In a surprise, Pandit steps down as Citigroup CEO
Vikram Pandit, who steered Citigroup through the 2008 financial crisis and the choppy years that followed, abruptly left the bank on Tuesday, stepping down as CEO and as a director.
The move shocked Wall Street, and Citigroup offered no explanation. There had been no hint of the departure Monday, when the bank discussed its strong third-quarter earnings in lengthy calls with financial analysts and reporters.
A second top executive resigned as part of the shake-up: President and Chief Operating Officer John Havens, who was also CEO of Citi's Institutional Client Group, which serves global companies, banks and governments.
Pandit was replaced immediately by Michael Corbat, 52, who had been CEO of its Europe, Middle East and Africa division. Corbat joined the bank in 1983, just after graduating from Harvard.
The Wall Street Journal reported that the departures followed a clash between Pandit and the company's board over strategy and business performance, including at the group run by Havens.
In a conference call late Tuesday with analysts and reporters, Corbat and Citigroup chairman Michael O'Neill remained vague about the sudden change.
"What happened is that Vikram submitted his resignation and we accepted it," O'Neill said more than once. Corbat said the changes do not reflect any desire to change Citigroup's strategic direction.
Analysts suspected there was more to the story. Pandit's departure from the board is a clear indication that "this was a complete and unexpected break" between Pandit, 55, and Citi directors, said Chris Whalen, a bank analyst and senior managing director of Tangent Capital Partners in New York.
"This shows how dysfunctional this organization is, to have this event unfold this way," Whalen said. "They should have told us yesterday, unless they didn't know."
If Pandit's disagreements with the board were recent, his trouble with shareholders had been brewing far longer. They rejected his 2011 pay package in a non-binding vote this spring.
Since joining the bank in December 2007, Pandit has made at least $56.4 million, according to data compiled for The Associated Press by Equilar, an executive pay research firm.
That includes salary, bonuses, benefits and perks and stock awards. Pandit also made about $165 million from a buyout of his ownership stake in Old Lane Partners, a hedge fund he founded that was acquired by Citi.
Many shareholders were also frustrated by Pandit's failure to boost Citigroup's stock price, which was decimated during the 2008 financial crisis and remains far below where it was when Pandit took over.
The day Pandit was named CEO, Citi's stock closed at $332.30, after adjusting for a reverse stock split last year that reduced the number of shares in circulation. It closed Tuesday at $37.25, up 59 cents for the day.
Citi's stock has mainly kept up with its peers over the last year, but its longer-term record is dismal. It's by far the worst-performing major bank stock over the past five years, having lost 91 percent of its value, versus a 6 percent gain for Wells Fargo and a 2 percent gain for JPMorgan Chase.
Still, on Monday, Citigroup's stock rose to its highest level since April after the bank said it beat analysts' expectations in the third quarter.
In a call with financial analysts that lasted an hour and 40 minutes, and a shorter call with reporters, no one asked bank executives how long Pandit planned to stay, or whether there was a succession plan in place.
During his five-year tenure, Pandit slimmed the bank by selling businesses, sought and then repaid multiple federal bailouts, and helped right its balance sheet after billions in losses on bad mortgage investments made before he took the helm. It was a sharp departure from his predecessors, empire-builders with a hunger for big acquisitions.
Today, Citi is the country's third-largest bank, with $1.9 trillion in assets. It trails only JPMorgan, with $2.3 trillion, and Bank of America, with $2.1 trillion.
Yet the scars of the financial crisis have continued to plague Pandit and the bank he led, and will confront Corbat as he takes over.
Pandit was appointed CEO in December 2007, a period when the crisis was smoldering but had yet to engulf Wall Street. Some in government believed the bank was too slow to address its problems as they emerged in those months before the global financial system froze up in September 2008.
Among Wall Street banks, Citigroup was perhaps the closest to the center of the financial crisis. It participated in every step of the assembly line that transformed shoddy mortgages into complex investments and seeded them through the world financial system. When the housing market turned in 2007, Citigroup's fingerprints were all over the toxic loans it had originated, bundled and resold.
By the time Pandit took charge, Citigroup was considered the weakest of the Wall Street banks. Its stronger peers were forced to take billions in bailout money in October 2008 to divert attention from Citigroup, which needed the money to survive.
Citigroup was the only mega-bank, aside from Bank of America, to receive more than one round of taxpayer bailout money. It received a total of $45 billion from the government.
The government converted $25 billion into an ownership stake in the bank, the last of which the government sold in December 2010. Citigroup repaid the remaining $20 billion in December 2009.
The bank also benefited from billions more in government subsidies and guarantees against losses on bad investments.
As the crisis erupted in September 2008, Pandit suffered a bruising embarrassment. His bank announced it would buy the bulk of Wachovia, which was being crushed by lousy, complex mortgage investments. Citi would get a fire-sale price and emerge from the crisis a rescuer, rather than a victim.
But four days later, Wells Fargo charged in with another offer. It elbowed Citi out of the way and won the approval of shareholders and regulators.
Citi survived those critical months, but its reputation was tattered. In March 2009, as the crisis raged, President Barack Obama ordered the Treasury Department to consider breaking up Citigroup and removing its executives, according to a behind-the-scenes book about the crisis published last year by journalist Ron Suskind.
Treasury Secretary Timothy Geithner ignored Obama's request, according to Suskind's account. Geithner and the White House have disputed his version of events.
Pandit had another powerful opponent in Sheila Bair, an influential bank regulator who ran the Federal Deposit Insurance Corp. during the crisis. Bair wanted the government to fire Pandit after the taxpayer bailouts and government guarantees. Geithner disagreed, and Pandit kept his job.
In an interview with CNBC after Pandit's departure was announced, Bair said Citigroup has lacked "a clear strategic direction and focus" under Pandit, and said shareholders have been unhappy.
She said that the bank would benefit from a CEO like Corbat with commercial banking experience, as opposed to Pandit's background in investment banking, and that the move would be beneficial for shareholders.
In a book published last month, Bair said Pandit had been installed as CEO by Robert Rubin, a former treasury secretary who was the bank's chairman at the time, "to clean up the mess at Citi."
"I thought he had been a poor choice," Bair wrote.
Pandit nursed the bank back to annual profitability in 2010. But Citigroup's troubles continued, even after the Treasury Department sold the last of its stake.
Its stock price plunged 44 percent in 2011. Bank stocks suffered broad declines last year because of the European debt crisis, fear of a second recession and uncertainty over the federal borrowing limit. So far in 2012, Citigroup stock has recovered about half its loss from last year.
In March, Citigroup surprised observers by failing an annual financial checkup administered by the Federal Reserve, its main regulator. The Fed refused to let Citi raise its dividend because it said the bank, unlike its peers, did not have enough capital to pay shareholders and still withstand a financial crisis worse than 2008.
Investors voiced their frustration by voting this spring to reject Pandit's pay package for 2011, which was valued at $15 million — roughly in line with most of his counterparts — and included an additional $10 million in retention pay due to him in 2013 if he stayed on as CEO. Pandit received none of the retention money, a bank spokeswoman said.
The investor vote was the first time shareholders had dinged a Wall Street bank under a provision of the 2010 financial overhaul law that gives them a non-binding vote on executive pay.
Pandit had accepted a token $1 in compensation in 2010. In 2008, Pandit's compensation package was valued at $38.2 million.
Last month, Citigroup received much less money than it had hoped for when it sold its share of the retail brokerage Morgan Stanley Smith Barney. The bad estimate forced Citigroup to take a heavy write-down.
Along with Bank of America, it is the only mega-bank still paying its shareholders only a token penny dividend each quarter.
Still, said Daniel Alpert, managing partner at the New York investment bank Westwood Capital LLC, Pandit did "pretty much all he can do to turn the bank around."
He said it will be hard for big banks to boost their share prices because of intense pressure from regulators to simplify their businesses. Since the financial crisis, the government's financial watchdogs have encouraged banks like Citigroup to become more manageable by eliminating non-essential business lines and focusing on their strengths. Pandit strived to do that.
"There is some meaning to 'quit while you're ahead,'" Alpert said, noting that it's harder for executives to win massive pay packages when a company's stock is flat-lining.
In an off-camera interview with CNBC, Pandit said he had been thinking about leaving Citigroup for some time and that it was his idea to leave.
After the company's earnings release Monday, it was clear that the company was performing well and had stabilized, Pandit told CNBC. He said he called O'Neill, the chairman, after the analyst call and told him he wanted to leave.
Pandit said the board was ready for his decision and that how the bank handled the matter shows that the company is organized. Asked whether there were any "bombs" in the horizon, he told CNBC, "I would not be leaving if I didn't feel that this company was in good shape."
Both Pandit and Corbat sent memos to Citi's 262,000 employees early Tuesday. Pandit did not say why he was leaving, but gave the impression that he felt he had completed a mission.
"There is nothing better than our third quarter earnings announcement to demonstrate definitively that we have turned this company around," he wrote.
Corbat said he was humbled and excited, calling himself "a true believer in this company." He praised Pandit for leading Citi "back to its roots as a bank."
Corbat also noted the challenges ahead — "regulatory, legislative and economic changes around the world present headwinds as we redefine our relationships with all of our stakeholders."
Gerard Cassidy, a banking analyst at RBC Capital Markets, said he thinks the change of guard will mean more businesses getting sold and more cost-cutting. O'Neill, the chairman, was famous for slashing expenses when he ran Bank of Hawaii Corp.
O'Neill was a Citigroup board member when he was named chairman in March. He replaced Richard Parsons, who had held the job since January 2009 and is also the former CEO of Time Warner.
Other analysts speculated the bank may place less emphasis on Wall Street trading and helping companies sell stocks and bonds to the public, the so-called capital markets businesses in which Pandit had expertise. Instead, the focus could shift to traditional commercial banking, like lending to businesses and consumers, especially overseas.
Corbat will receive an annual base salary of $1.5 million and regular bonuses, Citigroup said Tuesday in a public filing.
Pandit ascended to head of investment banking at Morgan Stanley before leaving in 2005 to form the hedge fund. He joined Citigroup in April 2007, when it bought the hedge fund.
In December 2007, Pandit was elevated to CEO. He was seen as a careful, decisive investment banker. Charles Prince had been deposed a month earlier as losses mounted from mortgage-related securities.
A native of India, Pandit attended Columbia University at 16 and completed a bachelor's degree in three years. He earned a doctorate in finance in 1986.
He is a naturalized citizen, and lives in New York with his wife and two children.
AP Business Writers Christina Rexrode, Bernard Condon and Joseph Pisani in New York contributed to this report.
Daniel Wagner can be reached at www.twitter.com/wagnerreports .