Recent Items

Citigroup’s $900 Million Man Departs Abruptly

Posted on by

The mainstream media and Internet were abuzz with the Big Surprise of the day, the sudden exodus of Citigroup CEO Virkam Pandit, the most overpriced and underperforming 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.

Print Friendly
Twitter27DiggReddit1StumbleUpon0Facebook32LinkedIn2Google+2bufferEmail

18 comments

    1. Yves Smith Post author

      No. I’m just following Whitney, in that she was warning shareholders, one constituency the clearly does want Citi to grow.

      1. dan

        Thanks. To be fair, do we really need to read what she says on Citi? Hasn’t she been saying the same thing for 5 straight years?

        1. Yves Smith Post author

          Given that the stock has managed to underperform every big financial stock, even AIG, was she wrong?

          She’s saying that the loss of Pandit won’t change anything, the problems are much bigger than that.

  1. jake chase

    Once again the executive performance myth explodes. What a world of hacks insists upon calling ‘compensation’ is simply looting enabled by st*oge directors and justified by phony comparison to looting going on in allegedly comparable companies.

  2. Zuzu's roots

    It’s probably the people cleaning Pandit’s office at night could do better at his job than he did.

  3. ambrit

    Would there be any way for the board , or a reinvigorated Regulatory Agency, to ‘claw back’ some of that ‘compensation?’ Would the shareholders have a chance with a class action suit? (The list of corespondents on that one would make interesting reading.)

    1. Ms G

      AMPLIFYING: Leave Mr. Pandit alone. He is a savvy businessman — he is very good at getting me and my people to do what he wants us to do for his business and his wallet.

      Signed: The President

      1. leapfrog

        “Citigroup is ‘the incredible shrinking bank,’ and the least interest of the big four, in our opinion,” Whitney said. “

        Wasn’t Citi the biggest corporate welfare recipient (2 trillion), per the GAO audit? If so, how does that correlate with the “least interest” of the big 4? Maybe I’m not understanding what she is saying here.

  4. sierra7

    Just more arguments towards in retrospect, CITI (and the “other” 7 behemoths) should have been broken up in 2008-09.
    What a dismal failure of policy!

  5. Hugh

    I wrote this back on November 26, 2008 about an appearance of Pandit on Charlie Rose:

    http://www.charlierose.com/guest/view/6459

    When asked if companies that are too big too fail are maybe too big, period, he responded that no, Citi’s size did not mean it couldn’t be managed effectively. He said this the day after Citi received a $306 billion bailout and $20 billion investment from the US government. And about that, Pandit didn’t describe the bailout as a bailout. Instead he said that Citi had purchased “insurance” from the government on $306 billion of its assets. That is a truly incredible statement. How many of us out there, do you think, would be allowed to buy fire insurance on a house after it had burned down? But Pandit’s deceit and dishonesty does not end there. Although he can’t give a precise number, he says the face value of these assets was around $340-$350 billion so really the government is getting a good deal because the government gets to insure them at a discount. But the discount is only 9-12.5%. Some of those assets may have a value that is zero. For the mortgage related ones, their real value is at a minimum 40% off their face value. So no, it is not a good deal. We are getting rooked, a surprise I know. But that’s the essence of a con to get the mark to think he/she is putting one over on the con man even as the con man is putting one over on them.

    1. Doug Terpstra

      As Roger Dawson put it in his book, The Secrets of Power Negotiating: “When you get the gold out of their teeth, that’s not negotiating. That’s stealing. When you get the gold out of their teeth and they thank you for it, that’s negotiating.”

      Pandit and Obama apparently studied the book. It was published too late for Hitler.

  6. craazyman

    I doubt more than a handful of individuals worldwide who run big corporations and sit on their boards are not inherently “self indulgent and immature” to the core of their being.

    It would seem either a constitutional pre-requisite for the job or a natural and degenerative by-product of years of willingly received affirmation by lackeys, ass kissers and sober-voiced “advisors” — producing in the end a narcosis of mind and a near-total elision of the self-reflective faculty.

    Would any human being graced by self-possession and maturity willingly take $900 million dollars (or even $100 million or even $50 million) from a corporation as compensation when that corporation also runs roughshod over part-time hourly temps and janitors and cleaning ladies like they’re Roman slaves under the wheels of a chariot?

    Who would do this, other than a child in the body of an adult? Man or woman, it matters not.

    Won’t one of these types stand up and say “This amount of money is insane. Nothing I have done or ever will do justifies this sort of compensation. Better to take most of it and pay it to our real workers. $1 million per year is enough for me. It is enough for anyone to do the best that they can do, all the time, no matter what circumstances they face or how much success they achieve.”

    The money is a measure of a larger social illness, of which each man and woman is a mere symptom. It is not just Mr. Pandit. It is all of them. They are all mentally ill. And a society that suffers such a spectacle is itself made ill by it.

    If you’re really talented though, like an NFL quarterback or a baseball pitcher or a comedian or a rock star, all limits are removed. Go for it.

Comments are closed.