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Friday, 31 October 2014

Pandit panned

Pandit succumbs to “three strikes you’re out” rule

Vikram Pandit succumbed to the most basic rule of thumb: three strikes and you’re out. A trio of Citigroup misfortunes, not all of the chief executive’s making - the bank’s dividend policy, his own compensation and the sale of Smith Barney - eroded the confidence of shareholders, regulators and the board. And they couldn’t have been much fun for Pandit to endure, especially after successfully navigating Citi to stability.

Though Pandit’s departure came suddenly, it’s easy to see why he and the board were ready to go their separate ways. In March, Pandit went to bat for shareholders by asking the Federal Reserve to let Citi pay a higher dividend or buy back more stock. But the Fed decided that would overly weaken the bank’s capital position.

The clash put the bank at loggerheads with its primary watchdog again. While the central bank’s math was indeed tough to comprehend, Pandit had already spent much of the year talking up Citi’s risk-management credentials and the prospect of higher shareholder payouts. In that sense, he failed to meet his own ambitious expectations.

That made it less surprising when the bank’s owners revolted against executive pay. Though it was a non-binding vote, 55 percent of Citi’s shareholders rejected a package that would have awarded Pandit $15 million and a retention package worth as much as $40 million for hitting relatively mundane targets. Though it’s really the job of the chairman and the compensation committee (which included now-chairman Mike O’Neill) to justify the rewards, the taint unfortunately stuck to Pandit, who was working without a contract.

The third strike seems more clearly self-inflicted. Pandit engaged in a bit of misguided game theory when valuing the Smith Barney brokerage he was selling to Morgan Stanley. It resulted in a $4.9 billion writedown that showed up in yesterday’s uninspiring third-quarter results.

None of the misses was deadly in the way of so many decisions by deposed bank bosses, including Barclays’ Bob Diamond, Bank of America’s Ken Lewis and Lehman Brothers’ Dick Fuld. They nevertheless cumulatively revealed a CEO who couldn’t always effectively communicate a set of expectations and meet them.

In the end, though, Pandit leaves behind a much stronger Citi than the one he took on at the advent of the financial crisis. The stock is up by a third in the past year, and barring another unforeseen hiccup - always a real possibility at Citi - the bank should be able to free up nearly $10 billion of capital for shareholders annually for the next few years.

Pandit’s replacement, Mike Corbat, is cut of Citi cloth and well positioned to oversee that process. He is unlikely to be the man to take Citi to its next logical transformation - a value-enhancing breakup. But he is the right man to pick up the pieces from Pandit and fulfill Citi’s financial promise.

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Citigroup named Mike Corbat as chief executive officer to replace Vikram Pandit, who took the job in December 2007, giving no reason for his sudden departure.

The board praised Pandit’s “leadership, integrity and resilience in guiding Citi through the crisis and positioning it well for the future.”

Corbat, who was Citi’s CEO of Europe, Middle East and Africa and previously ran Citi Holdings, has “demonstrated outstanding leadership qualities and brings deep and varied operating experience across a broad spectrum of the financial services industry,” Chairman Michael O’Neill stated.

“Citigroup is well-positioned for continued profitability and growth, having refocused the franchise on the basics of banking,” Pandit said in a statement.

Said Corbat: “The fundamentals we have in place today are solid, and we are on the right path. Citi’s businesses, footprint and talent are unmatched, and we will be relentless in our drive toward operating excellence and risk management.”

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