Citi's Old Lane Fiasco: A Perfect Illustration of Everything That's Gone Wrong

I try not to kick companies when they’re down, but Citigroup’s (C) experience with the soon-to-be late, lamented Old Lane Partners is such a perfect distillation of everything that’s gone wrong at the company in recent years, I can’t help myself. It’s got it all.

From the moment Old Lane deal was announced in April of last year, there were signs it was an accident waiting to happen. First, was that price tag: $800 million for a smallish money manager with a so-so track record, whose main point of attraction seemed to be the guy in charge, ex-Morgan Stanley whiz Vikram Pandit. Citi’s plan, recall, was that Old Lane would be the centerpiece of its effort to expand its alternative investment unit, which Pandit would run. The deal “is the equivalent of buying the New York Knicks to have dinner with Patrick Ewing,” one wag said at the time. Pandit himself made $165 million from the transaction.

In retrospect, the timing for Citi couldn’t have been worse. The financial markets began their crackup within months. Old Lane was down in the second half of 2007, and was down slightly again in the first quarter of the year.

Then, in an early management shuffle that followed news of Citi’s mortgage blowup, Pandit was pulled out of Old Lane and made head of Citi’s institutional clients group. That shift gave Old Lane investors the right to redeem their investment immediately. Which they did. Citi indicated last month that “substantially all” of the funds investors have pulled. Late last week, the company said it’s shutting down Old Lane altogether.

So shareholders are out $800 million with absolutely nothing to show for it. 

Is the Old Lane fiasco the most calamitous deal Citi’s done in recent years? By no means. But the same management skills that brought this debacle about—hubris and a seemingly willful obliviousness to risk—are what have caused Citi’s bigger blowups, as well, from subprime mortgages, to the regulatory problems, to SIVs.

So we’ve come full circle. Before Citigroup’s recent problems began the company was run by a man who’d never been a CEO, never run a public company, never made a loan, and never run a bank. Now, $40 billion in writedowns later, the company’s being run by a man (Vik Pandit, of all people) who’s never been a CEO, never run a public company, never made a loan, and never run a bank.

Only the new CEO is up by $165 million.

Nice work if you can get it.

Comments

[Lark Williams:]

Curses on directors who don't seem to appreciate that running large and complex organizations require a little something called operating experience. More often than not these virgin CEOs do exactly what you'd expect, awkward and less than satisfying initial experiences. When will their be BoD reform so that shareholders can get meaningful competence and commensurate compensation plans?

Then again, or presidential candidates, as CEOs of the country, haven't run anything either. So the nation as a whole seems place little value on experience. I wish I could say we get what we pay for

2008 Jun 17 04:42 AM

[LoveShorting:]

Thanks, Vernon. I am short C so you made my day.

2008 Jun 17 09:14 AM

[Chemist29:]

So are we ripping on pandit because he's smart and made 165 million dollars? Not sure how its his fault citi bought his hedge fund. I would take this article on a positive, shows how smart Pandit is, he's objective and intelligent and knows how to be successful. His old hedge fund was weak and he shut it down, no remorse, no pity, so far he looks like he knows what he's doing. Besides, experience is overrated in general. Smart, ambitious, hard working, quick learners will always excel. Hopefully Pandit continues his meteoric rise to the top.

2008 Jun 17 01:30 PM

[Old Trader:]

Chemist,

I don't see how this piece is a knock on Pandit (other than deservedly questioning his capabilty to run an organization like C). It seems obvious (to me, anyway) the author merely using the Old Lane affair to point out the kind of muddled thinking that got Citi to where it is today.

jan

2008 Jun 17 11:16 PM