Citigroup is a broken organisation, but its new boss doesn’t have a plan to fix it
In April 2007, Citigroup shelled out a reported $800 million to buy Old Lane Partners, a young hedge fund with a relatively modest $4.5 billion in assets under management.
In April 2007, Citigroup shelled out a reported $800 million to buy Old Lane Partners, a young hedge fund with a relatively modest $4.5 billion in assets under management. ‘This transaction is an investment as much as it is an acquisition,’ said Citi’s chief executive at the time, Chuck Prince.
As investments go, it could hardly have been more disastrous. One year later, Old Lane has just $1.5 billion left under management, all of it belonging either to Citigroup or its employees. Old Lane’s hedge fund proved to be all but worthless: it has lost all its outside investors, and its future lies somewhere between dim and non-existent. Citi has already started to write off its $800 million investment, and Old Lane’s founder, Vikram Pandit, who promised Citi’s shareholders that he would ‘deliver world-class performance’, has been unceremoniously… er, promoted to chief executive of Citigroup.
After ascending to the top job, Pandit lost little time in surrounding himself with Old Lane’s other heroic failures. Co-founder John Havens runs Citi’s investment banking and hedge fund operations; another Old Lane principal, Brian Leach, is now Citi’s chief risk officer. The upshot is that Citigroup, one of the largest financial institutions in the world, is now being run by a coterie of men whose main claim to fame is that they did pretty well when they were being supervised by the grown-ups at Morgan Stanley, but whose only profitable achievement since setting up shop on their own was to sell out at the top of the market to the greater fools at Citi.
Pandit, who had zero commercial banking experience before taking the helm at a huge commercial bank, has shown as chief executive all the boldness of a soggy kitten. He has surrounded himself only with loyal lieutenants, but he seems to have no ability to delegate – something that is obviously crucial in an organisation with 374,000 employees.
In February, when an employee in Turkey asked when staffers would no longer have to go to New York for approval of every decision, Pandit replied that ‘it’s going to take some time’. Meanwhile, Pandit’s fingerprints are all over the decisions to disinter Citigroup’s old advertising slogan, ‘Citi never sleeps’, and to spam all of the bank’s customers with an insipid letter assuring them that he has personally committed himself ‘to work tirelessly around the world and around the clock to deliver outstanding value and service’. Given how his commitment ‘to capture premium returns for our investors across all strategies’ turned out after his fund was acquired by Citigroup, Citi’s long-suffering customers could be forgiven for not feeling particularly reassured.
Most troubling of all is Pandit’s failure to provide any kind of vision or leadership. Citigroup is a broken organisation, but Pandit has no plan to fix it: instead, he has told analysts that he wants it to become a ‘global universal bank’ – an aspiration which falls somewhere between the meaningless and the impossible. The closest thing to a strategy that Pandit has unveiled so far is the idea of selling off $400 billion in non-core assets – but the top non-core asset on the list is Citigroup Germany, which is worth maybe $10 billion tops. Oh, and Pandit is giving himself two to three years to conduct the asset sales, by which time there’s a non-negligible chance he’ll have been ousted by furious shareholders.
It didn’t have to be this way. Merrill Lynch was, if anything, just as broken when its former boss Stan O’Neal departed as Citi was when Chuck Prince resigned. But Merrill seems to have charted a coherent way forwards under new chief executive John Thain, who is flattening the organisation chart rather than creating vapid new positions like head of talent and head of innovation.
Under Pandit, most key employees have two or more bosses – something which is unlikely to encourage them to act decisively and take responsibility for their actions. Pandit says that so long as everybody’s on the same page, it shouldn’t matter how many bosses someone has. He doesn’t seem to have twigged that the trick to getting everybody on the same page is to make it crystal clear which page you’re reading from yourself.
Pandit's main regulator, Federal Reserve chairman Ben Bernanke, has problems of his own - and not just the fact that he faces the central banker's worst nightmare of negative growth with high inflation. He's also facing criticism from the kind of people who think it's simply devestating to quote Walter Bagehot at someone - in this case, invariably, the dictum that in the event of a credit crunch, the central bank should lend freely at a penalty rate.
Bernanke has indeed been lending freely, but at far from penalty rates. In fact, he reduced the penalty spread between the Fed Funds rate (the equivalent of the Bank of England’s base rate) and the Discount rate (the Fed’s ‘emergency’ rate) in an attempt to pump ever more liquidity into the US banking system.
Bernanke is an economic historian by trade, and the ‘penalty rate’ criticism rankled him enough that he actually responded in public, in a speech to a conference in Sea Island, Georgia. (Sadly, Bernanke didn’t get to enjoy the resort: he appeared by satellite.)
According to Bernanke, there was a very good reason why Bagehot recommended that the central bank’s funds be lent only at ‘a very high rate of interest’: at the time, the Bank of England was severely capital- constrained. If the Bank of England had lent freely at a low rate of interest, it would have run out of money entirely. The consideration which most exercises Bernanke’s critics – that of moral hazard, or the risk that bailing out banks will only encourage future recklessness – was not something which Bagehot was particularly worried about at all.
Today’s Federal Reserve, in contrast to the Bank of England of the 1870s, has pretty much all the money it wants. And Bernanke makes a good case that the way he’s behaving now is exactly the way that Bagehot would have behaved, had he had the same luxury.
Felix Salmon blogs for Portfolio.com