Citi Cure: Tough Love Or Kid Gloves?
Two days after Vikram Pandit took the top job at Citigroup Inc., the bank capitulated on its off-balance-sheet financing vehicles, lost its chief operating officer and began 'a companywide review of our structure and expense base.'
But the big question hanging over Mr. Pandit is whether he should take a meat cleaver to the Citigroup empire. Doing so would please many investors and analysts who say the bank's parts would be worth more than the whole, but such a plan might be costlier than people think. Citigroup executives already have gone through these breakup scenarios and found that the bank, its capital depleted by losses on mortgage securities, may face regulatory scrutiny, see its credit rating cut and be hit with a big tax bill, according to an outside advisor who helped the bank to analyze a breakup.
The retirement of Chief Operating Officer Robert Druskin wasn't a shock. He was a Citigroup veteran recruited by the bank's architect, Sandy Weill, and he was a close ally of former CEO Charles Prince, who resigned last month as the bank warned of billions of dollars in mortgage-related losses. Mr. Druskin, 60, oversaw the last big round of cuts last spring, which included about 17,000 jobs, or about 5% of Citigroup's staff.
Citigroup executives have again been instructed to find areas to cut, and the result may be thousands more layoffs next year, people familiar with the matter say. Other, less dramatic, moves are more likely in the near future, including better integration of businesses and management shuffling. In a memo to employees, Mr. Pandit named Chief Financial Officer Gary Crittenden to lead the effort.
The move to consolidate $49 billion of structured investment vehicles onto its balance sheet showed how much pressure Mr. Pandit is under to get the bank back in order. Citigroup was forced to bring the assets onto its balance sheet because of a potential review by the credit-ratings firms, and while the bank's capital levels will decline only slightly, it may prevent any dramatic moves by Mr. Pandit.
'We think it would be much more likely for Vikram to cut the dividend, replenish capital more quickly, get the ship righted and then possibly consider splitting the company up, several years down the road,' Morgan Stanley analyst Betsy Graseck wrote to clients Wednesday.
A few hours after the board named him CEO on Tuesday, Mr. Pandit told analysts and investors that one of his top priorities is 'an objective and dispassionate review of all our businesses.' Asked about the possibility of spinoffs, Mr. Pandit didn't slam the door. Some interpreted the remarks as a sign that the former Morgan Stanley executive, who joined Citigroup in July after the company bought his hedge fund, isn't wedded to the 'financial supermarket' model that his predecessors steadfastly defended.
One idea that has been discussed is merging Citigroup's thriving wealth-management business, in particular its Smith Barney retail brokerage, with its struggling U.S. retail-banking group, one person said. That would be a natural outgrowth of a strategy already under way, in which Smith Barney brokers now work in some Citibank branches. Combining the units would parallel Mr. Pandit's approach to Citigroup's investment bank. During his brief tenure overseeing the unit, Mr. Pandit took steps to encourage greater cooperation between different types of bankers, to provide more seamless service to clients.
A Citigroup spokeswoman declined to comment.
Analysts estimate that if Citigroup splintered into several companies -- a U.S. retail bank, an overseas retail bank, an investment bank and a retail brokerage -- the entities could have a combined value of 16% to 32% more than Citigroup's current stock price. With Citigroup's shares down about 44% this year, those scenarios appeal to frustrated investors.
The most commonly mentioned breakup scenario would entail Citigroup spinning off one or more units to shareholders. Such a transaction would be tax-free. But while Citigroup shareholders might gain, the company might not. By shedding profitable business lines, Citigroup would be relinquishing a source of retained earnings, an important part of a bank's capital base. Capital levels measure a bank's financial strength, essentially gauging how much of a cushion it has to absorb major losses.
'That in and of itself might argue against a spinoff because it would deplete their capital,' said Robert Willens, an accounting and tax expert at Lehman Brothers.
That could be a deal breaker. Citigroup's capital levels remain above regulatory minimums but have fallen below the company's internal target of 7.5%. With Citigroup bracing for as much as $11 billion in mortgage-related losses in the fourth quarter, the capital levels could dive again. Regulators might balk at a breakup plan that would further erode the capital cushion.
'I don't think breaking up the whole business is going to be something that regulators will look on with great fondness right now,' especially with fresh write-downs looming, said Christopher Whalen, a managing director at Institutional Risk Analytics.
Given Citigroup's capital plight, some analysts have suggested that Citigroup could sell a business line and use the proceeds to shore up its capital levels. Smith Barney, for example, could prove attractive to a company such as Bank of America Corp., which lacks a major retail brokerage force. David Hendler, an analyst at CreditSights Inc., said that if Citigroup sustains major additional write-downs, selling a unit might be the only way for the company to avoid slicing its quarterly dividend.
But a sale would generate a hefty tax bill. The outside adviser to Citigroup, who has evaluated the feasibility of spinoffs for the company, says taxes could consume about 40% of the proceeds of such a transaction, and therefore wouldn't be worthwhile given the revenue Citigroup would be sacrificing.
Meanwhile, shedding units could inflate the borrowing costs for Citigroup and any newly-independent businesses. Citigroup currently enjoys high credit ratings, keeping its borrowing costs low, in large part because of its diverse business model. If one segment stumbles, another is likely to pick up the slack. The result, at least in theory, is a stable income stream.
'Anything they do to de-diversify is a negative consideration in the rating,' said Tanya Azarchs, a managing director in the financial-institutions ratings group at Standard & Poor's. 'Each of its parts would not necessarily get an AA rating on its own.' The parent company also could see its ratings cut, she said.
在潘伟迪(Vikram Pandit)出任花旗集团(Citigroup Inc.)首席执行长之后仅仅两天，该行就决定将表外投资实体的资产计入公司资产负债表，并开始对公司的组织架构和费用基础来一次内部大审查，而花旗首席营运长罗伯特•德鲁斯金(Robert Druskin)也将于年底前退休。
德鲁斯金的退休决定对花旗倒也算不上一个意外打击。现年60岁的他是花旗的元老级人物，是由这个金融王国的缔造者──威尔(Sandy Weill)亲自招进公司的，也是前首席执行长普林斯(Charles Prince)的亲密战友。在上个月花旗宣布计入数十亿的次债损失后，普林斯黯然辞职。去年春天，在德鲁斯金的指挥下，花旗完成了距今最近的一次大规模裁员，有1.7万人离开了公司，占花旗员工总数的5%左右。
雷曼兄弟公司(Lehman Brothers)的会计及税务专家罗伯特•威兰斯(Robert Willens)表示，花旗自己可能会对拆分表示反对，因为这将给公司的资本状况带来重创。
Institutional Risk Analytics的董事总经理克里斯托弗•维伦(Christopher Whalen)表示，他并不认为将花旗业务分拆会得到监管机构的赞许，尤其是在很有可能发生新的资产冲减之时。
考虑到花旗集团的资本现状，一些分析师认为花旗可能出售一项业务，并用所得收入支撑起资本水平。举例来说，美邦就可能获得美国银行(Bank of America Corp.)等公司的青睐，对后者来说，零售经纪业务正好是其弱项。CreditSights Inc.的分析师大卫•汉德勒(David Hendler)表示，如果花旗继续大规模冲销资产的话，将某一业务出售是唯一能够避免削减季度派息的办法。
标准普尔(Standard & Poor's)负责金融机构评级业务的董事总经理泰娅•阿赞克斯(Tanya Azarchs)表示，只要花旗做出有违业务多元化原则的决定，该行的评级都有可能受到不利影响，花旗任何一项独立出来的业务都未必能获得AA评级，母公司的评级也有可能下调。