Citigroup Shake-Up
Most Americans probably have not heard the name Vikram Pandit. Mr. Pandit resigned yesterday after a five year tenure as the CEO of one of America’s largest banks, Citigroup. Amid all the talk of the presidential debates, this story has slipped by unnoticed, but here a few reasons why you should care.
Pandit’s resignation was seen largely as a result of a series of setbacks for the banking giant, most notably when shareholders rejected his compensation plan. Pandit was appointed as CEO in 2007 and the firm has since then suffered a series of setbacks mostly unique to Citi, including a partial nationalization by the government, the Fed’s rejection of Mr. Pandit’s plan to increase the dividend and buy back shares, and a rejection from shareholders to boost his compensation from $1 to $14.9 million. Don’t feel bad for Mr.Pandit, however, as he was able to bring home $165 million for selling his hedge fund to Citi in 2007, with an additional $56.4 million in compensation during his tenure. How has Citi fared during this time? Well, shares are down 90% since Mr.Pandit took the role as CEO compared to being down only 50% for his competitors, measured by the KBW Bank Index.
Pandit’s tenure and subsequent resignation highlight some of the problems and challenges that Wall Street is dealing with. First and foremost, the benefits of size. JP Morgan Chase is perhaps the exception to the rule but countless of Wall Street experts, including Sandy Weill, the Dr. Frankenstein behind the Citi monster, are calling for big banks to break up, including his previous employer.
If the argument for breaking up the banks is rooted purely in improving social welfare by decreasing the possibility of a future bailout — an argument which is questionable at best, — I am not sure that we will see a change of the status quo. On the other hand, if the argument becomes about the economies of scale and scope that Citi enjoyed for so many years that no longer exist due to burdensome regulation, lower interest rates, and an unfavorable economic environment, then we may see significant changes ahead on Wall Street.
Lastly, I would like to point out the role the government may or may not have had in Mr.Pandit’s resignation. Since Mr.Pandit’s appointment as CEO, former FDIC Chairwoman Sheila Bair has been constantly at odds with his qualifications. Mr.Pandit, who previously worked within investment banking and ran a hedge fund, did not have the populist qualifications that Ms.Bair was looking for. During the financial crisis, Ms.Bair attempted to put pressure on her fellow regulators to ask Citi to seek new management only a year into Mr.Pandit’s tenure. Since Mr.Pandit arrived at Citi in 2007, he had little influence over the pre-2007 catastrophic mortgage losses that led to Citi essentially becoming a bankrupt entity. In addition, the Citi board of directors indicated that Mr.Pandit’s entire tenure has been free of ethical issues and misconduct.
What I am getting at here is that it is highly inappropriate for Ms.Bair to ask for Mr.Pandit’s removal as CEO because she does not agree with his qualifications. As one of the bank’s regulators, the FDIC does have certain regulatory oversight of the firm, but that does not mean that the Citi board needs to listen to her opinion on matters of management. In addition, she once raised her concerns to her fellow regulators that duly disregarded her opinion. The Federal Reserve and the Office of the Comptroller of the Currency are Citi’s chief regulators, with the FDIC only responsible for regulating the bank’s deposits. Even after Bair left her official role at the FDIC, she continued to speak about her distaste for Mr. Pandit in her new book documenting her fight against Wall Street. In a recent interview with Fortune Magazine, Bair states that she viewed Mr.Pandit’s resignation “as a positive” and is sure that “Vikram still blames me” for some of his recent failures.
Ms.Bair can now rest assured that all is well at Citi since it seems that the shareholders, the board, and perhaps Pandit himself agreed that he is not the best man for the job. If there is one point I want us to take from this recent resignation, it’s that determined regulators rarely decide when its time for a CEO to step down. Rather, Mr.Pandit’s resignation comes as a positive for all shareholders that wish to see managers take responsibility for their performance. Mr.Pandit’s record is clear, he earned over $200 million during his time at Citi and the shares lost 90% of their value. Ultimately, the shareholders will decide who is the best person to run their firm, regardless of whether they have investment banking or commercial banking expertise. Perhaps Ms. Bair’s time could be used more productively lobbying for increased shareholder rights as opposed to trying to handpick a candidate to maximize her conception of social welfare.