Pandit's Letter to Citi Shareholders: Lame

While we’re on the topic of annual shareholder letters, you’ll get no argument from me that surely the toughest letter to write this year—by far—had to be the one from Vikram Pandit to the shareholders of Citigroup (C).

But the letter figured to be highly instructive, as well. Here’s a company that lost $28 billion last year, and that had to take two direct investments from the government (that tallied to $49 billion) while also receiving a government guarantee on $301 billion of dodgy assets. Top management has been in place for not much more than a year; yet in 2008, it made some momentous decisions, from restructuring Citi into a “good bank” and a “bad bank,” to converting the government’s preferred holding into common, and massively diluting prior shareholders in the process. The feds now own 36% of the company.

Given all this, shareholders were likely interested to read what Pandit had to say about the year just past, and his outlook for the future. Unfortunately—and I say this with the utmost understanding of the challenge he was up against—Pandit whiffed.

Take, first, his discussion of the conversion of the government’s stake into common. The move, recall, was ruinous for Citigroup’s existing shareholders. When you combine the conversion of the government’s preferred with the conversion by other preferred holders, common shareholders were diluted by 76%. And what benefit did holders receive in return? Pandit doesn’t say. Instead, he writes that the move “was designed to strengthen our tangible common equity and increase confidence in our capital strength.” Only that’s not really true. Citi received absolutely no incremental federal dollars as a result of the deal, nor did the move improve the company’s three key regulatory capital ratios. All it did instead was address the concerns of a minority of capital markets participants (many of which are short Citi) by increasing the company’s tangible common equity ratio, a ratio no one cared about a year ago. The conversion was essentially a relabeling of pieces of a portion of Citi’s capital base—at a huge cost to existing shareholders.

Given the price that holders paid, Pandit might have spent some timing talking in detail explaining why he made the decision that he did, and why it will help shareholders over the long term. Instead, he merely writes that “ultimately, the trade-off we made will be in the best long-term interest of our shareholders.” Really, Vik? Why?

Nor is Pandit’s discussion of Citi’s disastrous results last year much more satisfying. Here’s a company, once the world’s largest bank by market cap, that spent much of 2008 on life support. And yet Pandit’s discussion of Citi’s problems consists of two paragraphs. And even in those two paragraphs, Pandit doesn’t seem to grasp (or, at least, convey) the size of the challenges the company faces. Instead, he writes that “our official results this year were very disappointing. However, away from these losses, our core franchises are performing well…”

Are you reminded of that old joke about whether or not Mrs. Lincoln liked the play? Vik, your company just lost gobs of money and inflicted huge dilution on it shareholders. It is preposterous for you to say that, absent that, everything is fine! It’s not.

Similarly, Pandit’s discussion of his decision to split Citi into two pieces, a good bank (Citigroup) and a bad bank (Citi Holdings), misleads more than it clarifies. Discussing the good bank, he writes, “On a stand-alone basis, I believe there is no stronger financial services firm than Citigroup.” Well, of course you think that. You set it up to look that way. But let’s not forget a Citigroup shareholder owns both Citigroup and Citi Holdings. And let’s don’t forget, either, that the two halves both still exist within the same entity. So it’s not really helpful to crow about Citigroup simply because you set it up as a subsidiary of the holding company, devoid of its most troublesome assets! Shareholders still own the same good and bad assets, and the company still has the same amount of capital and loss reserves after the split as it did before.

Pandit then looks forward and writes that “as the economic environment begins to recover, as it inevitably will, Citi will be well-positioned to create the kind of shareholder value of which we all know Citi is capable and which you should reasonably expect.” Pandit’s regard for shareholder value would be comical if it weren’t so pathetic. Remember, this is the same guy who just served up enormous dilution to these same shareholders he now says he’s so concerned about.

The hardest part of the letter to take, though, comes toward the end, where Pandit lays out the four factors that he believes give Citi its competitive edge. They are (and, yes, you’ve seen this before): a) Citi’s global presence, b) its legacy of innovation, c) its determination to build a culture of meritocracy, and d) its commitment to make a difference in the communities it operates.

I kid you not. That is of course the same list of “advantages,” more or less, Sandy Weill would have given you back when he ran the company, and Chuck Prince would have listed when he was in charge. And look, exactly, at how things have turned out. Citi’s vaunted global presence, for example, wasn’t much use in helping prevent last year’s $28 billion loss. And its “legacy of innovation” (in CDO underwriting, perhaps?--or Dr. Evil trades?) may have even contributed to the company’s problems. As for Citi’s new commitment to meritocracy, from what I can tell that’s still a figment of Pandit’s imagination. I don’t know why that last item, Citi’s commitment to its communities, is even on the list, except that maybe Maxine Waters made Pandit put it there.

By the time Pandit winds up his final paragraph, he has left our world and entered some weird parallel universe: “With the top team in the industry,” he writes, “we will succeed.” Top team in the industry? Vik—hello! In fact, your executive suite has a revolving door that has seen, among other things, the arrival of three CFOs in the past three years. Citi nearly drowned in red ink last year, required a vast amount of government assistance as well as a loss-sharing agreement, and then inflicted needless dilution on common shareholders. Please don’t say the company is run by the top management team in the business.

I know I know, Citi’s shareholders letter must have been tremendously difficult to write. Even so, I don’t see how Vik Pandit could have done a worse job. Read the whole letter and be prepared to wretch!

Comments

[ANTON:]

You are correct ..it seems that the shareholders like me lost their 401K and lifework in CITI shares with litle opportunity to regain even a ortion of its former 97% value. Who are these demagogues ? Where did they find them to misrepresent ad infinitum ? Where are the usury laws ? Where is justice ?

Mar 25 06:09 AM

[al s:]

Another crap Board, another crap Chairman, another crap CEO, sure sounds like a winning formula for success !!!!!
The past two weeks of common share upticks were a headfake. No doubt C will flow with the market and ride the wave of mark to market changes, etc., but THIS team will never get them back to a $60 a share level. NOT IN A LIGHT YEAR.
Just go into a Citi branch, the few that are left, and compare them to JP Chase, BoA, Wells, Capital One, TD, etc. They look like trailer parks ( with apologies to people who live in trailer parks) .
C is still "hiding" TWO TRILLION of toxic/semi toxic assets on and off their many balance sheets, and they need to come to come clean with these orphans before there is any real hope foe a once great company,

Mar 25 06:52 AM

[User 133894:]

Just keep banging CITI. It adds to it's value.

Mar 25 06:59 AM

[mikeg3:]

Citi improved their Tangible Common Equity ratio because that is part of the stress test. Once Citi officially passes the stress test, the bettors on Citi's demise will have to find another target.

The interesting question is why TCE replaced Tier 1 capital as the Fed's metric of bank health. I think that was just following the crowd, but it wasn't Citi's decision.

Mar 25 07:19 AM

[monday1929:]

Citi DIED. Don't you get it yet???


On Mar 25 07:19 AM mikeg3 wrote:

> Citi improved their Tangible Common Equity ratio because that is
> part of the stress test. Once Citi officially passes the stress test,
> the bettors on Citi's demise will have to find another target.<br/>
>
> The interesting question is why TCE replaced Tier 1 capital as the
> Fed's metric of bank health. I think that was just following the
> crowd, but it wasn't Citi's decision.

Mar 25 08:35 AM

[mikeliu:]

Pandit is really Citi's Bandit
Pandit is just a coward in seeking conversion of the preferred into common. The true rational behind the move is the fear that Citi as a bank in the "business of confidence" will face a run on the bank. He was just scared when stock prices dropped below $3 a share. It is true a run on the bank could quickly suck all deposits which are the lifeblood of a bank. However, Pandit in his fear and muddled mind forgot that this is a unprecedented banking crisis and all banks are faced with a confidence crisis. A depositer has limited choices in running from major banks. And the government support has more or less guaranteed all depositers' money. As a result, Pandit's request to convert preferred did nothing but destruct Citi shareholders' value. Pandi is a true Bandit who robbed great Citi. As investors you may pariticipate in the redistribution of that wealth if you could buy at below $2 prices.

Mar 25 09:23 AM

[freddywho?:]

I am so sick of all WS types! Pandit, on top of the list! They really need a public hanging to get some realism back in the financail world.

Round up GS top 100, add Paulsen in group. All the ML slime, and the remaining AIG slime who ran off with the loot! And, what about the those outside of our country why are they not asked to return elicit bonuses? Do not allow them to enter country ever again unless the repay. They are thugs-big time!

Is there any triuth to the CITI's toxic assets adding up to 3.0Trillion?

We need clean sweeps in our house of horrors, the Congress and their accomplices in the Oval Office.
How about the FBI investigating THe SEC?, THe Fanny's and Freddy's? Some heads should role!

Then the American people will feel free aagin to boost our economy

Mar 25 12:09 PM

[Allan Frain:]

And what does this say of a general rally initiated by the letter ? Still too much faith where none is due. We are still in the denial phase. We have a long road to hoe.

Mar 25 12:17 PM

[Tom K:]

I agree with general substance of article.

What concerns me most as a shareholder is the weakness of Pandit in dealing with the government and regulators.

A company like C needs and requires strong and knowledgeable leadership which has not been seen from Pandit.

Show results or look for the exit door and let a strong and knowledgeable president be appointed.

Tom K

Mar 27 02:41 PM