Citigroup Inc. (C:US), the biggest U.S. bank to have regulators reject its capital plan this year, dismantled a board committee created during the credit crisis to police the disposal of toxic and unwanted assets.
About $200 billion of such assets remained when directors broke up the Citi Holdings oversight panel last month under new Chairman Michael O’Neill. Shannon Bell, a spokeswoman for New York-based Citigroup, confirmed the move.
Assets in Citi Holdings have shrunk from about $600 billion since Chief Executive Officer Vikram Pandit created the unit in 2009 after the bank almost collapsed. The division, with losses of $19 billion since inception, still holds Spanish and Greek loans, overdue U.S. mortgages, bonds worth a fraction of face value and a consumer lender that Pandit has yet to sell.
“To remove the focus now on bad assets of any sort is simply a risky decision,” said Gerald Hanweck, a former Federal Reserve economist who’s now a finance professor at George Mason University in Fairfax, Virginia. “The board would want to have more focused monitoring on these kinds of assets, not be happy that you got rid of $400 billion of them.”
Scrutiny of how Wall Street directors oversee risk intensified this month after New York-based JPMorgan Chase & Co. (JPM:US), the biggest U.S. bank by assets, reported a $2 billion loss tied to the trading of illiquid credit derivatives. None of the directors on JPMorgan’s risk committee had worked at a bank or as a financial risk manager.
The Citi Holdings committee members had two roles, according to its charter: monitor Pandit’s strategy to dispose of assets and meet with executives to check on the unit’s “risk exposures.”
O’Neill, 65, a former CEO of Bank of Hawaii Corp., led the panel until he succeeded Richard Parsons, 64, as chairman of the parent company in April. The committee also included Rockefeller Foundation President Judith Rodin, 67, ex-Wells Fargo & Co. (WFC:US) Vice Chairman Robert Joss, 70, and Timothy Collins, 55, CEO of New York-based buyout firm Ripplewood Holdings LLC, Citigroup’s proxy statement shows.
Directors now will oversee Citi Holdings through the risk- management and finance committee, which monitors risk control for the bank, Bell said. Anthony Santomero, 65, a former president of the Federal Reserve Bank of Philadelphia and a Citigroup director since 2009, is chairman of that four-member panel. Citigroup, the third-biggest U.S. lender, had $1.94 trillion in assets (C:US) as of March 31 and has operations in more than 100 countries.
The loss at Citi Holdings widened to $1.03 billion in the first quarter from $1.02 billion a year earlier. Moshe Orenbuch, a Credit Suisse Group AG analyst, estimates the unit’s 2012 losses will climb 10 percent from last year to $4.64 billion. Annual profit at the parent company may increase 9.9 percent to $12.2 billion, according to the average estimate (C:US) of 13 analysts surveyed by Bloomberg.
Pandit, 55, has sold private-equity stakes, auto loans, mortgage portfolios, Student Loan Corp., life insurer Primerica Inc. and other unwanted finance firms, including a hedge-fund business, since creating Citi Holdings. The unit’s assets fell 28 percent to $225 billion last year, and directors considered the decline in their decision on executive compensation for 2011, the proxy statement shows.
Citigroup has sold more than 60 subsidiaries since 2008 and reduced assets in Citi Holdings to 11 percent of the balance sheet as of March 31, Bell said. “The vast majority of remaining assets represent non-operating businesses and we will continue to manage and reduce these assets in an economically rational manner,” she said.
Analysts including Todd Hagerman at Sterne Agee & Leach Inc. said the decision to disband the committee isn’t alarming because the unit is smaller now.
“Holdings will likely be less than 10 percent of assets near-term and has become much more manageable,” said Hagerman, a former Fed bank examiner who has a “buy” rating on Citigroup shares. U.S. regulators, who oversaw the company’s $45 billion taxpayer bailout, probably approved the move, he said.
Spokesmen for the Federal Deposit Insurance Corp., the Federal Reserve Bank of New York and the Office of the Comptroller of the Currency declined to comment.
Citi Holdings still contains about $114 billion of U.S. mortgages and personal loans, almost equal to the total assets of Cincinnati-based Fifth Third Bancorp (FITB:US), Ohio’s biggest lender. The rate of delinquencies on those loans is about seven times higher than for Citigroup’s U.S. retail bank, which includes commercial loans, according to a first-quarter financial supplement.
Citigroup has loaned $7.3 billion mainly to retail customers and small businesses in some of Europe’s most indebted nations. The “vast majority” of these loans are in Citi Holdings and made to customers in Greece, Portugal and Spain, the bank said. Those loans may have contributed to the Fed’s rejection of the lender’s capital plan in March, preventing Pandit from boosting the dividend (C:US) or repurchasing shares, said Charles Peabody, an analyst with Portales Partners LLC.
Another part of Citi Holdings contains about $1 billion in alternative investments and the firm’s 49 percent stake in Morgan Stanley (MS:US) Smith Barney, the world’s biggest brokerage. New York-based Morgan Stanley owns the rest of the firm, which has more than 17,000 advisers and $1.74 trillion in client assets as of March 31, and can buy it outright over the next two years.
There’s also a Special Asset Pool in Citi Holdings that contains about $36 billion of some of the bank’s most toxic investments. That’s more than the amount controlled by Brevan Howard Asset Management LLP, the world’s fourth-biggest hedge fund, data compiled by Bloomberg show. The pool includes subprime mortgage-backed securities the firm values at 10 cents on the dollar, as well as corporate bonds, loans, leases and letters of credit.
“Citigroup, and Citi Holdings in particular, has an element of black-box risk that a company like Coca-Cola doesn’t have,” said Whitney Tilson, founder of hedge fund T2 Partners LLC, which owns shares (BAC:US) in the lender. At $209 billion, it’s “still a good-sized portfolio.”
Investor concerns that Citi Holdings will weigh on profit have hurt the bank’s shares, Tilson said. The stock has tumbled 44 percent since the end of 2010 to close last week at $26.47 in New York, the second-worst performance in the KBW Bank Index (BKX) of 24 U.S. lenders. This view is faulty, according to Tilson, who said Citigroup is worth about $50 a share.
Pandit’s ability to sell assets also will slow from the past three years, the bank said in February. Citi Holdings contains about $39 billion of home-equity loans, and there’s no market for such debts after they sour, according to the company. Nor is he the only CEO looking to unload investments -- Bank of America Corp. (BAC:US)’s Brian T. Moynihan sold more than $33 billion in assets last year, while banks in France, the U.K., Ireland, Germany and Spain have announced plans to shrink by about 775 billion euros ($972 billion).
Citigroup halted talks to sell consumer-finance lender CitiFinancial, also known as OneMain Financial, a person familiar with the matter said in January. Pandit said in October that he no longer wanted to sell a store-branded credit-card business and removed those assets from Citi Holdings.
“Investors are increasingly frustrated with the seemingly slow pace of run-off in legacy mortgage assets and the inability or unwillingness to more aggressively pursue an alternative way to significantly reduce outstandings,” said Sterne Agee’s Hagerman.
Dismantling the committee could make it easier for Pandit to get more aggressive in divesting what’s left in Citi Holdings, according to Peabody of Portales Partners. This could include selling some of the assets in a “less than economic fashion,” he said.
“Now it can be liquidated in whatever fashion they want,” Peabody said. “When you dismantle a committee like that, then all those checks and balances are done away with.”
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