In the case of Citi CEO Vikram Pandit, the answer appears to be a bit of both. A scrum of New York media insiders who have squeezed their sources silly for the past 24 hours and then breathlessly reported the results appear to agree that the board had had it with Pandit, let him know that change was inevitable and so he left before they could announce it.
Two sides have formed in the media post-mortem; those who think he was screwed by a claque of former Salomon Brothers execs who, after Citi acquired that failing enterprise, resented that Pandit, an arch-rival Morgan Stanley guy, was brought in to run things. The other group, to which the writer of the article below belongs, believes that Pandit, a hedge fund guy, not a traditional banker, was miscast in the role of mega-bank CEO from the get-go and grievously overpaid for his paltry performance.
While again, the truth appears to be somewhere in the middle, Pandit was not helped by the 89% decline in Citi's stock price during his watch and by the several hundred million he received for his pains. Not that Citi hadnt made similar arrangements with his predecessor Charles Prince, Robert Rubin and others.
There is an argument to made for the fact that Pandit did as well as anyone could have under the fairly ridiculous circumstances. Citi had become the horse designed by a committee that strongly resembled an elephant. It was put together by Sandy Weil, who reveled in his ability to apply cash and political pressure to have his way with regulators, competitors and anyone else who got in his way. The description finally agreed upon for this ungainly conglomeration was 'financial supermarket.' And that may have been more apt than intended. Margins in the supermarket business are notoriously small and Citi reflected that unpleasant reality.
The larger issue is what this portends for the financialization of the US and European economies. When the insiders start turning on each other it is generally a sign that the pickings are getting too slim to spread around.
The fact is that despite its ad claiming that 'the Citi never sleeps,' the bank's board and regulators either slept through or turned a blind eye to its many problems in hopes that a rising economy would lift the wreckage along with the financial tide. Pandit's departure may signal the dawning realization that sterner measures must now be taken. JL
Yves Smith comments in Naked Capitalism:
The mainstream media and Internet were abuzz with the Big Surprise, the sudden exodus of Citigroup CEO Vikram Pandit, the most overpriced and underperforming bank CEO in the history of corporate America.
The kerfluffle is over whether he hiked out in a huff over the board prodding him or whether he was pushed. The media seems to have accepted the board’s effort to save face, which is that they were in the process of pushing Pandit out. But “in the process” is not the same as pulling the trigger. This was, in the words of analyst Mike Mayo, the worst transition he’s seen in 25 years. While Pandit presumably got some personal satisfaction by (probably barely) beating the board to the punch, it was a self-indulgent, immature move. (The official story, clearly from board members, in the New York Times, simply does not add up: the board chairman had a chat with Pandit Monday evening and Pandit resigned. While that may technically be accurate, the Monday night chat can’t have been the typical coded “time to tender your resignation” or there would not have been so much chaos today).
But Pandit’s much bigger win is that he is laughing all the way to the countinghouse. The behemoth bank paid $800 million to secure the services of Pandit, who had been a promising executive at Morgan Stanley before forming the hedge fund, Old Lane Partners, that Citi acquired. That price produced at least a $165 million payday for Pandit personally. The effective price of getting him on board may have been even higher, since the bank shuttered the fund a mere 11 months later, and may have taken losses on credit extended to it. Even though he took only $1 in 2010, he still wound up with $56.5 million over his tenure at Citigroup (Felix Salmon claims it was $96 million).
Pandit managed the impressive task of underperforming his closest cousin in the garbage barge category, Bank of America. Citi’s stock price fell 89% over Pandit’s tenure, while the Charlotte bank’s declined a mere 79%. Sheila Bair wanted his scalp, both out of the belief that managers of bailout-out banks, even relatively new ones, needed to suffer consequences, as well as her assessment that Pandit was not up to his job, in particular, that he was not on top of operational workings. But Pandit, a pick of Robert Rubin, got to keep his job thanks to the support of fellow Rubin protege Timothy Geithner. And the “strategy” he appears to have been given credit for, that of shrinking and focusing the bank, was demanded of him by regulators. Similarly, the offensive “the government made money on its investment in Citi” is patently false. It not only had to restructure the deal (a second bailout after the initial TARP infusion) but the Treasury provided a second huge gimmie, that of allowing Citi to preserve the value of $50 billion in deferred tax assets, which in 2010 counted for a full third of the bank’s tangible common equity.
The media is now dutifully recounting Pandit’s sins: Citi’s failure to get permission from the Fed to pay dividends this year; an exit from its JV of Smith Barney on terms that were way too favorable to its partner, Morgan Stanley (ahem, but where was the board on that one?); asking for $15 million in pay for 2011, a level that investors rejected. And I’m a bit of a loss at the idea that quitting after the third quarter earnings announcement allowed Pandit to exit with his head high. Nearly half of the quarter’s $3.3 billion in earnings (before the $2.9 billion after tax loss on the Smith Barney sale) came from the reversal of loss reserves.
While the stock market said it regarded Pandit’s departure as no loss, veteran banking analyst Meredith Whitney dismissed the idea that Citi could be salvaged, except by making it considerably smaller. From the Wall Street Journal:
“Citigroup is ‘the incredible shrinking bank,’ and the least interest of the big four, in our opinion,” Whitney said. “No CEO will be able to change these facts in the near-term. It appears the board feels the same way, as they have appointed an unknown to the outside to the new CEO position, Mike Corbat.”
Bair’s scathing observations about Citi in her book and interviews are similar: the bank was incompetent at executing, had problems answering regulatory inquiries, and was badly undermanaged. I had a much smaller Citibank as a client in the 1980s, and even back then, it was clear the bank had serious compliance problems. It seems that more mass has been piled on a shaky foundation.
The fact that the Fed refused Citi’s request to pay dividends may be a sign that Bair’s concerns are widely shared and the bank won’t be permitted to grow until it makes further strides on improving its management. And if Whitney is right, Citi investors may be sorely disappointed if they think anything short of a radical restructuring will do the trick.
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