Why Citigroup Matters to You

By Todd Harrison  OCT 16, 2012 10:45 AM

Reading between the picket lines.



Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

Citigroup (NYSE:C) CEO Vikram Pandit -- and his top lieutenant, President and COO John Havens -- unexpectedly resigned from their posts this morning, a day after posting better-than-expected earnings. While the stock remains 93% below 2007 levels, this was as graceful an exit as there could have been, all things considered, and word on the Street is that it wasn't exactly their choice.

I worked at Morgan Stanley (NYSE:MS) with both of these guys way back in the day; in fact, Mr. Havens was one of the first people to interview me in 1990 and Mr. Pandit was the last person to say goodbye when I resigned in 1997.  My belief then and to this day was that Pandit's interest had everything to do with my leaving to join one of the biggest hedge funds on the Street and little to do with me as a young man trying to find his way.

I'm not here to pass judgment on their performance; by all accounts, they were dealt an extremely tough hand and played it to the best of their ability. Yes, they had the benefit of a $45 billion bailout, but they were not the stewards when the decisions were made that created the conditions for the bailout. At 55 and 56 respectively, Mr. Pandit and Mr. Havens have likely aged well beyond their years.

Yesterday afternoon on the Buzz & Banter, I offered the following thoughts:

Another session toggles toward the close as the bulls cling to the daily gains. A snapshot of today's action suggests they've won today's battle; questions remain, however, regarding The War on Capitalism.

Governments the world over have made no bones about their distaste for speculation. They look at Wall Street as profiteers who benefit at the expense of Mom and Pop America. They see hedge funds as acceptable casualties of war and shed no tears for fund managers grappling with performance anxiety. Someone has to pay, and as far as they're concerned, it should be those who have already been paid.

In many ways, the populous has every right to be angry as a chosen few benefit in our bifurcated world. In others, and as we've seen before, the unintended consequences of policy -- both written and implied -- may create more profound issues than what was being addressed in the first place. I've said it before and I'll say it again: These are historical times, flush with obstacles and by extension, opportunities.

If no changes are made to Mr. Pandit's compensation, Citigroup will have paid him roughly $261 million in the five years since he became CEO, according to Bloomberg. That's a heckuva lot of money, enough that his family, children, and grandchildren won't have to sweat to put food on their table or a roof over their heads. Perhaps it was time to step away from the spotlight and enjoy the most precious commodity, that of time; maybe, just maybe, there's more to it than that. Despite the fright since the wheels fell off the global financial wagon five years ago, Morgan Stanley CEO James Gorman recently warned that overcapacity and compensation are "way too high" in the banking complex, and expressed "sympathy" with those who believe "the industry is still overpaid." Similarly, Bank of America (NYSE:BAC) CEO Brian Moynihan announced a few weeks ago that he is speeding up his cost-cutting efforts and will cut 16,000 jobs by year-end.

In 2006, in an article titled The State of the Art, I offered: "There will always be a Wall Street and a need for capital markets. The trick, for an industry mired in overcapacity, is to proactively adapt before the trade passes them by."

That process -- and it's just that, a process -- is now in full swing; despite year-to-date gains in the stocks of the world's largest financial institutions -- the BKX (INDEXDJX:BKX) is up 27% year-to-date -- few of the folks I speak to within these large firms are feeling particularly plucky.  Many of them are looking over their shoulders, others are just happy to have a seat. All of them understand that in the eyes of John Q, they are Public Enemy No. 1.

I often opine, when referring to the economic imbalances and the longstanding socioeconomic malaise, that "in order to get through it we had to go through it, and we're going through it now." 

The same can be said for the financial industry; we're likely in the middle innings of this seismic readjustment. We can choose to look at that as a negative -- as most people are -- or a positive, in that we're a LOT closer to where we need to be for the next phase of secular growth, one that hopefully won’t require trillions of dollars of taxpayer money.

From here to there, both for the financial industry and the economy as a whole, we'll have to put our heads down, bust our humps, and work much harder for less money -- not all of us are in a position to walk away with hundreds of millions in our back pockets. We must survive to thrive and preserve capital to create wealth. That's our mission in the rain, for the other option -- the white flag -- isn't a viable scenario.

Yes, it will take persistence, passion, and elbow grease, and no, it's not exactly fun -- but I will tell you this: When the dust settles, and yes, it will settle, there will be better days and easier trades. We just have to get there, one step at a time, while reminding ourselves that we don't live to work, we work to live.


Twitter: @todd_harrison

No positions in stocks mentioned.