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Citi Fights Losing Battle With Washington

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Struggle between bank and its regulators just won't end.

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Vikram Pandit, aren't you ready for a new job?

Since taking the helm at Citigroup (C) in late 2007, Pandit has led the bank through its darkest days. He's overseen controversial executive management exits, an embarrassing private-jet debacle, and a desperate bailout from the federal government.

And still, the light at the end of the tunnel keeps getting further and further away. When Pandit unveiled the Citi Never Sleeps slogan -- and made promises about the future of the universal bank model -- to investors in May 2008, the already embattled CEO could never have imagined what fate had in store for him.

Right now the bank is fighting a public relations battle over its contract to reward a single trader, Andrew Hall, with a $100 million payday. The controversy has dominated headlines and enraged lawmakers for weeks now, and, perhaps due to the slow August news cycle, the story unfortunately only continues to gather steam.

Kenneth Feinberg, President Obama's pay czar, is beginning to examine the compensation practices at the biggest recipients of federal aid, including Bank of America (BAC), AIG (AIG), Citigroup. According to the New York Times, Citigroup plans to argue that Hall's pay is exempt from Feinberg's oversight since his contract was signed before the legislation for compensation oversight was passed. And according to the Wall Street Journal, Hall is trying to negotiate a new contract with Citigroup that would theoretically satisfy the government's demands for his pay going forward, even if it slightly reduces his payday for next year.

This controversy is growing a bit tiresome, but it's particularly damaging for Citigroup. It's easy to be outraged over the idea that any single person would be paid such a sum by a bank that's running on federal fumes, but what's getting lost in all the mayhem is the fact that Hall, as head of Citigroup's commodities trading unit Phibro, has actually been one of the few things working in Citigroup's favor during the credit crisis. The trading unit has consistently produced strong returns and Hall's pay is directly tied to his unit's performance.

Now Pandit is struggling to figure out how to keep both the government and its own lucrative traders happy.

But even worse for Pandit, the Financial Times reports that the feds have forced Citigroup to hire external consultants to determine whether Pandit and his management team are even capable of getting Citigroup out of this crisis. The bank has reportedly hired Egon Zehnder, a headhunter and board consultancy, to conduct an in-depth review of Citi's management. The results are expected by the time the bank reports its earnings in October.

It's not particularly unusual or out of line for the FDIC and other regulators to demand some answers. Many questioned Pandit's appointment in 2007 since he had no previous history of strong leadership. He came to Citigroup when the bank bought Pandit's struggling former hedge fund, Old Lane Partners.

It also doesn't help Pandit's cause that his clashes with FDIC and its chairman, Sheila Bair, have been made so public. Earlier this year, the Wall Street Journal reported that the FDIC was determined to remove him from the top spot and had even reached out to potential successors.

Pandit appeased some critics by agreeing to take a $1 salary until the firm returns to profitability, but clearly the government wants to see more change from the bank that never sleeps.

The battle between Pandit and Washington is ugly, and it's reaching a point of exhaustion. It's time to move on from Andrew Hall and his $100 million payday and focus on Citigroup's future. The only question for Pandit to answer now is whether or not he's the right man to get it there
No positions in stocks mentioned.
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