Citi at a Crossroads
Apr 16 2008
Turning around Citigroup has been compared to steering a huge ocean liner away from danger.
In his four months as Citi's new captain, Vikram Pandit has moved quickly to stabilize the company and shore up its balance sheet. The question—as Citigroup prepares to report first-quarter results on Friday—is whether a steady hand on the helm will be enough.
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William Smith, president of New York-based S.A.M. Advisors, said he had hoped that "a cost cutter" would have come in to lead Citi and "start breaking furniture," ultimately splitting up the financial supermarket that Sandy Weill built. Still, he has a confidence that Pandit will succeed.
"My turnaround and his might look a little different, but I think he will pull the turnaround off," Smith says.
On Friday, Citi is expected to announce an additional huge write-down for the first quarter, estimated to be as much as $18 billion. Yet investors will be focusing less on the subprime past than on the future direction of the bank as articulated by Pandit.
In recent weeks, the grumblings of some of the bank's long-standing skeptics has grown quieter. Deutsche Bank’s banking analysts, Michael Mayo and Christopher Spahr, who were critical of Pandit's predecessor, say that Pandit has "made logical changes." And Smith now says he backs Pandit "100 percent," after being initially "extremely skeptical" of Pandit’s ability to fix Citi’s sprawling and dysfunctional empire because of his lack of operational experience.
Known for his cautious analytical approach to managing risk, Pandit spent much of his time on Wall Street at Morgan Stanley, dealing with institutional securities, before starting his own hedge fund, Old Lane Partners. He only joined Citi last April, when the company purchased his hedge fund for $800 million, and he has never run a Wall Street firm.
His lack of experience running a company, along with his all-too-apparent discomfort in his first public appearances as Citi C.E.O., left many scratching their heads. The widely followed banking analyst, Meredith Whitney, then with CIBC World Markets, gave Pandit poor marks for his first conference call in December, calling the details "scant" and the tone "defensive."
Since taking charge, Citi watchers say Pandit has worked quickly to change the bank’s course. Among the moves: Pandit slashed the company’s high-paying dividend by 41 percent to bolster reserves and removed the guesswork from about $49 billion in possibly shaky assets in Citi-backed investment vehicles by taking them onto Citi's balance sheet. Citi is also negotiating to sell off at a loss $12 billion worth of leveraged loans to private equity groups.
Organizationally, he has moved to simplify the corporate structure, dividing it into four regional units. He has brought in new blood to run the various arms and has moved to further reduce Citi’s workforce. The company is also in the process of separating its credit card business from the company and shoring up its 900 U.S.-based consumer branches, moves that could portend a spin-off or sale of these assets.
Smith, who publicly tangled with Pandit’s predecessor, Chuck Prince, notes that "a lot of things that were on the plate before Pandit arrived have now been reversed, which I think is positive."
Citi began to struggle several years after Sandy Weill created the behemoth in the merger of Citicorp and Travelers in 1998. No amount of tinkering so far—be it reshuffling of personnel, restructuring of units, or tweaks in the game plan—has been able to fix Citi's problems.
Last month, on the eve of the combined company's 10-year anniversary, one of the merger's architects, former Citibank chief John Reed, called it a mistake. "The stockholders have not benefited, the employees certainly have not benefited, and I don't think the customers have benefited because our franchises are weaker than they have been," said Reed in an interview with the Financial Times. Weill shot back that it was not that Citi was too big, just that management had not been strong enough.
But for many investors, these problems seem to be intertwined. They note that Prince consistently snubbed calls to consider a breakup of the company even as he failed to gain control over it and discounted worries over the credit markets—saying Citi should continue the derivatives dance until the music stopped—even as the band was packing up. Prince resigned in November, as Citi was disclosing it had $55 billion in direct exposure to the American subprime market.
Citi’s chairman, former Treasury Secretary Robert Rubin, has scoffed at any insinuation that he should have been more watchful of the risk the company was taking, even while he has shown a striking lack of understanding about that danger.
Pandit may not be the most sociable C.E.O. to take over Citi. But investors can now at least take comfort that the man who told analysts he would "undertake an objective, dispassionate view" of Citi's parts knows deeply which mess he oversees. While a student, Pandit tackled the question of "asset pricing with heterogeneous agents" in his dissertation at Columbia University. It was very complex problem, says Rajnish Mehra, a finance professor at the University of California, Santa Barbara, who served on Pandit’s dissertation committee.
It is also a very relevant one considering the difficulty banks such as Citi are now having placing a value on their diverse portfolios of asset-backed securities. "He has a very strong analytical background and, looking back, I was really impressed how much he had done early on in the game," said Mehra, noting that he went back over Pandit’s work shortly after he learned his former student would take charge of the bank. "He can think through complex situations pretty thoroughly and has a clarity of thoughts. So, if that is any indication, then I think Citi is in safe hands.”
Richard X. Bove, an analyst with Punk Ziegel & Company, notes that one of the smartest moves Pandit has made since taking over has been to ignore the analysts and the rest of the chattering class.
"He’s got to turn his back on investors and on the analysts and he’s got to run the business," Bove says. "This company has gone through mismanagement for something like 13 years and nobody steps in for two months and turns it around."
