Citigroup's Pandit: On the Way Out?

Citi denies a shuffle impends, but published reports say the FDIC's Sheila Bair wants new management. Will Jerry Grundhofer take over?

By Mara Der Hovanesian and Jane Sasseen

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.

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