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Why investors are cheering Pandit’s exit

Vikram Pandit, CEO of Citigroup Inc.

Investors aren't concerned about the abrupt departure of Vikram Pandit from Citigroup Inc., just a day after the global banking giant reported strong quarterly results that had sent the share price up 5.5 per cent. Despite jitters early on Tuesday morning in premarket activity, the stock was up another 1 per cent in morning trading, suggesting that investors are warming to the idea of a new chief executive.

Why? For starters, Mr. Pandit is departing Citigroup at a time when few observers are overly concerned about its financial health. Yes, the bank's well-publicized plans to boost its quarterly dividend were rejected by the Federal Reserve earlier this year, raising some concerns.

But with net earnings of $468-million (U.S.) in the third quarter – or $3.3-billion after adjusting for special items – and improving credit spreads, Citigroup seemed to be moving in the right direction. His departure, then, is likely not a sign that the bank is struggling.

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For another, some influential observers cheered Mr. Pandit's departure. On the Bloomberg Surveillance program, Sheila Bair, former chairman of the Federal Deposit Insurance Corporation, said: "I did have concerns about Mr. Pandit's qualifications to serve as CEO of the largest commercial bank since he'd never been a commercial banker. Also, in my interactions with him – on the bailout initiatives, the ring-fence with the original Wachovia situation – I saw not a good ability to execute, not a good ability to have information, which I thought was pretty basic for anyone managing a large institution…this was a concern to me."

Indeed, Mr. Pandit ran a hedge fund and private equity firm, only joining Citigroup after that firm was acquired by the bank in 2007. According to Bespoke Investment Group, Citigroup's share price fell nearly 90 per cent under his leadership, after adjusting for a reverse stock split.

"Granted, the stock was in a free-fall when he stepped in, but all in all, Pandit's experience at Citigroup was probably not what he envisioned when he first stepped in," Bespoke said on its blog.

And finally, investors might be waking up to the idea that new leadership, far from unsettling, tends to be good for companies. I wrote about this a couple of years ago in this space, drawing from the academic work of David Denis and Diane Denis, finance professors at the Krannert School of Management at Purdue University.

They studied more than 900 top management changes at U.S. companies between 1985 and 1988. In the three years before a management change, companies tended to be struggling, with return on assets in decline. After top managers left and were replaced by new blood, things improved. New leaders tended to shake things up at companies, and the shift in direction usually sent operating profitability surging.

Of course, Citigroup is a special case because it is operating in a difficult environment that weighs on the entire U.S. financial sector. It isn't clear how much influence a chief executive has when interest rates are low, the housing market is still struggling and consumers remain wary. But new leadership might be able to make the best of a bad situation.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More


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