Citigroup Inc. became too big too fail, then nearly did, and has muddled along ever since. Perhaps now it has decided it is too big to succeed.
That's an intriguing theory that has emerged in the wake of the resignation of chief executive officer Vikram Pandit and his top lieutenant Tuesday. And investors who embrace the idea may finally profit, much more quickly than those who have held on for Mr. Pandit's five-year regime.
Much was made of the fact Citigroup stock was down 89 per cent since Mr. Pandit took over in late 2007; alas, much like Barack Obama, Mr. Pandit inherited an unwieldy mess from his predecessor and should not take full blame.
The turnaround, however, has been similarly slow for both men. Of the four biggest U.S. banks (Wells Fargo & Co., JPMorgan Chase & Co. and Bank of America Corp. are the others) Citigroup shares trail all but Bank of America over the past three years, and come in last of the four over the prior 12 months. Other ignominies included the U.S. government's rejection in March of the company's plan to resume stock buybacks, and the shareholder disapproval of Mr. Pandit's pay package in April.
So, while Mr. Pandit's resignation was widely labelled a "shocker," the only true surprise was how ineptly the company handled it. Typically, Mr. Pandit would have been allowed to hand off the CEO role to a successor, take up space on the company's board for a few more months, then retire gracefully and quietly. And the announcement would not, in all likelihood, come just one day after what were widely perceived as solid quarterly earnings.
The abrupt change unleashed theories that a major scandal was imminent, such as Citigroup getting dragged into the Libor scandal. (Theories that Mr. Pandit denied in an interview with Maria Bartiromo of the cable channel CNBC, where he also unconvincingly suggested the departure was his idea.)
However, investors should instead look to the market's reaction: Citigroup's shares, already up 5.5 per cent on Monday's earnings release, gained again Tuesday on the departure, illustrating that, for all Mr. Pandit has done to keep Citigroup afloat, investors are ready to see what someone else can do.
Nominally, that man is Michael Corbat, the new CEO. But the true visionary pushing Citigroup may be Michael O'Neill, who took over the chairmanship in the spring.
This is the compelling argument of RBC Dominion Securities' banking analyst Gerard Cassidy, who observes that previous Citigroup chairman Richard Parsons was an industry outsider who was less active in the role. Mr. O'Neill, by contrast, is a banker who demonstrated remarkable success at Bank of Hawaii Corp. a decade ago.
To be sure, Bank of Hawaii and Citigroup operate on vastly different scales; today, Citigroup is more than 100 times the size of the Hawaiian bank. But Mr. Cassidy says it's what Mr. O'Neill did a dozen years ago that suggests Citigroup's path to greater profitability.
Mr. O'Neill unwound a number of the bank's operations outside Hawaii that were dragging it down. In the process, he took the bank from $14-billion (U.S.) in assets at the end of 2000 to less than $10-billion in 2002. Over the course of his five-year tenure, however, the bank's return on assets more than doubled, and its return on equity went to 21.6 per cent from 9.0 per cent.
The track record suggests Mr. O'Neill recognizes that a company must sometimes pull back from widespread, unfocused expansion. While Mr. Pandit's Citigroup had been slowly discarding troubled businesses, it's possible Mr. O'Neill and the company's board have decided to chart a new path that requires a level and pace of downsizing that Mr. Pandit was unable or unwilling to engage in.
It's just a theory, along with much else that's been said about Citigroup in the past 24 hours. But Citigroup continues to trade at 0.7 times its tangible book value, a measure of the company's assets and liabilities; most of the larger U.S. banks trade above 1.0, and some top performers trade for more than two times tangible book. At just over eight times forward earnings, Citigroup is cheap for the sector by that measure, as well.
We thank Mr. Pandit for his dedicated service to Citigroup. But shareholders will likely be much more grateful to the company's next generation of leadership.