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Citigroup's Pandit: On the Way Out?

As the financial crisis has unfolded over the past 18 months, bank executives have come under fire from scores of angry government officials over their pay, poor management, lack of risk oversight, and downright greed. But few rifts have run as deep as the one between the Federal Deposit Insurance Corp.'s (FDIC) chairman, Sheila Bair, and embattled Citigroup (C) CEO Vikram S. Pandit

On June 5, The Wall Street Journal (NWS) reported that Bair's office has been maneuvering to oust top management at Citi, citing sources it did not identify. An FDIC spokesman on June 5 said the agency does not comment on "open, operating institutions."

Citigroup says that a management change is not imminent and that it will not comment on the FDIC's reported moves. Citigroup did release a statement from Richard D. Parsons, its board chairman, saying directors have confidence in management and its efforts to return to profitability. "We went through a rigorous stress test process, the results of which were agreed to by appropriate regulatory agencies and clearly reflect the significant progress made by this management team over the last 15 months to turn Citi around," Parsons said in the statement.

A $1 Salary with No Bonus

Pandit continues to weather criticism that he does not have the right skills and isn't moving fast enough to turn around the troubled and intensely complex global bank. He was initially reluctant to sell off assets and trim Citigroup's sprawling financial supermarket. And his career has been marked primarily by investment banking experience, rather than commercial and retail banking, which lie at the core of the bank's operations. In February, Pandit cut his salary to $1 with no bonus, vowing that he would not earn more until the bank—which has accepted $45 billion in government bailout money—returns to profitability.

The FDIC has good reason to want Citigroup well-managed and in good health: The agency insures $29.9 billion of Citigroup's deposits and other accounts, plus it has guaranteed $34.6 billion in Citigroup bonds. Moreover the FDIC backs a slice of a $306 billion pool of risky assets held at the bank. Following the government stress tests, Citi was ordered to fill a $5 billion shortfall, less than rivals Wells Fargo (WFC), and Bank of America (BAC).

A holdover from the Bush Administration, Bair was one of the first to urge more aggressive mortgage modification strategies to arrest losses in the housing market. Many other regulators from the prior Administration—including, some argue, Treasury Secretary Timothy Geithner, who was then head of the New York Federal Reserve Bank—have egg on their face for not having provided enough oversight of the banks' mortgage, securities, and derivatives business or for not having moved quickly enough last fall to stem the problems. "She's taken seriously because she's not sitting pat and saying this is going to clean itself out," says senior analyst John Jay of the Aite Group. "She's taking a much more aggressive stance and because she is the gatekeeper, the custodian for all the taxpayers' money that is being put out for the benefit of Citi. She has to be bold enough to stand up and raise her hand."

Pushing for a Promotion?

By pressing hard for more extensive changes in Citi's executive suite, Bair may also be improving her chances to secure an even more powerful position in the new regulatory construct under discussion within the Obama Administration. "This appears to be part of her bid for a bigger role in the regulatory restructuring that's under way," says Daniel Clifton, a Washington policy analyst for institutional broker Strategas Research Partners. "It's a mess right now; everyone is for more regulation, but no one agrees on what should be done." Clifton argues that Bair, who many believe did a better job than other regulators at foreseeing the extent of the crisis and pushing for aggressive policies to contain the damage, wants to ensure that her views are heard. But Clifton considers her push not just politics or the usual infighting. "She firmly believes that what she's doing is the best [for the banking system]; she's not just trying to do it to move up," he says.

Still, Bair risks creating schisms with fellow regulators, primarily the Office of the Comptroller of the Currency (OCC), Citi's primary bank regulator. "I understand her concerns and the need to stabilize a very large institution that poses systemic risk," says Kevin Petrasic, attorney with Paul Hastings in Washington and a former special counsel at the Office of Thrift Supervision. "But she is putting [the OCC] in a very difficult position. It doesn't make the job of the primary federal regulator any easier if the backup authority isn't in sync."

Bair is alienating her regulatory brethren by stirring up fresh doubt about Citi after the bank passed the federal stress test and worked to demonstrate that it is not complacent about fixing itself. Some call the leak about Pandit counterproductive. "This has certainly got to be a distraction within Citigroup," says Len Blum, managing director of Westwood Capital in New York, a boutique investment bank. "But if the government wants to [oust management] or not, we shouldn't be hearing the debate between the government agencies. This is just a great case study of why we need one great regulatory agency. At best it's a disagreement. At worst it's a turf battle."

Bad blood over Citi's Wachovia bid

And Bair's reported stance will no doubt further the bad relations she already has with Pandit. The bad blood between them began last fall over the buyout of Wachovia, the troubled Charlotte, N.C., bank. In late September, Pandit made a bid with backing from the FDIC to rescue Wachovia from bankruptcy. About two weeks later, a competing deal with Wells Fargo was on the table—and Wells was not seeking government help for its bid. Late one night, Pandit was summoned from bed by a call informing him of the rival bid. The incident, in which the FDIC declined to back Citi's pursuit, planted the seeds of animosity, according to people familiar with the call.

Losing out on the Wachovia deal "made [Pandit] look really bad," says a high-level banker involved in the negotiations between Wells and Wachovia, who is sympathetic to Pandit's plight. "All the things that happened at Citi, they're not his fault. Hardly anything in his experience would have qualified him for what [is] needed there. It's like taking Michael Jordan and trying to make him into a baseball player. It's not easy to be a superstar especially when you are in crisis mode."

For its part, Citi says it continues to proactively shrink its balance sheet and shave risky assets. From the 2007 third quarter to this year's first quarter it has cut assets by more than $500 billion, or by about a third. The bank has slashed its so-called "risky asset categories" by 50%. Direct subprime exposure is down 65% year over year and highly leveraged finance commitments are down 75% year over year, the bank reports. It has also reduced its highest-risk assets in portions of the investment bank by half, to about $100 billion.

Grundhofer Could be Tapped

Nevertheless, Bair is not the only one calling for a shakeup at Citi. Others are skeptical about the bank's prospects and its ability to weather fresh credit losses. "Shaking up their management is an important step in making amends," says Martin Weiss of Weiss Research, an independent research firm in Jupiter, Fla. "But it's just the first step. The surge to 9.4% in the jobless rate means that we can now expect a parallel surge in the delinquency rates on mortgages, credit cards, and other consumer loans."

If Pandit were to depart, federal officials would likely turn to former US Bancorp (USB) CEO Jerry Grundhofer, and they have reached out to him about taking over the bank, the Journal reported, citing people familiar with the talks. Grundhofer recently joined Citi's board as part of the government's effort to bring in new directors.

Grundhofer has experience in commercial banking, unlike Pandit, and in repairing troubled banks. William B. Smith of Smith Asset Management, a Citi shareholder, said on June 5 that he would support having Grundhofer as chief executive. "Citi continues to rot at its core due to poor employee morale and the burden of government intervention," Smith wrote in an e-mail. "Let him monetize the company over the next few years and attempt to return the company to shareholders."

At the very least, it is likely that change will continue to come to Citi's board, which for years was perceived as lax and complicit with Citigroup founder Sanford I. Weill. "I don't think [previous CEO Chuck] Prince improved it much," says Professor Robert Howell of the Tuck School of Business at Dartmouth. "I have been terribly disappointed about Citi's board. It has been extraordinarily inbred and weak. Management in general has been very adversarial and made up of a whole bunch of fiefdoms. It's something that the current CEO has to address. It's a major weakness in the institution."

With Theo Francis

Sasseen is Washington bureau chief for BusinessWeek.
Der Hovanesian is Banking editor for BusinessWeek in New York.

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