Citigroup CEO resignation raises questions and concerns

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The only constant at Wall Street is that there will be reorganizations. A lot of them, and they’ll happen often. But rarely do they happen in the top operational job and even less often do the announcements come at unexpected times.

So, Tuesday’s news that Citigroup CEO Vikram Pandit was stepping down sent ripples through the newsrooms, trading floors and boardrooms across New York and beyond. The initial stories flatly repeating the company’s press release quickly turned into something more interesting.

From the Bloomberg story by Donal Griffin and Bradley Keoun (the link also has several good Bloomberg TV clips of people talking about the news):

Citigroup Inc. (C) directors ousted Chief Executive Officer Vikram Pandit after concluding his mismanagement of operations caused setbacks with regulators and cost credibility with investors, a person with knowledge of the discussions said.

Episodes that led the board to replace Pandit with Michael Corbat included the rejection by regulators in March of a plan to boost shareholder payouts, said the person, who requested anonymity because board deliberations are private. Citigroup’s $2.9 billion writedown on the Smith Barney brokerage unit and a two-level cut of its credit rating by Moody’s Investors Service also contributed, the person said.

Directors had discussed whether to replace Pandit for months, even before the appointment of Michael E. O’Neill as the new chairman in April, the person said. O’Neill, a board member since 2009, and other directors became increasingly frustrated with Pandit’s performance, and Corbat told the staff today that a shakeup may follow.

In interviews with several news outlets, Pandit said the decision to leave was his own and he wasn’t forced from the bank. Saying he didn’t intend to stay in the job forever, Pandit said he felt the firm was in a good position, so he could leave. However, many were still caught off-guard according to the Wall Street Journal story:

Friction between Mr. Pandit and certain board members “has been bubbling for some time,” one person familiar with Citi said. “There were always differences.” They clashed over strategic priorities, resource allocation, selection of directors, regulatory cooperation and executives’ pay packages, this person said.

One executive who recently met with Mr. Pandit and Mr. Corbat said the executives gave no hint that a shake-up was imminent.

In recent weeks, some traders inside the bank have grumbled that the Morgan Stanley Smith Barney transaction was poorly handled. Citigroup didn’t set aside reserves to help avoid a write-down, an executive noted.

The timing of the news is shocking. It follows a day after Citigroup reported third-quarter earnings. While the bank took several large write-downs and charges, core revenues did increase in the quarter, so presumably the bank’s businesses are making money.

The New York Times has this analysis of the earnings:

The surprising departures come just a day after the firm reported stronger-than-expected third-quarter earnings. Excluding a number of one-time charges — including a big loss tied to the continued exit from the Smith Barney brokerage — Citigroup earned $3.27 billion, or $1.06 a share. That exceeded analysts’ average estimate of 96 cents a share.

Yet those results paled in comparison with the earnings announced on Friday by JPMorgan Chase and Wells Fargo. Spurred by exceedingly low interest rates, and the Federal Reserve bond-buying program, there has been a recent resurgence in mortgage lending, bolstering those banks.

Yet Citigroup appeared to have been caught flat-footed. In its earnings call on Monday, John Gerspach, the bank’s chief financial officer, intimated that the bank was slow in staffing up to deal with the mortgage activity.

But I still question the move. Why not announce it when you release earnings? Why be the top news story for two days? Most public relations executives will tell you that the best policy is to get everything out publicly as quickly as possible. Plus, the dual news of earnings and a new CEO would leave beat reporters scrambling and pulled in many different directions.

The way Citigroup chose to release the news (kindly) gives reporters a day to go through their financials and then yet another day to write the story about the CEO’s departure. Then journalists have the rest of the week to keep digging into the why and the timing and the decision. You can expect in-depth follow-ups in the coming days.

What this signals to me is that Citigroup’s PR office either wasn’t consulted, saw their advice ignored, or the news literally happened overnight. Obviously this is all speculation, but the lack of a successor for Pandit deputy John Havens signals it’s likely the latter.

But this does make me question the board of directors. Even if you agree with the move, why not let Pandit finish the year, collect his bonus and preemptively announce it giving the market time to digest the news? All signs point to a board in distress or at least one that’s out of touch with the perception of the company.

Obviously there’s a lot more to this story, and I expect the excellent Citigroup beat reporters will uncover as much of it as possible.

But if I had stock in the company, I would have serious concerns about the state of the board of directors. The timing of the move leads me to question their judgment, which is not exactly reassuring.