On June 21, Moody’s Investors Service published a list of 15 banks and securities firms operating in the global capital markets that were downgraded. The long-term senior debt rating of several banks was downgraded between 1 and 3 notches. The short-term rating of four companies was lowered to Prime-2.
Citigroup Inc.’s long-term senior debt’s outlook was changed to negative and lowered from “A3” to “Baa2.”
“Today’s actions, however, reflect not only the credit implications of capital markets operations. They also reflect (i) the size and stability of earnings from non-capital markets activities of each firm, (ii) capitalization, (iii) liquidity buffers, and (iv) other considerations,” Moody’s states in its June 21 downgrade announcement.
Opting for Resignation
An announcement titled “Vikram Pandit Steps Down as CEO of Citigroup” was published by Citigroup on Oct. 16. Pandit has held this position since December 2007.
With Pandit’s departure, only two executives running major banks throughout the financial crisis are left: Jamie Dimon, chairman and CEO at JPMorgan Chase & Co. and Lloyd C. Blankfein, chairman and CEO at Goldman Sachs Group Inc.
“The truth is he [Pandit] didn’t leave voluntarily. He was given an ultimatum by the ‘new’ board of directors: resign or be fired,” according to Shah Gilani’s Oct. 18 article on the Wall Street Insights & Indictments website.
Challenging to Find the Truth
“Poor old Vikram. This was a setup from the start,” Gilani suggests in the article.
Apparently, Pandit lacked the expertise for running a commercial bank. Besides, he could be easily influenced and should Citibank face trouble, they had their scapegoat.
An Oct. 17 article on the Motley Fool website suggested: “When Citigroup itself began to crumble, the board of directors decided to make Pandit CEO of the entire company. … When a crisis hits, find an inexperienced leader of an ill-fated acquisition and put him in charge of the ship.”
Pandit joined Citigroup in December 2007 in what could be looked at as a package deal. Citigroup had acquired the former Old Lane Partners hedge fund, of which Pandit was an owner, and liquidated it within one year.
But what appears to have been Pandit’s downfall were the 2012 write-offs: a $1.2 billion write-off in the first quarter for Citibank’s investment in Akbank T.A.S., and a third quarter $3.3 billion write-off of Citibank’s investment in Morgan Stanley Smith Barney, according to the bank’s third quarter statements.
For the nine months in 2012, interest revenue fell to $51.5 billion from $54.9 billion during the same period in 2011. At the same time, net profit took a nose dive, from $10.1 billion in 2011 to $6.3 billion in 2012, a 37 percent decrease.
Yet, as of Dec. 31, 2007, the month Pandit took over the helm at Citigroup, the bank’s unadjusted historical daily closing stock price was $29.44 per share, and the Oct. 17, 2012, price was $38.43.
According to the monthly historical stock price chart, stock prices steadily declined during that time period. On Jan 2, 2008, the stock price was at $28.17 per share and by Nov. 3, 2008, it declined to below $10.00.
The stock price bottomed out on Feb. 2, 2009 at $1.50, then hovered below $10 until May 2, 2011, when it jumped to $41.15 due to a stock split. From then on, there were some ups and downs, but closing prices did not go below $25.
“Back in July, I noted that Pandit was reorienting this banking giant to higher-growth markets. And though the stock has made a nice 38% upward move in the past three months, you can now spot a path for an additional 30% gain from here,” according to an Oct.18 article on the Seeking Alpha website.
Pandit’s Competence Examined
A number of investment advisers are vocal about Pandit’s inability to be in charge of a global commercial bank the size of Citibank, including Sheila Bair, former Federal Deposit Insurance Corp. chairman.
On Oct. 16, the Huffington Post quoted Bair’s comments in an interview with Bloomberg Radio: “I saw not a good ability to execute, not a good ability to have information, which I thought was pretty basic for anyone managing a large institution. … I think he’s got skills that may be well suited at a different type of organization.”
Others disagree. “Many others suggested Pandit had done the best job he possibly could with the basket case that he inherited when he took over Citigroup at the dawn of the financial crisis. … Pandit has, by some accounts, done an admirable job of getting the bank back on the right track and of beginning the process of shrinking it,” the Huffington Post article suggests.
The Oct. 18 article on the Seeking Alpha website was complimentary of the job Pandit did, pointing to earnings per share of $1.11, which were about 10 percent better than forecasted.
“Let’s tip our cap to Vikram Pandit. Though he was just shoved out the door as CEO of Citigroup (C), he did a commendable job of fixing a very broken business,” the Seeking Alpha article declares.
The article also points to Pandit’s slip-ups, especially his inability to deal with regulators when it came to Citibank resuming stock buybacks and dividends. The regulators suggested that the bank’s wherewithal was not up to par. Also, the board of directors was not happy about the bank’s asset sales, which went sour for Citibank with the buyers getting a steal.
“As long as Citigroup trades so far below tangible book value, buybacks are the preferred path to enrich shareholders. … Investors will finally stop looking at Citigroup as a troubled lumbering bank,” the Seeking Alpha article asserts.
Investors and banking sector experts continue to pipe in about Pandit’s competence in running a global-sized commercial bank. Some admit that those not present at the board meeting can’t know if Pandit was asked to resign or resigned because he had had enough. In the end, it really isn’t important.
The Oct. 17 Motley Fool article said that Pandit had nothing to do with the bank’s problems. He didn’t create the mess that got Citigroup into trouble and was hired to get the bank back on its feet.
“The toxic CDOs [collateralized debt obligation], the multibillion-dollar losses, the bailouts—all of those seeds were planted before he arrived,” the Motley Fool article states.
In retrospect, Citigroup’s stock rose, the bank turned profitable, and it is in better shape than it was before Pandit took over. He started to divest unprofitable divisions, although at a loss. Overall, his performance achieved what he was asked to do when brought on board, and it was no secret that he wasn’t an experienced commercial bank CEO.
“The bank isn’t back to its former self, nor should it strive to be. But it’s stabilized. … Pandit actually did a decent job over the last five years, while every megabank that drove itself into the ground in 2008 was run by a ‘seasoned manager,’” according to the Motley Fool article.
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