Citigroup CEO Candidate Pool at the Mercy of the Feds

NEW YORK (TheStreet) -- If Citigroup (C Quote) was forced by the federal government to replace former CFO Edward 'Ned' Kelly, that could crimp the banking veteran's chances to someday run the ailing company.

The Financial Times reported on Wednesday that according to a confidential agreement the company made in June with the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp., Citi was under pressure to replace Kelly just a few weeks before his surprise shift to a more strategic role as vice chairman as part of a broader management shake-up in July.

Citi apparently had agreed to consider whether to replace Kelly before October, the FT said. But upon learning of the agreement, Kelly, only four months into his role as CFO, resigned from the position, which prompted the company to move him.

Still, the black mark could hurt his chances at eventually snatching the top role at Citi, since the move shows just how entrenched the U.S. government -- Citi's largest shareholder -- is at the company.

CEO Vikram Pandit has been criticized for not bringing change quick enough to the troubled institution, as well as for his lack of commercial banking experience. Many have speculated that Pandit could be replaced, with Kelly and former US Bancorp (USB Quote) Chairman Jerry Grundhofer, who is a Citi director, as two possible successors. Former Freddie Mac (FRE Quote) executive Eugene McQuade was hired in July as CEO of Citibank N.A., Citi's depository institution, and also has been mentioned as a candidate.