
Citi CEO Walks Mean Street
Can new CEO Vikram Pandit get it done at
Citigroup
(C) - Get Report
?
To look at the way Citi's shares have been hammered over the past few days, the answer is a resounding no.
The stock is down nearly 10% since Tuesday's announcement -- just moments before the
Federal Reserve
announced its eagerly awaited policy decision -- that Pandit would be charged with leading the huge financial institution, and Sir Win Bischoff, who had been interim CEO, would become chairman.
Pandit, a former top finance executive at
Morgan Stanley
(MS) - Get Report
who joined Citi in April, is said to be an affable banker with a penchant for problem-solving. Tackling Citi's myriad woes may be his biggest financial conundrum yet.
Still, for all his charm, Pandit held a rocky first call with analysts Tuesday and appeared stiff in interviews in the hours following his appointment. He seemed more comfortable sticking to a script rather than speaking freely and openly about the company's plans.
The new exec ought to be forgiven his initial impression, given that these were his first moments taking the wheel of a banking giant with a market capitalization of $177 billion (and shrinking). Wall Street, however, was unforgiving, dragging the stock down nearly 8% during the trading day Wednesday. Shares closed down 5.3% to $31.47.
Overall, Citi's stock is down more than 40% this year. It didn't help matters Wednesday when Pandit's former company, Morgan Stanley, listed Citi as its best short stock for 2008. In essence, Morgan Stanley's Citi short call indicates that Citi shares will continue to get worse, not better, under new management.
CIBC analyst Meredith Whitney described Citi as the worst-capitalized of its peers "by a long shot" in an interview with
Bloomberg
Tuesday. Whitney has railed against the big bank for months, noting that it has a capital shortfall of nearly $30 billion and may have to cut its dividend and shed assets to shore up its balance sheet.
Citi managed to raise $7.5 billion in late November via an investment by the Abu Dhabi Investment Authority -- but with a pricey 11% yield for the oil-rich government fund. Whitney described the capital infusion as far short of what Citi needs.
Faith in Citi's Pandit Proves Fleeting |
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On Tuesday, Pandit maintained that Citi was "well-capitalized" during the analyst call. "In terms of capital-raising, we just raised a lot of capital," he said in response to a question posed by Whitney.
After the call, Pandit implied during a
CNBC
interview that Citi's dividend would not be cut.
The dividend may be the least of the issues surrounding Citi.
Pandit said on Tuesday that an overhaul of the bank's businesses my be in order. "I will undertake an objective and dispassionate review of all the businesses individually and in aggregate." Translation: Job cuts and asset sales may very well lurk on Citi's horizon.
"It cannot be ruled out that a major business unit or more may be monetized," said CreditSights analyst David Hendler, in a report following Pandit's statements.
A Citi spokesman declined to comment on Citi's plans.
Not least of Citi's worries are the bank's billions of dollars in exposure to structured investment vehicles, entities set up by banks and investment firms that generate returns by issuing low-yielding short-term debt instruments and purchasing longer-term paper in student loans and mortgage-backed securities.
The market for SIVs has been frozen because of flagging confidence in credit. Last week, Standard & Poor's gave the SIV market a negative outlook and put SIVs -- including some run by Citi -- on ratings watch negative. The ratings agency said that it expected to see continued value erosion for the assets that make up these investment vehicles as sponsors are forced to unload them.
For Citi, this situation has essentially become nectar in a SIV. The bank reported that at the end of November, the value of its SIV assets, once $83 billion, fell to around $60 billion. Citi has continued to say that it would not be forced to take its SIVs on to its balance sheet, as U.K.-based
HSBC
(HBC)
and French bank
Societe Generale
recently have.
"The good news is that
Pandit has tremendous skills in the institutional securities business," says Joe Capone, managing member at SMaRT Financial Partners in New York. "The bad news is that he has every incentive to take a huge charge to get as much as possible behind him and blame it on prior management." Capone holds a small long position in Citi via his investment fund.
The pluses for Pandit are that most view him as a banker with tremendous character who most executives enjoy working with.
Sanford Bernstein analyst Brad Hintz, who worked with Pandit between 1986 and 1996 at Morgan Stanley, notes that during his tenure Pandit was the sort of boss who would trade his first-class seat on business flights to sit among the rank-and-file bankers.
Such character has not been the trademark of Citigroup, which over the years has been criticized for a lack of genuine culture, compared with peers
Goldman Sachs
(GS) - Get Report
and
Lehman Brothers
( LEH).
Culture may be the new word on the Street, but with an employee base of more than 300,000 and a sprawling geographic outlay in more than 100 countries, it remains a lingering issue for Citi.
"Sword fights in the halls, sweep the bodies out on the weekend," quips Hintz, describing how some observers view Citi's internal workings.
Many blame the Citi's problems on its ousted CEO Charles Prince, who has left Pandit with what could be some $14 billion in writedowns tied to mortgage-related paper.
In truth, it was Prince's predecessor Sandy Weill who created the unwieldy financial supermarket more than a decade ago.
But it's Pandit who may have to decide whether it makes sense to unwind at least some portions of it and lay off tens of thousands of workers.








