panditknockscitiintoshapeeuromoney_july2010
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Volume 41, Number 495
Panditknocks Citiinto shape
BANKER OF THE YEAR
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“BEING A SUPERMARKET is not a strategy.”
That simple sentence sums up everything that went wrong with
Citigroup, and everything that Vikram Pandit is trying to do to
make Citi one o the world’s best banks again.
Citi isn’t back just yet, but it’s on its way. First-quarter 2010
earnings, announced in mid-April, were some o the most impres-
sive in the industry. Citigroup produced net income o $4.1 billion.
Compare that with Bank o America, which is widely thought to
have emerged rom the crisis aster and stronger than Citi, but made
$3.2 billion over the same period. Or Barclays, a bank that suppos-
edly came out o the crisis a clear winner, but has rst-quarter net
income o about $2.2 billion. Or JPMorgan, the bank least impacted
by the credit crunch, but which had rst-quarter 2010 net income o
just $3.3 billion.
One quarter does not make a recovery. Citi posted a loss or six
o the nine previous quarters and a loss in Q4 2009 o $7.6 billion.
Most analysts had expected the bank to break even or this one at
best.
It was the rst good piece o news Pandit had been able to
present in almost two-and-a-hal years as chie executive o the
group. His has been one o the most challenging tenures the bank-
ing industry has seen. Few thought he would survive. Fewer still
thought he was the right man to restore Citi. He might just be
proving his critics wrong.
Those critics have included Federal Deposit Insurance Corp chair
Sheila Bair who, last summer, had angled or Citi to be broken up
quickly and or Pandit to be replaced as chie executive.
At the time, Euromoney was sitting in the oce o another leading
Wall Street banker. On the TV screen, a caption with two photos
fashed up: “Pandit vs Bair”. “Well,” said the chie, “we all know
who is going to win that battle. And it’s not Vikram.”
They have included Sandy Weill, the creator o the Citi supermar-
ket, who let it be known that he was unhappy with the way Panditwas running Citi, and that he had not been consulted having publicly
backed the bank through a share purchase in January 2008.
Pandit is still there. Those that dismissed him, who underesti-
mated him, might now have to eat their words. He has seen through
one o the most dramatic bank restructurings in history. And now,
he thinks, he and his team deserve some credit.
“We don’t always get credit or some o the tough decisions we
have made: decisions which have enabled us to take $13 billion a
year o our cost base,” he says. “And this at a company that tried
and ailed many times to get costs under control in the past, and has
now achieved this without hurting revenue signicantly.”
Those cost savings equate to $3.25 billion a quarter: that’s most o the net income Citi made in its rst quarter. And that revenues were
maintained tells its own story.
“Think about it: we cut our workorce o 370,000 people by
110,000. We sold a lot o assets. We raised a lot o capital. And yet
we have maintained revenues. That tells you a lot about how ar we
have come rom the old Citigroup,” Pandit says.
a whirlwind debutPandit joined Citi in July 2007, just as the bank was about to realize
the extent o the losses it had suered in the sub-prime and lever-
aged nance sectors.
It was a whirlwind six months or Pandit. He joined to run Citi
Alternative Investments.
Beore long, he had been asked to come in and sort out the prob-
lems within Citi’s banking and markets divisions, since renamed the
institutional clients group. “I was running our alternative business
in midtown. One day Chuck [Prince] called and said: ‘Vikram, I need
you downtown [at the bank’s Greenwich Street banking and markets
hub] to help sort out our market positions. Put the right people in
place and then go back to doing what you were doing beore’.”
Pandit elt compelled to leave the job he had been brought in to
do. “I respected Chuck, and could not turn him down. And once I
had made the decision to go downtown, I owned it. There was no
going back.”
Citi unravelled very quickly in the autumn o 2007. One minute
chie executive Chuck Prince was still dancing; the next he was
gone, as Citi revealed it would post sub-prime losses o $11 billion
and sought a $7.5 billion capital injection rom the Abu Dhabi
Investment Authority under an interim leadership team o Citi vet-
erans Robert Rubin and Win Bischo.
At the same time, the board was looking or a new chie execu-
tive. Rumours were rie about who would get the job: could Jose
Ackermann be tempted to leave Deutsche Bank? Would Barclays
president Bob Diamond ull his dream o running one o the big-
gest US banks? Could Jamie Dimon be persuaded to return to thebank that he had once been heir apparent to, beore his alling out
with Sandy Weill?
Few people picked Pandit as a potential leader. He had only been
at the rm a ew months. Citi was a universal banking behemoth,
employing not ar short o 400,000 people; Pandit’s pre-Citi
management experience had peaked at Morgan Stanley, where he
managed a ew thousand people in the institutional securities group.
He had no experience o the consumer and commercial banking
businesses that had been the bedrock o old Citicorp.
Rubin said at the time: “The combination o his deep executive
experience and long history as a strategic thinker makes Vikram the
outstanding choice to be Citi’s chie executive.” Few people thoughtthose credentials would suce or one o the toughest jobs in bank-
ing history.
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Cv sy
Pandit knew he had his doubters. “Sure, I was relatively new to
the company, but at least I had had a ew months here and was
amiliar with the issues we aced, unlike any candidate that may
have come in rom the outside,” he says. “And given that Citi was
involved in so many parts o banking, it would have been hard to
nd a candidate with experience across all o them. Remember most
o the problems stemmed rom issues in the investment banking
and trading parts o Citi, businesses which I had a great deal o expe-
rience in rom my career at Morgan Stanley.
“It was clear that the world had changed. The previous environ-
ment o seemingly limitless pools o liquidity and capital had come
to a sudden end. Citi had to change too.”
Growing write-downsBy the time Pandit had become chie executive, two weeks beore
Christmas in 2007, those write-downs were growing; in early Janu-
ary 2008, he was orced to announce they had become $25 bil-
lion over two quarters and Citi was compelled to sell $12.5 billion
o convertible preerred securities to investors such as Singapore
and Kuwait’s investment arms, and long-term shareholders such
as Prince Alwaleed bin Talal and ormer Citigroup chie executive
Sandy Weill.
“When you need to raise capital, the rst question to consider is
why should people nance you,” says Pandit. “We had our immedi-ate needs: to deal with our nancial stress; to dene our strategy,
and what makes this bank dierent; to put in place the right team
to take the bank through the crisis and then orward into the uture;
and to rebuild a culture o execution.”
Pandit and his team immediately got to work, but nine months
later the problems they aced were no longer Citi-specic: Lehman
Brothers collapsed and the crisis became systemic.“Lehman changed the rules o the game or us and every other
bank. The markets had given us the capital we needed up till that
point,” says Pandit.
Now, as Citi aced collapse, the markets could not give Pandit
what he needed to survive. So he was orced instead to turn to the
US government. The mighty Citigroup, not long ago the biggest
bank in the world, was on its knees begging or help.
That culminated in a third bailout or Citi in February last year,
when the US government agreed to convert $25 billion o preerred
stock into common equity. Citi’s tangible common equity had
plummeted to just $29 billion at the time. Its stock was trading at
just $1.50.
“Our decisions on raising capital, particularly relating to the
investments by the US government, were tough but necessary,” says
Pandit. “Our early capital raises, though important, turned out to be
insucient in the light o the collapse o Lehman and subsequent
events. Getting our capital position strong, and our operating com-
pany in order, was critical.”
Seeking new strtegyAll the way through the crisis, while Pandit was raising capital and
dealing with a share price that had been wiped out, the new chie
executive and his team were trying to dene a new business model
or Citi.
“We had to get our strategy right, and then we could make some
inormed decisions,” says Pandit.
Citi’s new chie executive actually had some previous experi-
ence in helping Citi through a crisis, as his colleague, John Havens,
now chie executive o the institutional clients group, explains:
“Vikram and I rst walked into Citi when we were at Morgan
Stanley together in the early 1990s. We worked with John Reed on
the restructuring o the business. The thing that Reed did best, and
which we always remembered, is that he believed in Citi’s platorm
and would not sell o any o the core businesses. And those core
businesses are still vital to the platorm today, even ater everything
that has happened.”
As they looked at the way the bank was run, Pandit and his teamdiscovered that many o the jibes thrown at Citi – that it was too big
to manage, disjointed, a series o businesses bolted together but with
little interaction – were true.
“Everything in Citi was in silos. Each business had everything rep-
licated – rom buying the coee to doing the accounting. We even
had three dierent ways o taking part in US Treasury auctions: the
Citi platorm, the old Salomon system and the Smith Barney system.
No one ever paid attention to it,” says Pandit.
Pandit also had to instil a cultural change in the bank i his strat-
egy was to succeed: “It’s interesting: speak to the people who were
here in the 1990s, and they’ll tell you that the old Citi knew how to
execute a strategy. Somewhere along the line, we lost that. But weare back to that now.”
Citi is now a remarkably dierent business to what it was two years
“Being the biggest is no longer a denition o
success here. I don’t want to be number one in
everything. But I do want my clients to think
we are the best at what we do”
John Havens, Citi
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ago. In act, it is two businesses. Pandit’s biggest decision was to place
businesses and assets that were no longer core to the bank’s strategy
in a separate entity, Citi Holdings. Into these Pandit put the bank’s
remaining holdings o the iconic brand o Smith Barney, one o Sandy
Weill’s biggest buys, ater Citi sold a 51% stake and management con-trol o the business into a joint venture with Morgan Stanley.
Pandit also prepared to say a long arewell to one o Citi’s key
building blocks o the past, local consumer lending, which included
residential and commercial real estate loans, auto and personal loans
and consumer banking in western Europe.
Also dumped into Citi Holdings was a special asset pool made up
o many o the illiquid non-core assets that had helped bring Citi’s
uture into question.
Run by ormer Salomon veteran Mike Corbat, Citi Holdings aims
to reduce assets as quickly as possible while providing the best
return possible or shareholders. Total assets at the end o the rst
quarter o 2010 were $503 billion, compared with $662 billion when
Citi Holdings rst reported at the end o Q1 2009. Its rst-quarter
revenues or 2010 were $6.6 billion, on which it contributed a loss
to Citigroup o $887 million.
Core considertionsThat let Citi with what Pandit considered its three core businesses,
which exist under the old Citicorp banner: global transaction serv-
ices, securities and banking, and regional consumer banking.
Citi has a unique take on consumer banking: “Our core retail
strategy is to be an urban bank, serving customers in the top 100 cit-
ies around the world. In the US we’re in the 10 biggest metropolitan
areas. People in these bigger cities have much more in common as
customers than they do necessarily by nationality: rom a banking
perspective, São Paolo has more in common with London than it
does with San Juan.” Regional consumer banking contributed $1.01
billion o $5.16 billion o net income or Citicorp in the rst quarter
o 2010.
Global transaction services is a powerhouse business, which lever-
ages o Citi’s presence in more than 100 countries, contributing
$941 million o net income in the rst quarter.That leaves securities and banking, which includes the investment
bank and markets business – or institutional clients group – and
which made $3.2 billion o net income in the rst quarter.
Pandit had put his long-time colleague John Havens, with whom
he had worked closely at rst Morgan Stanley and then Old Lane, in
charge o rationalizing Citi’s banking and markets eort, leveraging
its strengths, and correcting its mistakes.
“We understand that we are dened by our global network. The
value we bring is clear: our ability to provide access to markets, peo-
ple and ideas. And our network is our huge advantage,” says Pandit.
“Once we have established that platorm, we can be a traditional
business. We cover clients as clients – in cash, custody, advice,
liability management and so on. And we trade with them – and his-
tory proves that in banking the best money is made over time rom
bid-oer spreads, and not on proprietary trading.”
Getting back to those basics was a huge task. Like the whole bank,
much o ICG had become unocused and wasteul. “Did we need
to cover 40,000 clients? No, covering 5,000 properly is the right
number. Does market share matter? Sometimes, but certainly not
always,” says Pandit.
As Havens puts it: “Being the biggest is no longer a denition o
success here. It doesn’t work – it costs money, and it leads to hubris.
I don’t want to be number one in everything. But I do want my
clients to think we are the best at what we do.”
Big cuts in some areas were inevitable.
Cut nd thrust“We had some mighty battles internally about what would happen
to revenues i we made some o these cuts,” says Pandit. “But once
we had made the decisions, the system responded.”
One o the questions Pandit posed to his businesses was: how
many salesorces do you need? Citi’s sales eorts were divided in
every which way, to the point that the bank even had teams selling
the same product but under dierent management in its midtown
and downtown oces. Some managers argued that moving to a rela-
tionship manager model would reduce the size o the salesorce and
hence revenues. It hasn’t been the case.Regional silos would each have their own chie nancial ocer,
accounting team and technology groups. These were combined into
one. Some internally complained that such a move would increase
operating risk. Again, the ears were unounded.
Perhaps the biggest battles were around the use o Citi’s balance
sheet. Pandit made it clear that the bank would no longer provide bal-
ance sheet to clients that did not give it other business. That meant
coverage ocers were aced with losing multiple clients. They ought
hard to keep them. I they couldn’t prove they could change a rela-
tionship that did not meet the new criteria, they lost the battle.
But the scrutiny applied to the way Citi deals with clients has
transormed some o the rm’s relationships. Havens takes up thestory: “I had a group o bankers complaining to me about a big
client, a major multinational. They said the company only wanted
0
100
200
300
400
500
600
700
Q2 2009 Q3 2009 Q4 2009 Q1 2010
Special asset pool
Local consumer lending
Brokerage and asset management
$bln
A lot leFt to get rid oF
Citi Holdings’ assets Q2 2009 to Q1 2010
Q1 numbers include $43bln of assets brought on balance sheet due to adoption of
SFAS 166/167
Source: Citi
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Cv sy
our balance sheet; that we never got any other business; and that we
should stop dealing with them.
“So I asked a ew questions: are they one o the biggest clients in
their industry group? – is that industry group important to us? – is it
important to know the client better? – do they do a lot o business?
– and nally, do we have our best people covering this client?
“The answers to the rst our questions were all ‘yes’. The answer
to the last one was ‘no’.
“So we put some o our best people on coverage, and now we’re
the number one counterparty to that company. Last time I went to
see the CFO, he took me in to see his chie executive. He told me
that since Citi had done a lot or his company, he wanted to nd
ways to do more with Citi. And to think we were discussing whether
we should bother to cover them!”
Citi has also had to get its own house in order. Perhaps because o
the old silo mentality, the bank had ailed to put systems in place to
compete in the age o electronic trading. That is now changing.
“I we are going to be client-centric, then we must have all the
products and the capability to deliver them to our clients,” says
Havens. “We were sorely lacking in some areas. For example, we
took an inventory o our equity and rates platorms and clearly we
weren’t where we needed to be.
“We ound we had been disintermediated by technological ad-
vances in the market. We’d made some investments in tech in FX,
but we had completely ignored banks as a client segment. Well, how
can you claim to be a leading rm i you are not in that market? So
we made the right investments in people and technology, and nowwe are seeing some good results rom that.”
ctions nd fedomsThe common accusation levelled against pre-crisis Citi is that it was
simply too large, and too unwieldy, to manage. There’s a great deal
o truth in that.
But Citi had another, entrenched problem. The business was ac-
tional. Fiedoms prolierated. The heads o dierent businesses did
not get on. Their businesses barely talked to each other.
This was epitomized by the atmosphere at Citi’s Greenwich
Street oces. You were either in the camp o Tom Maheras, who
ran the markets business; or that o Michael Klein, who ran bank-ing. As Citi altered in 2007, all the talk in New York and beyond
was which o the two would take over i Prince let the bank.
When Pandit joined in July 2007, the Maheras and Klein camps
were briefy united in saying that the new arrival had no chance
and no credentials or being the next chie executive. Maheras and
Klein were soon gone. Pandit, with no constituency, was let at the
helm o the whole business.Perhaps that helped Pandit. In any case, he says the problems at
Citi were more due to the inherent conficts within the business
than they were due to clashing personalities.
“I you have a supermarket, oering all things to all people, then
you cannot expect it to operate as one team,” he says. “But i you
dene the strategy o being a global bank, then you can create a
structure that works.”
One o Pandit’s key measures was to bring in regional chie execu-
tives. “Take our Asia business as an example. We used to have ve
silos operating independently o each other in Hong Kong. Now our
regional CEOs Stephen Bird and Shirish Apte make sure the business
operates as one.”
Pandit is remarkably sel-eacing or the leader o one o the
world’s biggest banks. He’s determined to make sure that credit or
Citi’s turnaround is shared with his senior management.
“Every team has a captain but I view leadership and manage-
Old Lane is, to many outsiders, the biggest blot on Pandit’s career
at Citi. Ater being orced out o Morgan Stanley in 2005 by its
then chie executive, Philip Purcell, Pandit and a group o close
colleagues, who included now-Citi senior executives such as John
Havens and Brian Leach, joined the legion o ormer bankers who
set up hedge unds. Old Lane began operations in March 2006.
Within 13 months, Citi had bought Old Lane or what seemed
even then an infated price o $800 million. By then it had $4.5
billion o assets under management. Pandit’s share o the sale was
estimated to be around $165 million, o which he reinvested about
$100 million into Citigroup stock.
But Old Lane, like many hedge unds, struggled in the down-
turn. By June 2008, Citi had taken the decision to shut down Old
Lane, rather than injecting a $1 billion-plus sum o new capital,
and took most o the hedge und’s assets on to its balance sheet.As Citi continued to struggle, Pandit was hammered by the
media. His payout, and the demise o Old Lane, came to typiy or
many the worst excesses o executive compensation and the bank-
ing crisis took hold.
Pandit knows it’s a sensitive subject, but he comes out ghting.
“I’m condent that in the ullness o time, people will see that
Old Lane brought a lot to Citigroup. We have a number o private
equity unds and trading businesses that are perorming well. But
most o all it brought talent to the bank: people like Brian Leach
and John Havens that are now taking this company orward. And
you have to remember that as the senior management moved into
the Citi’s executive team, there were key-man clauses that triggeredand we had to oer investors the chance to take their money out.”
Pndit deends hisOld Lne legcy
Mike Corbat (l) and Don Callahan: key members of the team that have
resurrected Citi with Pandit
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ment as very much a team sport,” he says.
He gives some examples: chie administrator Don Callahan, who
runs the operations and technology side o the group and whose
division bore a large share o the cuts burden as Citi rationalized its
platorms and systems.
He praises the risk-management team, run by his old colleague
rom Morgan Stanley and Old Lane, Brian Leach, which undertook
a root-and-branch review o the entire business. Leach had some
experience in crisis management: in October 1998, he was seconded
to Long-Term Capital Management to oversee the orderly unwind-
ing o the hedge und’s positions, which had threatened a systemic
crisis almost exactly a decade beore Lehman caused one.
Leach had also worked closely with Mike Corbat, who combines
his role as head o the group’s brokerage and asset management unit
with the chie executive position o Citi Holdings.
And Pandit also mentions Bill Mills, whom he describes as “one
o the unsung heroes o our turnaround, a real hands-on manager”,a 26-year Citi veteran who as chie executive o Europe, Middle East
and Arica had to oversee the withdrawal o Citi rom consumer
banking in western Europe while pulling disparate silos together.
“We heard all the comments that the management team was
no good. But the strongest management teams are those that get
through the bottom o the cycle. It’s not always easy to ignore, but
you get caught up in what you need to do,” says Pandit.
“We had a good team and a common sense o purpose. But
the key thing was to make sure we had a credible plan that we all
believed in, that we would stick to and that we could communicate
to our colleagues and our clients. I you can’t do that, then you’re
dead. And at the end o the day, this is a antastic company. Yes,we’ve had some strategic issues, but the underlying quality o the
business was always there.”
Blck mrk The US government is still a shareholder in Citi. At the start o the
year, its stake was around 27%. The Treasury has stated that it plans
to reduce its stake to zero by the end o this year, a process it is
achieving through incremental sales o blocks o shares.
That it still owns Citi stock is held as a black mark against Pandit’s
tenure by some, and he admits the day the US government is no
longer a shareholder will be a milestone or the bank.
“Getting closure on US government ownership will be an im-
portant psychological point. The Treasury should recover all o its
investment and then some.” Perhaps more important is the continu-
ing reduction in the size o Citi Holdings. “We’ve sold a lot o assets.
As we sell more, the story transitions rom Citi Holdings to the
uture o the bank, which is Citicorp.”
Pandit is targeting a sustainable return on assets o between 1.25%
and 1.5%, something the bank achieved in the rst quarter o 2010.
Return on equity was also healthy or that period, at 12%, butPandit says it’s not a measure o perormance that he can run the
business by in the oreseeable uture, given the discussions about
bank capital among regulators. “You can’t talk about ROE when you
don’t know what the ‘E’ is going to be,” he says. At the end o the
rst quarter, Citi had tier 1 common equity o $97 billion and a tier
1 capital ratio o 11.2%.
Whether Citi can repeat that perormance in the more dicult
markets o the second quarter and beyond remains to be seen.
But the uture excites Pandit. “I’m looking orward to getting
back to what excited me about joining this rm in the rst place.
We have a great opportunity here. There are not many 198-year-old
bank ranchises out there. More importantly, there are very ew thatcan have a real impact on the economic potential o the world. This
business ts perectly with where the world is going.”
“I was running our
alternative business
in midtown. One day
Chuck [Prince] called and
said: ‘Vikram I need you
downtown to help sort
out our market positions’.
I respected Chuck, and
could not turn him down”
Vikram Pandit, Citi