Citigroup Rises While Bank America Wallows


"Vikram Pandit’s last day at Citigroup swung from celebratory to devastating in a matter of minutes. Having fielded congratulatory e-mails about the earnings report in the morning that suggested the bank was finally on more solid ground, Mr. Pandit strode into the office of the chairman at day’s end on Oct. 15 for what he considered just another of their frequent meetings on his calendar. Instead, Mr. Pandit, the chief executive of Citigroup, was told three news releases were ready. One stated that Mr. Pandit had resigned, effective immediately. Another that he would resign, effective at the end of the year. The third release stated Mr. Pandit had been fired without cause. The choice was his."

"Citi Chairman Is Said to Have Planned Chief’s Exit Over Months"

The New York Times




New York -- So now that Vikram Pandit has exited stage right from the CEO position at Citigroup, a number of people have asked me about the Zombie Dance Queen.  Think Grace Jones with a dash of Tim Geithner and a taste for living assets.  And truth to tell, I am liking Citigroup more and more, albeit as a play on a future, as yet to be determined destination in terms of business model.

Source of happiness numero uno is the presence of Michael O’Neill on the board.  It did not click at first that this is the former Marine who fixed Bank of Hawaii (BOH).  Specifically he took BOH from a confused, troubled bank to one of the best performers in the large bank peer group. Kind of reminds me of the evolution of another hero, Jesse Jones of the Reconstruction Finance Corporation in the 1930s.  Jones organized private recapitalizations of several banks in Houston before going to Washington to work for President Hoover and later FDR.

I like the bifurcation of the role of Chairman and CEO at C.  The Chairman is responsible for the corporation, while the CEO works for the board of C. Having the roles separated is not only a good idea operationally, but it is good corporate governance.  It is high time that the Fed and OCC mandated that all bank holding companies separate the Chairman and Ceo positions as a matter of public policy under Section 12.  

Neither Americans nor investors should ever endure kings, the precise description of a Chairman/CEO archetype.  Had Pandit been both Chairman and CEO, we never would have gotten rid of him -- and the legacy of Sandy Weill, Robert Rubin and Dick Parsons. Call them the three headless horsemen of the fiasco at Citigroup.

The second thing about O’Neill is that he is not afraid to shake things up, even if it means dirty hands and hard work in a restructuring.  In the fine bit of reporting by  Susanne Craig and Jessica Silver-Greenberg of The New York Times, “Citi’s Chairman Steps Up to a Decisive Role,” they noted that O’Neill had been offered the top role at that other favorite Zombie Drag Ho, Bank of America (BAC).  

Indeed, the Times relates:

“Mr. O’Neill, who interviewed for the top position at Bank of America in 2009, a spot given to Brian T. Moynihan, advised that the bank be broken up, according to several people with knowledge of the discussion.”

Now Moynihan is just CEO of BAC, a fitting role for a man who is more personnel officer than operator.  Moynihan has spent the past few years buying time at BAC, but only as the problems associated with Countrywide and the bad old BAC mortgage business have festered.  Indeed, the bank’s bizarre legal strategy of denying responsibility for Countrywide in court has now been laid bare by the DOJ lawsuit.  Moynihan’s departure at BAC may be a necessary condition for fixing that particular Zombie Girl.  

But there are still several kings on Wall Street.  Jamie Dimon wears three hats and effectively dominates the board of JPMorgan Chase (JPM) without challenge.  John G. Stumpf of Wells Fargo (WFC) likewise wears the three hats of current chairman, president and chief executive officer of that large bank, weakening the corporate governance of WFC.  

Unless the CEO of a bank has a counter-weight on the board in the form of an independent chairman, cronyism and a lack of accountability often result.  C under Sandy Weill and Robert Rubin is sadly a case in point.  C was, by appearances, a board where no questions were asked and reckless risk taking was encouraged at the highest level.  The result was the financial failure of the Zombie Queen, but she’s still dancing as we can all see.  

For C and O’Neill, the question is whether anyone can shift the culture at this money center bank.  The core business of C is now corporate and consumer lending, with a capital markets arm as a sometimes profitable complement.  Changing C to the degree that Kelly shifted the business model at BOH would be a monumental accomplishment.  

When management at C has suggested a change in internal default targets, for example, my reaction has been “OK, why do we still need you?”   The irony is that the markets desperately need capacity in the area of subprime lending – once a money making machine for C and its true subprime peers like HSBC (HSB).  

One area that needs attention at C is the mortgage department, another segment where a lot of value could be created if the bank could only get itself organized in an operational sense.  It’s not like the mortgage market has enough capacity at present, especially in the area of non-conforming loans.  One key benchmark of O’Neill’s tenure as Chairman is the mortgage origination and servicing business at C.

C knows how to price subprime credit better than most banks.   Maybe Kelly might even consider spinning off the consumer lending business to focus on this opportunity in a non-bank context.  But it is unclear to me how Kelly can fix C by seeking greater virtue.  The best path might be to take the bank more into subprime, but with better spreads and risk control.  

The next shoe likely to drop is Brian Moynihan at BAC.  While the credulous souls who inhabit the world of Big Media like to treat Moynihan as corporate royalty (Betty Liu at Bloomberg TV comes to mind, but all are guilty), the fact is that his tenure at BAC has been a fiasco.  Moynihan has pursued untenable, bizarre strategies in dealing with BAC legal problems.  At the same time, BAC has shed businesses and revenue in a willy-nilly fashion, leaving the entire mortgage market to WFC and USBancorp (USB).

BAC was the first large bank to withdraw from wholesale and correspondent lending in residential mortgages, causing an immediate decrease in volumes.  The destruction of value under former CEO Ken Lewis and now Moynihan, his loyal henchman, has been monumental.  All of the new origination capacity of Countrywide has essentially been shed and then some, leaving uncertain how BAC is going to generate revenue going forward. BTW, look for the same volume and asset shrinkage at WFC now that the third party origination pipeline has been shut down.

Moynihan likes to brag about the BAC capital levels, something he may have learned watching Jamie Dimon, but neither man has adequately reserved for their respective mortgage meltdowns.  

In the case of Moynihan, the combined Countrywide, Merrill Lynch and BA legacy liabilities are easily worth double digits, especially given how things are proceeding in court.  While the $1 billion DOJ lawsuit against BAC gets a lot of attention, the real action is the civil claims.  If the Countrywide putback litigation against BAC fails to settle, then this situation becomes unstable. 

An adverse legal decision against BAC could provide a systemic shock to this name, financials and markets, one reason why I have for some time called for the appointment of a Receiver with respect to BAC and an orderly settlement of all claims with the support of regulators.  Do regulators really think that allowing BAC to suffer a double digit court judgment is good from a systemic perspective?  Think again.     

A BAC restructuring looks like the GM bankruptcy, but with a stronger cast and the active involvement of the Fed and FDIC.  Yet if we wait long enough, Moynihan could be forced to select the nuclear option and file bankruptcy for Countrywide -- this to buy more time. The trouble is that BAC is reaching the point where Plaintiffs are going to start winning outright in court.  Stay tuned. 


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