

But Mr. Furash is more optimistic. "If Citigroup does everything right, the worst that can happen is that 10 years from now, they break it up and shareholders make a lot of money," he said.

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