Stephen Foley: Time to put the brakes on Citigroup


US Outlook: Vikram Pandit, Citigroup's chief executive, has spent the past week lashing a horse to the back of a cart and trying to persuade everyone that he's created a roadworthy vehicle.

In trying to pay back the government's bailout money before Citigroup has cut itself down to manageable size, before the US economy is unequivocally out of the woods, and before its shares have recovered substantially, the bank is doing things in the wrong order. To over-extend the cart-before-the-horse metaphor, if Mr Pandit is allowed to gallop off, he will endanger himself and other road users.

This is the big one, the one that the US Treasury really has to get right. It simply cannot bail out Citigroup again. There would be uproar in Congress, if not riots in the streets. The government should stop him, and his shareholders should stop him.

Mr Pandit's eagerness to get himself out from under the thumb of government is understandable enough on a human level. Mr Pandit has been working for a dollar a year while the company works through the consequences of its enormous follies in sub-prime mortgages, and the Obama administration's pay tsar, Ken Feinberg, is making demands that will restrict the riches he and his top lieutenants can make for as long as taxpayer money is on the line.

It must be particularly galling when his former colleagues at Old Lane, the hedge fund he sold to Citigroup in 2007, are once again setting up on their own in the hopes of earning a second fortune.

The chief executive also has a particularly frosty relationship with Sheila Bair of the Federal Deposit Insurance Corporation, one of Citigroup's most powerful regulators. She spent the summer trying to force him out of his job, claiming he was not moving fast enough to slim the bank, sell off assets, reduce leverage and put its finances on sounder footings.

None of these reasons add up to a good business argument. That case, such as it is, is based on two things. First, there is the issue of compensation, which dominates employees' minds at this time of year, as bonuses are decided. Mr Feinberg has jurisdiction over the top 100 best-paid employees, and Mr Pandit is worried they will be lured away by rivals.

Second, Citigroup's closest rival, Bank of America, made its exit from the bailout scheme this week. Two was company. Jamie Dimon of JPMorgan Chase called the bailout a "scarlet letter", and Citigroup worries that its status as the lone double-bailout bank could scare off potential clients.

It's difficult to see why this is more pressing now than it was a fortnight ago, before BofA's move stung Mr Pandit into action. Citigroup will earn its clients' business, if it deserves it, in the myriad ways that bankers always do, through price competitiveness and ability to execute. Mr Feinberg's strictures don't go down into the heart of the employee base. The relevance of the government's stake is more marginal than usually claimed.

In any case, the situation is much more complicated than at BofA, and it is not realistic to expect that the government can take one single step that ends its relationship with Citigroup and frees Mr Pandit. As Citigroup's finances were so shot, the government converted $25bn of its $45bn injection into shares, which will almost certainly have to be sold into the market over time. There is also an outstanding government guarantee on a little over $300bn of the bank's most toxic assets, the sliced and diced sub-prime mortgages and leveraged buyout loans of infamy.

As the economy recovers it seems unlikely that taxpayers will now be on the hook for these, but we can't be sure. The stress tests of earlier this year assumed what now seems an optimistic level of unemployment, so defaults could still cause problems for Citi both inside that portfolio and in its wider lending activities for years to come. Although Citigroup's capital levels are higher than other banks, its assets are riskier. Until a double-dip recession is off the table, the government should not gamble by removing its safety net, at least not until Congress sets up the new "resolution authority" to allow for orderly wind-down of banks deemed too big to fail.

One hopes that the sheer complexities of Citigroup's relationship with the government mean Mr Pandit will have to wait, but shareholders ought to be putting similar pressure on him to wait. BofA paid a hefty price to exit the bailout scheme, with shareholders diluted by 10 per cent in the fundraising needed to pay for the return of taxpayer funds. The dilution at Citigroup from issuing new shares comes on top of the overhang of the government's 34 per cent stake, which will keep a lid on the share price until it is divested. Better to wait until the economy is healthier, defaults have come down and Citigroup's anaemic earnings have picked up, so that the dilution might be much less.

Look at it this way. Mr Pandit is basically asking for permission to dilute shareholders and risk the financial system so he can pay a cadre of top executives more in the short term. He is flogging a dead horse.

PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
Britons buy more than 30 million handsets each year, keeping them for an average of 18 months
tech
Arts and Entertainment
Alloysious Massaquoi, 'G' Hastings and Kayus Bankole of Young Fathers are the surprise winners of this year's Mercury Music Prize
musicThe surprise winners of the Mercury Prize – and a very brief acceptance speech
Arts and Entertainment
TV Presenters Ant McPartlin and Dec Donnelly. Winners of the 'Entertainment Programme' award for 'Ant and Dec's Saturday Night Takeaway'
musicAnt and Dec confirmed as hosts of next year's Brit Awards
Arts and Entertainment
Orson Welles made Citizen Kane at 25, and battled with Hollywood film studios thereafter
film
News
video
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Finance Assistant - Part time - 9 month FTC

£20000 - £23250 Per Annum pro rata: Clearwater People Solutions Ltd: Pro rata ...

Marketing Manager

£40 - 48k + Benefits: Guru Careers: We are seeking a Marketing Manager to join...

Market Risk Manager - Investment Banking - Mandarin Speaker

£45,000 - £65,000: Saxton Leigh: Our client is a well-known APAC Corporate and...

Compensation and Benefits Manager - Brentwood - Circa £60,000

£60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...

Day In a Page

Isis in Syria: A general reveals the lack of communication with the US - and his country's awkward relationship with their allies-by-default

A Syrian general speaks

A senior officer of Bashar al-Assad’s regime talks to Robert Fisk about his army’s brutal struggle with Isis, in a dirty war whose challenges include widespread atrocities
‘A bit of a shock...’ Cambridge economist with Glasgow roots becomes Zambia’s acting President

‘A bit of a shock...’ Economist with Glasgow roots becomes Zambia’s acting President

Guy Scott's predecessor, Michael Sata, died in a London hospital this week after a lengthy illness
Fall of the Berlin Wall: History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War

Fall of the Berlin Wall

History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War
How to turn your mobile phone into easy money

Turn your mobile phone into easy money

There are 90 million unused mobiles in the UK, which would be worth £7bn if we cashed them in, says David Crookes
Independent writers remember their Saturday jobs:

Independent writers remember their Saturday jobs

"I have never regarded anything I have done in "the media" as a proper job"
Lyricist Richard Thomas shares his 11-step recipe for creating a hit West End musical

11-step recipe for creating a West End hit

Richard Thomas, the lyricist behind the Jerry Springer and Anna Nicole Smith operas, explains how Bob Dylan, 'Breaking Bad' and even Noam Chomsky inspired his songbook for the new musical 'Made in Dagenham'
Tonke Dragt's The Letter for the King has finally been translated into English ... 50 years on

Buried treasure: The Letter for the King

The coming-of-age tale about a boy and his mission to save a mythical kingdom has sold a million copies since it was written by an eccentric Dutchwoman in 1962. Yet until last year, no one had read it in English
Can instilling a sense of entrepreneurship in pupils have a positive effect on their learning?

The school that means business

Richard Garner heads to Lancashire, where developing the 'dragons' of the future is also helping one community academy to achieve its educational goals
10 best tablets

The world in your pocket: 10 best tablets

They’re thin, they’re light, you can use them for work on the move or keeping entertained
Lutz Pfannenstiel: The goalkeeper who gave up Bayern Munich for the Crazy Gang, Bradford and a whirlwind trawl across continents

Lutz Pfannenstiel interview

The goalkeeper who gave up Bayern Munich for the Crazy Gang, Bradford and a whirlwind trawl across continents
Pete Jenson: Popular Jürgen Klopp can reignite Borussia Dortmund’s season with visit to Bayern Munich

Pete Jenson's a Different League

Popular Klopp can reignite Dortmund’s season with visit to Bayern
John Cantlie video proves that Isis expects victory in Kobani

Cantlie video proves that Isis expects victory in Kobani

The use of the British hostage demonstrates once again the militants' skill and originality in conducting a propaganda war, says Patrick Cockburn
The killer instinct: The man who helps students spot potential murderers

The killer instinct

Phil Chalmers travels the US warning students how to spot possible future murderers, but can his contentious methods really stop the bloodshed?
Clothing the gap: A new exhibition celebrates women who stood apart from the fashion herd

Clothing the gap

A new exhibition celebrates women who stood apart from the fashion herd
Fall of the Berlin Wall: Goodbye to all that - the lost world beyond the Iron Curtain

The Fall of the Berlin Wall

Goodbye to all that - the lost world beyond the Iron Curtain