Friday, January 16, 2009

Pandit's Puzzle: How to Fix Citigroup

By David Enrich at the Wall Street Journal:

For his doctoral thesis at Columbia University in the 1980s, Vikram Pandit tackled a complex economic problem involving asset pricing. His academic advisers worried it would be impossible to unravel.

They were right. He never solved the problem.

Mr. Pandit faces a similar quandary at Citigroup Inc., which is likely to announce Friday an operating loss of at least $10 billion for the fourth quarter, according to people familiar with the situation. Net losses reported since the 52-year-old Mr. Pandit took over as chief executive in December 2007 are likely to surpass $25 billion.

Citigroup also is expected to detail the downsizing strategy aimed at dismantling pieces of the financial supermarket that Mr. Pandit repeatedly defended even as the credit crisis and recession overwhelmed his efforts to tackle problems haunting the company long before he arrived.

Mr. Pandit hasn't said publicly what changed his mind. But he will face pressure to shed unwanted businesses in a market with few buyers and shore up eroding confidence in his management. Mr. Pandit and a Citigroup spokeswoman declined to comment for this article.

In 4 p.m. New York Stock Exchange composite trading Thursday, Citigroup's shares fell 15%, or 70 cents, to $3.83. The stock is down 35% in the past two days.

Even Citigroup's sharpest critics don't blame him for causing the mess, which includes inefficiency and a balance sheet brimming with toxic assets. But his deliberative, academic style has fueled criticism that he was too slow to recognize the severity of Citigroup's problems.

By not moving to shrink the company before it needed $45 billion in capital infusions from the federal government, Mr. Pandit's push to dump about a third of Citigroup's assets "could be too little too late," said one person who helped hash out the plan.

Mr. Pandit has been on the defensive, critics said, since concerns about Citigroup's exposure to billions of dollars in losses led investors to pummel its stock last fall. By mid-November, the stock was trading for less than $10 for the first time in more than 15 years.

On Nov. 17, Mr. Pandit touted the company's prospects in an employee meeting. That evening, he boarded a Citigroup jet for a one-day trip to Brazil. Some employees were surprised that he didn't cancel the trip.

"A lot of people thought [it] was really a lack of judgment to leave New York during a time of so much pressure on the bank," a Citigroup executive in Brazil said.

At a meeting in São Paulo, an employee asked Mr. Pandit whether the U.S. government might have to intervene to prevent Citigroup from unraveling. Mr. Pandit said no. "The brokerages are ahead of us" in terms of needing federal aid, he said, referring to Goldman Sachs Group Inc. and Morgan Stanley, according to a person at the meeting.

Some Citigroup executives said they felt helpless. Later that week, they held informal talks with rival banks about a merger or sale of a major business line, according to people familiar with the matter. The discussions went nowhere, partly because Citigroup executives realized they didn't have time to pull off a complicated deal, these people said.

Citigroup's directors called an emergency board meeting to weigh the company's options. "All hell is breaking loose at the company," one director said at the time.

The next day, Mr. Pandit held a conference call with about 3,000 executives. He lashed out at "fear-mongering" by short sellers and rivals. But he defended the company's health and structure. "This is a fantastic business model," Mr. Pandit said.

After a weekend of talks with federal officials, the U.S. government announced it would inject $20 billion into Citigroup and shield the company against certain losses. The deal left the government with a 7.8% stake in Citigroup.

The rescue didn't shake Mr. Pandit's confidence in his strategy. He framed the chaotic week as a reflection of the overall financial industry, not Citigroup. "He had a spring in his step," said a Wall Street veteran who met with Mr. Pandit on Nov. 25. "You could not tell that he is a CEO that's under this kind of pressure."

But top officials with the Federal Reserve and the Office of the Comptroller of the Currency, Citigroup's two primary regulators, warned executives not to come back for more financial aid without making unspecified, drastic changes. Mr. Pandit's inner circle realized that meant Washington likely would insist on installing a new management team, according to people familiar with the matter.

Government officials, including OCC chief John Dugan and Fed governor Kevin Warsh, instructed Citigroup to devise an accelerated strategy to steady the company and urged executives to improve communications with Wall Street, said people familiar with the situation.

By mid-December, Mr. Pandit and his team realized the company was heading for a big fourth-quarter loss, according to people familiar with the matter. Over the course of a week of meetings, it dawned on them that they needed to at least symbolically break with Mr. Pandit's past insistence on preserving Citigroup's business model, these people said.

Before Mr. Pandit departed for a weeklong family vacation to his native India, the executives had settled on the new strategy. They started negotiating to spin off the Smith Barney retail brokerage into a joint venture with Morgan Stanley.

As word of the looming fourth-quarter loss surfaced earlier this month, Citigroup's shares tumbled to their November lows. Colleagues said Mr. Pandit remained in high spirits, pressing his lieutenants to remain focused on their work.

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