Should Alan Schwartz Be Citigroup's Next CEO?

The board is extremely supportive of Chuck's strategy. This is absolutely the right track. - Robert Rubin, November 2007

We begin this comment by giving kudos to Heny Sender at the Financial Times for breaking the story Monday about Corsair Capital leading a $7 billion raise for National City (NCC).

One cannot help but be impressed by the generosity of Corsair, injecting money into NCC (in concert with Michael Dell says the Wall Street Journal),an Ohio-based commercial bank which just saw its default rate double to 180bp in Q1 2008, this vs. all of 2007.

The surge in Q1 charge-offs will necessarily push NCC's maximum probable loss for the rest of the year into the 200-300bp range, a level that may yet go higher. In 1990, the predecessor of NCC did 150bp of defaults vs. 176bp for the peers, thus NCC is already over early 1990s levels of loan defaults.

Should we say that again for the reading impaired?

Question: Has anyone noticed the number of top-25 banks that doubled their run-rate charge-offs, 2007 vs. Q1 2008? As we told La Tribune on Wednesday, we don't expect the growth in charge-offs for US banks to slow until next year. Another 2x progression across the board for the top five banks in Q2 2008 gets us into 1990 default rate territory.

How do you feel about Citigroup (C) at 300 basis points (annualized) of charge offs? Or JPMorgan (JPM) at, say, 200bp? With these levels of losses, you have to figure that CDS spreads for these names must widen. Would those generous souls at TPG or Corsair still like bank stocks at these loss levels?

Meanwhile, we ponder the state of the industry as more earnings releases hit the market. It occurs to us that the failure of Bear Stearns (BSC) and acquisition by JPMorgan Chase might present an opportunity to C. And that opportunity is named Alan Schwartz.

You recall our earlier comments on the state of play at C, where a very smart hedge fund manager name Vakrim Pandit has been pressed into service as CEO of the House that Sandy built. Sandy's House, you understand, was a one-man bodega with a 24-hour drive-up window, where competition with the king was neither tolerated nor encouraged, thus driving out many of the obvious candidates for king.

Weil reportedly was forced out of the job by former NY Governor Elliot "Mayflower" Spitzer, this in the wake of the WorldCom scandal. Weil's overthrow had a certain poetic quality for some, since he had achieved the throne after CEO John Reed was forced out through similar circumstances, in that case a certain Latin American private banking scandal we'll talk about some other time.

Weil's loyal lieutenant and lawyer Chuck Prince was thrown into the fray. Another smart fund manager named Sallie Krawcheck had previously been tapped as CFO. However the Chuck-and-Sally team was less than compelling with investors, especially on the road. And Chairman Robert Rubin did not show great appetite for greater involvement. Thus began the slow bleed of credibility that has fed the crisis atmosphere at C as real credit conditions worsened.

When the swollen pool of investor angst reached the top of the septic tank, Prince was also forced out, though we hear that he continues to run C's regulatory affairs as a consultant. Ms Krawcheck went back to managing money and Gary L. Crittenden was tapped as CFO. Without taking anything away from Mr. Pandit or Mr. Crittenden, however, it is apparent that there remains a vacuum at the top of C.

Frankly, we think that C's shareholders would be well served were Chairman Robert Rubin to have a discussion with Schwartz about joining the team as CEO. Leave Pandit on the executive committee, but let him go back to making money, which he does very well. Instead, put Schwartz in the lead spot. Schwartz is a classic banker in the John Reed tradition and has an equally large network of contacts and relationships around the globe.

When we look at C, we see an organization that takes more risk than most of its asset peers, but does so with great skill and deliberateness. C's natural default rate is 2x JPM or Bank of America (BAC), but peers well against HSBC (HBC). And C has one of the deepest benches of bankers, product specialists and risk managers in the business.

What they don't have in Pandit, and did not have in Prince, is a banker who can sell the firm to investors and other institutional audiences. In our view, Alan Schwartz could do that job and more, and quickly reverse C's defensive posture in the marketplace. He's also a consummate deal guy who will energize C's investment banking operations, something that has not been lost on JPM.

We hear that Schwartz, who I worked for and have known for decades, has not yet made a commitment to staying with JPM. He reportedly is not willing to make any decision until he sees how JPM treats the remaining employees of BSC, those not among the 7,000 fired last week.

C and the rest of the banking industry may go through some tough quarters in the next year, but the difference between success and failure could be who is on the road and on television telling the story. We think C, with Alan Schwartz leading one of the best teams in the industry, would finally be a competitor to Jamie Dimon and JPM.

Comments

[calling bs]

Allan Schwartz has led Bear's investment banking unit for over 15 years - During this time, BSC has always been a has been in all aspects of inv banking - they have never been on top of the league tables when it comes to M&A, lev Fin or restructuring. They have never had a top notch industry group in the I banking world other than maybe, their aero space /defense practise. Why in the world would you think Schwartz is qualified to lead C? His track record shows nothing for him to be considered let alone qualify.

[Egg]

Don't forget to write an article touting Bernie Ebbers to run the new AT&T.

[Amazed!]

This is a truly an amazing piece of writing.

First, Bear Stearns was never that successful under Schwartz in the best of times and he managed to destroy the company in the worst of times.

Second, Vik Pandit may not be flashy and a great interview for CNBC but his early actions seem to be all the right moves. Give him 18 months and he is going to be hailed as a brilliant CEO who was the right man for the right time at Citi.

Expect Citi stock to be up about 25% over Pandits first year on the job.

[BSCLoser]

Alan Schwartz, the guy destroyed Bear and lied on CNBC about $17 billion in liquidity? It seems as if he is better qualified to run for Congress.

[BlackSwan]

You're onto the right church, but the wrong pew! Goldman must buy or merge with Citi and then we'll have the premier financial institution in the world and the shareholders will quickly regain all that has been lost over the past decade and then some. Pray for this marriage made in heaven to take place soon.