Pandit Knocks Citi Into Shape for a Man Who Was Supposedly Doomed to Fail, Vikram Pandit Has Done a Pretty Good Job in Transforming Citigroup

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Reprinted from July 2010 www.euromoney.com

Volume 41, Number 495

BANKER OF THE YEAR Pandit knocks Citi into shape For a man who was supposedly doomed to fail, Vikram Pandit has done a pretty good job in transforming Citigroup. Few, if any, bank chief executives have faced a tougher set of challenges over the past two years or been the subject of as much criticism. He has come through many battles, and has many more to come. But perhaps it’s time to start giving Pandit some credit. Clive Horwood reports

“BEING A SUPERMARKET is not a strategy.” “Think about it: we cut our workforce of 370,000 people by That simple sentence sums up everything that went wrong with 110,000. We sold a lot of assets. We raised a lot of capital. And yet Citigroup, and everything that Vikram Pandit is trying to do to we have maintained revenues. That tells you a lot about how far we make Citi one of the world’s best banks again. have come from the old Citigroup,” Pandit says. Citi isn’t back just yet, but it’s on its way. First-quarter 2010 earnings, announced in mid-April, were some of the most impres- A whirlwind debut sive in the industry. Citigroup produced net income of $4.1 billion. Pandit joined Citi in July 2007, just as the bank was about to realize Compare that with Bank of America, which is widely thought to the extent of the losses it had suffered in the sub-prime and lever- have emerged from the crisis faster and stronger than Citi, but made aged finance sectors. $3.2 billion over the same period. Or Barclays, a bank that suppos- It was a whirlwind six months for Pandit. He joined to run Citi edly came out of the crisis a clear winner, but has first-quarter net Alternative Investments. income of about $2.2 billion. Or JPMorgan, the bank least impacted Before long, he had been asked to come in and sort out the prob- by the credit crunch, but which had first-quarter 2010 net income of lems within Citi’s banking and markets divisions, since renamed the just $3.3 billion. institutional clients group. “I was running our alternative business One quarter does not make a recovery. Citi posted a loss for six in midtown. One day Chuck [Prince] called and said: ‘Vikram, I need of the nine previous quarters and a loss in Q4 2009 of $7.6 billion. you downtown [at the bank’s Greenwich Street banking and markets Most analysts had expected the bank to break even for this one at hub] to help sort out our market positions. Put the right people in best. place and then go back to doing what you were doing before’.” It was the first good piece of news Pandit had been able to Pandit felt compelled to leave the job he had been brought in to present in almost two-and-a-half years as chief executive of the do. “I respected Chuck, and could not turn him down. And once I group. His has been one of the most challenging tenures the bank- had made the decision to go downtown, I owned it. There was no ing industry has seen. Few thought he would survive. Fewer still going back.” thought he was the right man to restore Citi. He might just be Citi unravelled very quickly in the autumn of 2007. One minute proving his critics wrong. chief executive Chuck Prince was still dancing; the next he was Those critics have included Federal Deposit Insurance Corp chair gone, as Citi revealed it would post sub-prime losses of $11 billion Sheila Bair who, last summer, had angled for Citi to be broken up and sought a $7.5 billion capital injection from the Abu Dhabi quickly and for Pandit to be replaced as chief executive. Investment Authority under an interim leadership team of Citi vet- At the time, Euromoney was sitting in the office of another leading erans Robert Rubin and Win Bischoff. Wall Street banker. On the TV screen, a caption with two photos At the same time, the board was looking for a new chief execu- flashed up: “Pandit vs Bair”. “Well,” said the chief, “we all know tive. Rumours were rife about who would get the job: could Josef who is going to win that battle. And it’s not Vikram.” Ackermann be tempted to leave Deutsche Bank? Would Barclays They have included Sandy Weill, the creator of the Citi supermar- president Bob Diamond fulfil his dream of running one of the big- ket, who let it be known that he was unhappy with the way Pandit gest US banks? Could Jamie Dimon be persuaded to return to the was running Citi, and that he had not been consulted having publicly bank that he had once been heir apparent to, before his falling out backed the bank through a share purchase in January 2008. with Sandy Weill? Pandit is still there. Those that dismissed him, who underesti- Few people picked Pandit as a potential leader. He had only been mated him, might now have to eat their words. He has seen through at the firm a few months. Citi was a universal banking behemoth, one of the most dramatic bank restructurings in history. And now, employing not far short of 400,000 people; Pandit’s pre-Citi he thinks, he and his team deserve some credit. management experience had peaked at Morgan Stanley, where he “We don’t always get credit for some of the tough decisions we managed a few thousand people in the institutional securities group. have made: decisions which have enabled us to take $13 billion a He had no experience of the consumer and commercial banking year off our cost base,” he says. “And this at a company that tried businesses that had been the bedrock of old Citicorp. and failed many times to get costs under control in the past, and has Rubin said at the time: “The combination of his deep executive now achieved this without hurting revenue significantly.” experience and long history as a strategic thinker makes Vikram the Those cost savings equate to $3.25 billion a quarter: that’s most of outstanding choice to be Citi’s chief executive.” Few people thought the net income Citi made in its first quarter. And that revenues were those credentials would suffice for one of the toughest jobs in bank- maintained tells its own story. ing history.

www.euromoney.com Reprinted from EUROMONEY · July 2010 Cover story

to take the bank through the crisis and then forward into the future; and to rebuild a culture of execution.” Pandit and his team immediately got to work, but nine months later the problems they faced were no longer Citi-specific: Lehman Brothers collapsed and the crisis became systemic. “Lehman changed the rules of the game for us and every other bank. The markets had given us the capital we needed up till that point,” says Pandit. Now, as Citi faced collapse, the markets could not give Pandit what he needed to survive. So he was forced instead to turn to the US government. The mighty Citigroup, not long ago the biggest bank in the world, was on its knees begging for help. That culminated in a third bailout for Citi in February last year, when the US government agreed to convert $25 billion of preferred stock into common equity. Citi’s tangible common equity had plummeted to just $29 billion at the time. Its stock was trading at just $1.50. “Our decisions on raising capital, particularly relating to the investments by the US government, were tough but necessary,” says Pandit. “Our early capital raises, though important, turned out to be insufficient in the light of the collapse of Lehman and subsequent “Being the biggest is no longer a definition of events. Getting our capital position strong, and our operating company in order, was critical.” success here. I don’t want to be number one in everything. But I do want my clients to think Seeking a new strategy we are the best at what we do” All the way through the crisis, while Pandit was raising capital and dealing with a share price that had been wiped out, the new chief John Havens, Citi executive and his team were trying to define a new business model for Citi. “We had to get our strategy right, and then we could make some Pandit knew he had his doubters. “Sure, I was relatively new to informed decisions,” says Pandit. the company, but at least I had had a few months here and was Citi’s new chief executive actually had some previous experi- familiar with the issues we faced, unlike any candidate that may ence in helping Citi through a crisis, as his colleague, John Havens, have come in from the outside,” he says. “And given that Citi was now chief executive of the institutional clients group, explains: involved in so many parts of banking, it would have been hard to “Vikram and I first walked into Citi when we were at Morgan find a candidate with experience across all of them. Remember most Stanley together in the early 1990s. We worked with John Reed on of the problems stemmed from issues in the investment banking the restructuring of the business. The thing that Reed did best, and and trading parts of Citi, businesses which I had a great deal of expe- which we always remembered, is that he believed in Citi’s platform rience in from my career at Morgan Stanley. and would not sell off any of the core businesses. And those core “It was clear that the world had changed. The previous environ- businesses are still vital to the platform today, even after everything ment of seemingly limitless pools of liquidity and capital had come that has happened.” to a sudden end. Citi had to change too.” As they looked at the way the bank was run, Pandit and his team discovered that many of the jibes thrown at Citi – that it was too big Growing write-downs to manage, disjointed, a series of businesses bolted together but with By the time Pandit had become chief executive, two weeks before little interaction – were true. Christmas in 2007, those write-downs were growing; in early Janu- “Everything in Citi was in silos. Each business had everything rep- ary 2008, he was forced to announce they had become $25 bil- licated – from buying the coffee to doing the accounting. We even lion over two quarters and Citi was compelled to sell $12.5 billion had three different ways of taking part in US Treasury auctions: the of convertible preferred securities to investors such as Singapore Citi platform, the old Salomon system and the Smith Barney system. and Kuwait’s investment arms, and long-term shareholders such No one ever paid attention to it,” says Pandit. as Prince Alwaleed bin Talal and former Citigroup chief executive Pandit also had to instil a cultural change in the bank if his strat- Sandy Weill. egy was to succeed: “It’s interesting: speak to the people who were “When you need to raise capital, the first question to consider is here in the 1990s, and they’ll tell you that the old Citi knew how to why should people finance you,” says Pandit. “We had four immedi- execute a strategy. Somewhere along the line, we lost that. But we ate needs: to deal with our financial stress; to define our strategy, are back to that now.” and what makes this bank different; to put in place the right team Citi is now a remarkably different business to what it was two years

Reprinted from EUROMONEY · July 2010 www.euromoney.com ago. In fact, it is two businesses. Pandit’s biggest decision was to place billion of $5.16 billion of net income for Citicorp in the first quarter businesses and assets that were no longer core to the bank’s strategy of 2010. in a separate entity, Citi Holdings. Into these Pandit put the bank’s Global transaction services is a powerhouse business, which lever- remaining holdings of the iconic brand of Smith Barney, one of Sandy ages off Citi’s presence in more than 100 countries, contributing Weill’s biggest buys, after Citi sold a 51% stake and management con- $941 million of net income in the first quarter. trol of the business into a joint venture with Morgan Stanley. That leaves securities and banking, which includes the investment Pandit also prepared to say a long farewell to one of Citi’s key bank and markets business – or institutional clients group – and building blocks of the past, local consumer lending, which included which made $3.2 billion of net income in the first quarter. residential and commercial real estate loans, auto and personal loans Pandit had put his long-time colleague John Havens, with whom and consumer banking in western Europe. he had worked closely at first Morgan Stanley and then Old Lane, in Also dumped into Citi Holdings was a special asset pool made up charge of rationalizing Citi’s banking and markets effort, leveraging of many of the illiquid non-core assets that had helped bring Citi’s its strengths, and correcting its mistakes. future into question. “We understand that we are defined by our global network. The Run by former Salomon veteran Mike Corbat, Citi Holdings aims value we bring is clear: our ability to provide access to markets, peo- to reduce assets as quickly as possible while providing the best ple and ideas. And our network is our huge advantage,” says Pandit. return possible for shareholders. Total assets at the end of the first “Once we have established that platform, we can be a traditional quarter of 2010 were $503 billion, compared with $662 billion when business. We cover clients as clients – in cash, custody, advice, Citi Holdings first reported at the end of Q1 2009. Its first-quarter liability management and so on. And we trade with them – and his- revenues for 2010 were $6.6 billion, on which it contributed a loss tory proves that in banking the best money is made over time from to Citigroup of $887 million. bid-offer spreads, and not on proprietary trading.” Getting back to those basics was a huge task. Like the whole bank, Core considerations much of ICG had become unfocused and wasteful. “Did we need That left Citi with what Pandit considered its three core businesses, to cover 40,000 clients? No, covering 5,000 properly is the right which exist under the old Citicorp banner: global transaction serv- number. Does market share matter? Sometimes, but certainly not ices, securities and banking, and regional consumer banking. always,” says Pandit. Citi has a unique take on consumer banking: “Our core retail As Havens puts it: “Being the biggest is no longer a definition of strategy is to be an urban bank, serving customers in the top 100 cit- success here. It doesn’t work – it costs money, and it leads to hubris. ies around the world. In the US we’re in the 10 biggest metropolitan I don’t want to be number one in everything. But I do want my areas. People in these bigger cities have much more in common as clients to think we are the best at what we do.” customers than they do necessarily by nationality: from a banking Big cuts in some areas were inevitable. perspective, São Paolo has more in common with London than it does with San Juan.” Regional consumer banking contributed $1.01 Cut and thrust “We had some mighty battles internally about what would happen A lot left to get rid of to revenues if we made some of these cuts,” says Pandit. “But once Citi Holdings’ assets Q2 2009 to Q1 2010 we had made the decisions, the system responded.” One of the questions Pandit posed to his businesses was: how 700 Special asset pool many salesforces do you need? Citi’s sales efforts were divided in Local consumer lending every which way, to the point that the bank even had teams selling 600 Brokerage and asset management the same product but under different management in its midtown and downtown offices. Some managers argued that moving to a rela-

500 tionship manager model would reduce the size of the salesforce and hence revenues. It hasn’t been the case. Regional silos would each have their own chief financial officer, 400 accounting team and technology groups. These were combined into $bln one. Some internally complained that such a move would increase 300 operating risk. Again, the fears were unfounded. Perhaps the biggest battles were around the use of Citi’s balance 200 sheet. Pandit made it clear that the bank would no longer provide balance sheet to clients that did not give it other business. That meant 100 coverage officers were faced with losing multiple clients. They fought hard to keep them. If they couldn’t prove they could change a rela-

0 tionship that did not meet the new criteria, they lost the battle. Q2 2009 Q3 2009 Q4 2009 Q1 2010 But the scrutiny applied to the way Citi deals with clients has transformed some of the firm’s relationships. Havens takes up the Q1 numbers include $43bln of assets brought on balance sheet due to adoption of SFAS 166/167 story: “I had a group of bankers complaining to me about a big Source: Citi client, a major multinational. They said the company only wanted

www.euromoney.com Reprinted from EUROMONEY · July 2010 Cover story

When Pandit joined in July 2007, the Maheras and Klein camps were briefly united in saying that the new arrival had no chance and no credentials for being the next chief executive. Maheras and Klein were soon gone. Pandit, with no constituency, was left at the helm of the whole business. Perhaps that helped Pandit. In any case, he says the problems at Citi were more due to the inherent conflicts within the business than they were due to clashing personalities. “If you have a supermarket, offering all things to all people, then you cannot expect it to operate as one team,” he says. “But if you define the strategy of being a global bank, then you can create a structure that works.” Mike Corbat (l) and Don Callahan: key members of the team that have One of Pandit’s key measures was to bring in regional chief execu- resurrected Citi with Pandit tives. “Take our Asia business as an example. We used to have five silos operating independently of each other in Hong Kong. Now our our balance sheet; that we never got any other business; and that we regional CEOs Stephen Bird and Shirish Apte make sure the business should stop dealing with them. operates as one.” “So I asked a few questions: are they one of the biggest clients in Pandit is remarkably self-effacing for the leader of one of the their industry group? – is that industry group important to us? – is it world’s biggest banks. He’s determined to make sure that credit for important to know the client better? – do they do a lot of business? Citi’s turnaround is shared with his senior management. – and finally, do we have our best people covering this client? “Every team has a captain but I view leadership and manage- “The answers to the first four questions were all ‘yes’. The answer to the last one was ‘no’. “So we put some of our best people on coverage, and now we’re the number one counterparty to that company. Last time I went to Pandit defends his see the CFO, he took me in to see his chief executive. He told me Old Lane legacy that since Citi had done a lot for his company, he wanted to find ways to do more with Citi. And to think we were discussing whether Old Lane is, to many outsiders, the biggest blot on Pandit’s career we should bother to cover them!” at Citi. After being forced out of Morgan Stanley in 2005 by its Citi has also had to get its own house in order. Perhaps because of then chief executive, Philip Purcell, Pandit and a group of close the old silo mentality, the bank had failed to put systems in place to colleagues, who included now-Citi senior executives such as John compete in the age of electronic trading. That is now changing. Havens and Brian Leach, joined the legion of former bankers who “If we are going to be client-centric, then we must have all the set up hedge funds. Old Lane began operations in March 2006. products and the capability to deliver them to our clients,” says Within 13 months, Citi had bought Old Lane for what seemed Havens. “We were sorely lacking in some areas. For example, we even then an inflated price of $800 million. By then it had $4.5 took an inventory of our equity and rates platforms and clearly we billion of assets under management. Pandit’s share of the sale was weren’t where we needed to be. estimated to be around $165 million, of which he reinvested about “We found we had been disintermediated by technological ad- $100 million into Citigroup stock. vances in the market. We’d made some investments in tech in FX, But Old Lane, like many hedge funds, struggled in the down- but we had completely ignored banks as a client segment. Well, how turn. By June 2008, Citi had taken the decision to shut down Old can you claim to be a leading firm if you are not in that market? So Lane, rather than injecting a $1 billion-plus sum of new capital, we made the right investments in people and technology, and now and took most of the hedge fund’s assets on to its balance sheet. we are seeing some good results from that.” As Citi continued to struggle, Pandit was hammered by the media. His payout, and the demise of Old Lane, came to typify for Factions and fiefdoms many the worst excesses of executive compensation and the bank- The common accusation levelled against pre-crisis Citi is that it was ing crisis took hold. simply too large, and too unwieldy, to manage. There’s a great deal Pandit knows it’s a sensitive subject, but he comes out fighting. of truth in that. “I’m confident that in the fullness of time, people will see that But Citi had another, entrenched problem. The business was fac- Old Lane brought a lot to Citigroup. We have a number of private tional. Fiefdoms proliferated. The heads of different businesses did equity funds and trading businesses that are performing well. But not get on. Their businesses barely talked to each other. most of all it brought talent to the bank: people like Brian Leach This was epitomized by the atmosphere at Citi’s Greenwich and John Havens that are now taking this company forward. And Street offices. You were either in the camp of Tom Maheras, who you have to remember that as the senior management moved into ran the markets business; or that of Michael Klein, who ran bank- the Citi’s executive team, there were key-man clauses that triggered ing. As Citi faltered in 2007, all the talk in New York and beyond and we had to offer investors the chance to take their money out.” was which of the two would take over if Prince left the bank.

Reprinted from EUROMONEY · July 2010 www.euromoney.com “I was running our alternative business in midtown. One day Chuck [Prince] called and said: ‘Vikram I need you downtown to help sort out our market positions’. I respected Chuck, and could not turn him down”

Vikram Pandit, Citi

ment as very much a team sport,” he says. Black mark He gives some examples: chief administrator Don Callahan, who The US government is still a shareholder in Citi. At the start of the runs the operations and technology side of the group and whose year, its stake was around 27%. The Treasury has stated that it plans division bore a large share of the cuts burden as Citi rationalized its to reduce its stake to zero by the end of this year, a process it is platforms and systems. achieving through incremental sales of blocks of shares. He praises the risk-management team, run by his old colleague That it still owns Citi stock is held as a black mark against Pandit’s from Morgan Stanley and Old Lane, Brian Leach, which undertook tenure by some, and he admits the day the US government is no a root-and-branch review of the entire business. Leach had some longer a shareholder will be a milestone for the bank. experience in crisis management: in October 1998, he was seconded “Getting closure on US government ownership will be an im- to Long-Term Capital Management to oversee the orderly unwind- portant psychological point. The Treasury should recover all of its ing of the hedge fund’s positions, which had threatened a systemic investment and then some.” Perhaps more important is the continu- crisis almost exactly a decade before Lehman caused one. ing reduction in the size of Citi Holdings. “We’ve sold a lot of assets. Leach had also worked closely with Mike Corbat, who combines As we sell more, the story transitions from Citi Holdings to the his role as head of the group’s brokerage and asset management unit future of the bank, which is Citicorp.” with the chief executive position of Citi Holdings. Pandit is targeting a sustainable return on assets of between 1.25% And Pandit also mentions Bill Mills, whom he describes as “one and 1.5%, something the bank achieved in the fi rst quarter of 2010. of the unsung heroes of our turnaround, a real hands-on manager”, Return on equity was also healthy for that period, at 12%, but a 26-year Citi veteran who as chief executive of Europe, Middle East Pandit says it’s not a measure of performance that he can run the and Africa had to oversee the withdrawal of Citi from consumer business by in the foreseeable future, given the discussions about banking in western Europe while pulling disparate silos together. bank capital among regulators. “You can’t talk about ROE when you “We heard all the comments that the management team was don’t know what the ‘E’ is going to be,” he says. At the end of the no good. But the strongest management teams are those that get fi rst quarter, Citi had tier 1 common equity of $97 billion and a tier through the bottom of the cycle. It’s not always easy to ignore, but 1 capital ratio of 11.2%. you get caught up in what you need to do,” says Pandit. Whether Citi can repeat that performance in the more diffi cult “We had a good team and a common sense of purpose. But markets of the second quarter and beyond remains to be seen. the key thing was to make sure we had a credible plan that we all But the future excites Pandit. “I’m looking forward to getting believed in, that we would stick to and that we could communicate back to what excited me about joining this fi rm in the fi rst place. to our colleagues and our clients. If you can’t do that, then you’re We have a great opportunity here. There are not many 198-year-old dead. And at the end of the day, this is a fantastic company. Yes, bank franchises out there. More importantly, there are very few that we’ve had some strategic issues, but the underlying quality of the can have a real impact on the economic potential of the world. This business was always there.” business fi ts perfectly with where the world is going.”