Tuesday, May 13, 2008

On Pandit's New Plan at Citigroup

This past weekend's Wall Street Journal edition was full of information regarding Citigroup's CEO, Vikram Pandit, insistence that it will take years to fix the bank.

Sadly affirming the financial supermarket strategy first pioneered by James Robinson at American Express, then lifted by his capital markets hire, Sandy Weill, and ported to Travelers/Citibank, Pandit plans to take several years to get the overly-diverse financial conglomerate on the move in terms of shareholder returns.

Maybe Pandit's drinking whatever his chairman, Bob Rubin's been having, because it takes a lot of chutzpah for a CEO to tell shareholders,

"This will take time."

Apparently, rather than split the sprawling, hapless banking giant into reasonable pieces, such as institutional, consumer, and asset management, in its simplest description, Pandit intends to

"finally merge it all,"

to allegedly finish what Sandy Weill started back in 1998.

Do you know of any other sector in which the rationale for such a major merger is even still valid ten years later, without any changes?

It seems to me that Pandit is demanding, even challenging, his shareholders to stay put and wait a few years to see whether, untested as he is, the former finance professor can actually bring about profitable growth and consistently superior shareholder value at the financial utility.

If it were true that the bank were capable of being fixed to run, as is, intact, yielding consistently superior returns, but it would take some years, then I guess that's one alternative. But in the interim, shouldn't Pandit forgo any significant compensation, since he isn't planning on enriching his shareholders during the time period?

I'm thinking that he would be stripped of all deferred compensation, paid about $350K/year in cash, and, beginning in the year he forecasts improved, superior total returns, deferred stock grants could be paid to him.

If I were a shareholder, though, and heard Pandit's promise of years before a recovery of the bank, I'd just sell my shares and wait for some consistently superior total returns before plunging back in.

Heck, that's what my selection approach does anyway. I don't invest in 'turnarounds.' I only bet on superior operating businesses.

As I noted in this post, regarding GE, if shareholders dumped Citigroup stock now in droves, the price would plunge, actually making it easier for Pandit to earn superior returns in the near future. Provided he actually delivered the promised operating improvements.

Still, it's a pretty galling thing for Citigroup's shareholders to be told to just sit tight, as they have for, what, seven years? And maybe...maybe...this untried CEO will suddenly deliver some better returns than these poor souls could have been getting for the past seven years simply by selling Citi and buying the S&P500 Index.

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