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NEW YORK — Embattled Citigroup Inc. boss Vikram Pandit gathered his employees for a town hall meeting in the bank's Manhattan headquarters Monday morning, and ran through a presentation designed, presumably, to put a positive spin on the company's financial situation.
“Getting Fit – Fast!” read the caption on one slide.
It could just as easily have read “Get Lean!” Or, for tens of thousands of staffers, “Get Lost!”
Mr. Pandit, who has presided over a perilous nosedive in Citigroup's stock since he inherited the reins after the ouster of Charles (Chuck) Prince a year ago, announced plans Monday to cut 50,000 jobs through a mixture of asset sales and layoffs.
Citigroup is cutting jobs
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The moves will pare the work force to 300,000, down from 352,000 at the end of the third quarter, and a high of more than 370,000 not long ago.
The pace of Citigroup's decline has been breathtaking. Only last spring, it was the largest bank in the world, worth more than $250-billion (U.S.).
Today, its market value has withered to just $50-billion, making it roughly the same size as Royal Bank of Canada.
Much of that drop can be attributed to questionable lending and an overreliance on derivatives, two key ingredients in a credit crisis that has hammered pretty much every large U.S. bank.
But Citigroup now looks more vulnerable than most, and many observers are pointing to another underlying cause: a flawed business model.
When Sandy Weill created the sprawling financial conglomerate through the $70-billion merger of Citicorp and Travelers in 1998, it was a ground-breaking deal, not merely because of the size of the company it created, but because of the various business lines it combined. The newly christened Citigroup ushered in the financial “supermarket” model of U.S. banking, offering clients everything from deposit and loan services to insurance, investment banking and brokerage accounts.
Indeed, Mr. Weill's manoeuvring forced the U.S. government to repeal the Glass-Steagall Act.
Repealing Glass-Steagall, a Depression-era piece of legislation that prohibited retail and investment banks from combining operations, in turn enabled a new wave of consolidation in the industry.
That integrated business structure, already prevalent among Canadian banks, is now seen as the most viable model for the future of U.S. banking, since the large retail deposit bases provide banks with cheap sources of funding.
But while heavyweights like JPMorgan Chase & Co. and Bank of America have pursued this approach with several acquisitions, they have been focused more on the domestic market. Citigroup, ill-fatedly, took its supermarket approach around the globe, setting up operations in more than 100 countries.
Although it has since sold its insurance business, analysts say this global reach has become an Achilles heel. For one thing, it's expensive to maintain operations in so many places, and deal with the rules of multiple jurisdictions. Secondly, many of these developing nations have been enmeshed in the economic crisis, meaning they will face even more pressure to generate returns for the company.
“It's a repudiation of a global supermarket model,” said Christopher Whalen, head of Institutional Risk Analytics. “Citigroup maintains a small version of itself in every market it operates. If I was talking to the board, I'd look them in the eye and say I think this business model is dead. You probably ought to sell the offshore bank.”
Mr. Whalen, who called the board a “shambles” and has been critical of management, predicted that Citigroup will be controlled by the U.S. federal government by next year, and that the next logical step will be to break up the bank and sell the assets.
Mr. Pandit, who already secured $25-billion from a federal bailout package, Monday attempted to counter this growing pessimism about the bank's prospects. He highlighted the bank's strengthened capital position, its shrinking expenses and the progress it has made in reducing its portfolio of risky assets.
In an another attempt to bolster confidence, Mr. Pandit recently bought 750,000 common shares and 100,000 preferred shares for just under $10-million.
But investors have remained unconvinced. Last week, the company's stock dropped below $10 for the first time since Mr. Weill masterminded the merger. The stock has fallen approximately 70 per cent this year following four quarterly losses totalling more than $20-billion.
That sentiment was not helped by reports of boardroom friction, and an attempt by some directors to replace chairman Sir Win Bischoff with Time Warner chairman Richard Parsons, who is the bank's lead director.
The board denied any such intentions in a statement, but the suggestion of dissent reinforced long-held notions that Citigroup's culture lacked cohesion, the product of an acquisition binge that stitched together several companies with different ways of doing business. Industry watchers say Citigroup has also been a laggard when it came to investing in technology to knit these businesses together.
One of the biggest challenges facing the bank now, however, is keeping pace with healthier rivals that are bulking up at home, including JPMorgan, Bank of America and Wells Fargo.
Citigroup struck a deal to buy Wachovia Corp. last month, which would have given it access to a highly regarded retail banking network on the East Coast, as well as $420-billion in deposits – the new holy grail for integrated banks.
Yet Wells Fargo thwarted that deal by coming in with a much richer offer. With the disappearance of Wachovia, there are few, if any, targets that Citigroup could pursue to obtain that kind of deposit scale, although there are rumours now that it has begun to target smaller banks.
Oppenheimer & Co. analyst Meredith Whitney recently suggested it could take two years before the bank begins to turn a profit again, while others predict that Mr. Pandit, optimism aside, may have to go back to the U.S. Treasury and ask for more bailout money.
