Friday, May 20, 2011

Citigroup's Board's Appalling Reward of Pandit

Color me stunned as I opened yesterday's Wall Street Journal to learn that Citigroup's board actually awarded its inept CEO, Vikram Pandit, a potentially lush compensation package worth as much as $23MM, so he won't leave!

I actually heard Dick Parsons, Citi's board chairman, say this with a straight face in a noontime interview on CNBC.

Before I go further, take a look at the nearby price chart of several large US financial firms, Citi and the S&P500 Index for the past five years.
Citi is by far the absolute worst performer. There is absolutely no surviving firm which did as poorly, although Morgan Stanley (Pandit's old firm) and BofA were in the running.

Chase, Goldman and Wells Fargo tracked the S&P, ending the period more or less flat.

Missing, of course, are Bear Stearns, Wachovia, WaMu and Merrill Lynch, all of which either failed or were bought as they became insolvent.

Citigroup should have been in this group, with or without Pandit. Since he was CEO when the financial panic hit in the fall of 2008, his naivete, inexperience and general cluelessness were all good reasons to simply put Citi into court-protected reorganization. Deep-pocketed competitors would have gladly scooped up various pieces of the firm, so it's not like it would have literally disappeared, or that all its employees would have been suddenly jobless.

In fact, by letting more experienced, surviving, better-heeled firms buy the remnants of a failed Citigroup, Schumpeterian dynamics would have been playing out along its natural lines.

Instead, we now have sanctimonious Citi chairman Parsons claiming that Pandit did a great job and the board is concerned with his retention. This despite the fact that Pandit and his team haven't yet been able to give the board a clear, firm picture of Citi's normal expected business performance and income statement in the years ahead.

Mike Mayo, a longtime bank analyst, echoed my thoughts when quoted in the Journal article casting doubt on,

"rewarding a CEO whose company's stock has significantly underperformed other large banks during his tenure, and who got an enormous payday with the acquisition of his hedge fund."

It's unclear, besides lots of platitudes, that Pandit has any idea what he's doing. The same goes for Parsons and his board. How can they, in good conscience, squander their shareholders' money like this? Either Parsons is a fool, delusional, or was just plain lying when he spun his fairy tale version of Citi's recent performance on CNBC yesterday afternoon. It's not like there are any firms left stupid enough to try to hire Pandit if he actually left Citicorp.

The Journal piece details that one of the elements of Pandit's compensation is participation in a profit-sharing plan which is cleverly based only on the "core banking unit, without counting the losses at Citi Holdings, the entity holding the assets earmarked for sale. The profit-sharing payments kick in once the core Citicorp banking unit tops $12 billion in pretax profit over the years 2011 and 2012- less than half the level recorded for 2010." That was $20B.

So Parsons' contention that Pandit 'has to perform' is disingenuous. He and his board cronies set the bar so low that a monkey could be in Pandit's job and Citi would still beat the profit-sharing targets. And the bananas would be much cheaper than what Pandit's going to receive for a bank that is essentially on autopilot.

Parsons also hastily put the past behind, probably because he doesn't want anyone to remember that Pandit was paid several hundred million dollars for a hedge fund that subsequently performed so badly that it had to be closed. Even with various stock options and lockups, it's pretty clear that Pandit made tens of millions free and clear from the deal.

From seeing Parsons' performance on CNBC and reading of Pandit's new compensation package, I can't imagine anyone other than market-timing institutional professional investors going near Citi's equity anytime soon.

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