News April 17, 2008, 12:01AM EST

Where Pandit Is Taking Citi

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Leaner and Meaner

Pandit's recent moves will buy Citi time. But if he wants the model to work, Pandit may need to cut costs drastically. By at least one measure, Citi remains woefully inefficient: Its sales per employee stand at $218,000, vs. $349,000 for rival JPMorgan Chase (JPM). Since last spring, Citi has announced it would cut its workforce by 10%, or 30,200. Pandit hopes to chop the annual budget further by centralizing certain companywide operations such as technology and human resources. Critics claim that won't be enough. "What I'm looking for is an all-out assault on the bloated cost structure," says an analyst.

Whatever cuts Pandit ends up making, he's focusing more resources on high-level talent. He's hired a former human resources manager from computer maker Dell to head up talent management. Pandit plans to revamp compensation and how the company doles out promotions.

From the outset, Pandit was also aware that he needed to overhaul the bank's oversight. To that end, he's built a new risk management team, staffed with outsiders, including many from his former employer, Morgan Stanley (MS). Among them: Brian Leach, one of the six advisers who helped liquidate the assets of Long Term Capital Management, the hedge fund that collapsed in 1998.

Board Repairs

The 14-member board, which has come under fire for Citi's risky subprime securities and off-balance maneuvers, may get a face-lift as well. All of the directors are up for election at the annual meeting on Apr. 22. Citi has said it is looking for replacements, namely new directors "with a particular emphasis on expertise in finance and investments." Some anticipate drastic changes. "There's going to be a shakeup," says Peter Kovalski, a bank analyst for the Alpine mutual fund group. "I hear they are going to get rid of the deadwood—the friends of [former CEOs] Prince or Weill who were just there for the status and paycheck."

If Pandit had decided to split up Citi, the timing wouldn't have been auspicious. After all, financial assets aren't fetching a high price these days. Based on conservative estimates by Chad Brand of Peridot Capital Management, the breakup value of Citigroup is around $22 a share—roughly in line with today's price. "I'm not sure this is the market you'd want to sell something in anyway," says Robert Manieri, an analyst with Cleveland-based Victory Capital. "But I'll be happy to know they've considered everything. I just want to hear they have a plan."

Pandit's decision does help lift a cloud of uncertainty that's been hanging over the company for quite a while. "Management is trying to right the ship," says Kovalski. "It's going to be some years before they get the returns, but they are going in the right direction."

With Ben Levisohn in New York.

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