While we’re on the topic of annual shareholder letters, you’ll get no argument from me that surely the toughest letter to write this year—by far—had to be the one from Vikram Pandit to the shareholders of Citigroup.
But the letter figured to be highly instructive, as well. Here’s a company that lost $28 billion last year, and that had to take two direct investments from the government (that tallied to $49 billion) while also receiving a government guarantee on $301 billion of dodgy assets. Top management has been in place for not much more than a year; yet in 2008, it made some momentous decisions, from restructuring Citi into a “good bank” and a “bad bank,” to converting the government’s preferred holding into common, and massively diluting prior shareholders in the process. The feds now own 36% of the company.Â
Given all this, shareholders were likely interested to read what Pandit had to say about the year just past, and his outlook for the future. Unfortunately—and I say this with the utmost understanding of the challenge he was up against—Pandit whiffed.
Take, first, his discussion of the conversion of the government’s stake into common. The move, recall, was ruinous for Citigroup’s existing shareholders. When you combine the conversion of the government’s preferred with the conversion by other preferred holders, common shareholders were diluted by 76%. And what benefit did holders receive in return? Pandit doesn’t say. Instead, he writes that the move “was designed to strengthen our tangible common equity and increase confidence in our capital strength.” Only that’s not really true. Citi received absolutely no incremental federal dollars as a result of the deal, nor did the move improve the company’s three key regulatory capital ratios. All it did instead was address the concerns of a minority of capital markets participants (many of which are short Citi) by increasing the company’s tangible common equity ratio, a ratio no one cared about a year ago. The conversion was essentially a relabeling of pieces of a portion of Citi’s capital base—at a huge cost to existing shareholders.Â
Given the price that holders paid, Pandit might have spent some timing talking in detail explaining why he made the decision that he did, and why it will help shareholders over the long term. Instead, he merely writes that “ultimately, the trade-off we made will be in the best long-term interest of our shareholders.” Really, Vik? Why?
Nor is Pandit’s discussion of Citi’s disastrous results last year much more satisfying. Here’s a company, once the world’s largest bank by market cap, that spent much of 2008 on life support. And yet Pandit’s discussion of Citi’s problems consists of two paragraphs. And even in those two paragraphs, Pandit doesn’t seem to grasp (or, at least, convey) the size of the challenges the company faces. Instead, he writes that “our official results this year were very disappointing. However, away from these losses, our core franchises are performing well…”Â
Are you reminded of that old joke about whether or not Mrs. Lincoln liked the play? Vik, your company just lost gobs of money and inflicted huge dilution on it shareholders. It is preposterous for you to say that, absent that, everything is fine! It’s not.
Similarly, Pandit’s discussion of his decision to split Citi into two pieces, a good bank (Citigroup) and a bad bank (Citi Holdings), misleads more than it clarifies. Discussing the good bank, he writes, “On a stand-alone basis, I believe there is no stronger financial services firm than Citigroup.” Well, of course you think that. You set it up to look that way. But let’s not forget a Citigroup shareholder owns both Citigroup and Citi Holdings. And let’s don’t forget, either, that the two halves both still exist within the same entity. So it’s not really helpful to crow about Citigroup simply because you set it up as a subsidiary of the holding company, devoid of its most troublesome assets! Shareholders still own the same good and bad assets, and the company still has the same amount of capital and loss reserves after the split as it did before.
Pandit then looks forward and writes that “as the economic environment begins to recover, as it inevitably will, Citi will be well-positioned to create the kind of shareholder value of which we all know Citi is capable and which you should reasonably expect.” Pandit’s regard for shareholder value would be comical if it weren’t so pathetic. Remember, this is the same guy who just served up enormous dilution to these same shareholders he now says he’s so concerned about.
The hardest part of the letter to take, though, comes toward the end, where Pandit lays out the four factors that he believes give Citi its competitive edge. They are (and, yes, you’ve seen this before): a) Citi’s global presence, b) its legacy of innovation, c) its determination to build a culture of meritocracy, and d) its commitment to make a difference in the communities it operates.Â
I kid you not. That is of course the same list of “advantages,” more or less, Sandy Weill would have given you back when he ran the company, and Chuck Prince would have listed when he was in charge. And look, exactly, at how things have turned out. Citi’s vaunted global presence, for example, wasn’t much use in helping prevent last year’s $28 billion loss. And its “legacy of innovation” (in CDO underwriting, perhaps?--or Dr. Evil trades?) may have even contributed to the company’s problems. As for Citi’s new commitment to meritocracy, from what I can tell that’s still a figment of Pandit’s imagination. I don’t know why that last item, Citi’s commitment to its communities, is even on the list, except that maybe Maxine Waters made Pandit put it there.
By the time Pandit winds up his final paragraph, he has left our world and entered some weird parallel universe: “With the top team in the industry,” he writes, “we will succeed.” Top team in the industry? Vik—hello! In fact, your executive suite has a revolving door that has seen, among other things, the arrival of three CFOs in the past three years. Citi nearly drowned in red ink last year, required a vast amount of government assistance as well as a loss-sharing agreement, and then inflicted needless dilution on common shareholders. Please don’t say the company is run by the top management team in the business.Â
I know I know, Citi’s shareholders letter must have been tremendously difficult to write. Even so, I don’t see how Vik Pandit could have done a worse job. Read the whole letter and be prepared to wretch!
What do you think? Let me know!
Thomas Brown
www.bankstocks.com
But the letter figured to be highly instructive, as well. Here’s a company that lost $28 billion last year, and that had to take two direct investments from the government (that tallied to $49 billion) while also receiving a government guarantee on $301 billion of dodgy assets. Top management has been in place for not much more than a year; yet in 2008, it made some momentous decisions, from restructuring Citi into a “good bank” and a “bad bank,” to converting the government’s preferred holding into common, and massively diluting prior shareholders in the process. The feds now own 36% of the company.Â
Given all this, shareholders were likely interested to read what Pandit had to say about the year just past, and his outlook for the future. Unfortunately—and I say this with the utmost understanding of the challenge he was up against—Pandit whiffed.
Take, first, his discussion of the conversion of the government’s stake into common. The move, recall, was ruinous for Citigroup’s existing shareholders. When you combine the conversion of the government’s preferred with the conversion by other preferred holders, common shareholders were diluted by 76%. And what benefit did holders receive in return? Pandit doesn’t say. Instead, he writes that the move “was designed to strengthen our tangible common equity and increase confidence in our capital strength.” Only that’s not really true. Citi received absolutely no incremental federal dollars as a result of the deal, nor did the move improve the company’s three key regulatory capital ratios. All it did instead was address the concerns of a minority of capital markets participants (many of which are short Citi) by increasing the company’s tangible common equity ratio, a ratio no one cared about a year ago. The conversion was essentially a relabeling of pieces of a portion of Citi’s capital base—at a huge cost to existing shareholders.Â
Given the price that holders paid, Pandit might have spent some timing talking in detail explaining why he made the decision that he did, and why it will help shareholders over the long term. Instead, he merely writes that “ultimately, the trade-off we made will be in the best long-term interest of our shareholders.” Really, Vik? Why?
Nor is Pandit’s discussion of Citi’s disastrous results last year much more satisfying. Here’s a company, once the world’s largest bank by market cap, that spent much of 2008 on life support. And yet Pandit’s discussion of Citi’s problems consists of two paragraphs. And even in those two paragraphs, Pandit doesn’t seem to grasp (or, at least, convey) the size of the challenges the company faces. Instead, he writes that “our official results this year were very disappointing. However, away from these losses, our core franchises are performing well…”Â
Are you reminded of that old joke about whether or not Mrs. Lincoln liked the play? Vik, your company just lost gobs of money and inflicted huge dilution on it shareholders. It is preposterous for you to say that, absent that, everything is fine! It’s not.
Similarly, Pandit’s discussion of his decision to split Citi into two pieces, a good bank (Citigroup) and a bad bank (Citi Holdings), misleads more than it clarifies. Discussing the good bank, he writes, “On a stand-alone basis, I believe there is no stronger financial services firm than Citigroup.” Well, of course you think that. You set it up to look that way. But let’s not forget a Citigroup shareholder owns both Citigroup and Citi Holdings. And let’s don’t forget, either, that the two halves both still exist within the same entity. So it’s not really helpful to crow about Citigroup simply because you set it up as a subsidiary of the holding company, devoid of its most troublesome assets! Shareholders still own the same good and bad assets, and the company still has the same amount of capital and loss reserves after the split as it did before.
Pandit then looks forward and writes that “as the economic environment begins to recover, as it inevitably will, Citi will be well-positioned to create the kind of shareholder value of which we all know Citi is capable and which you should reasonably expect.” Pandit’s regard for shareholder value would be comical if it weren’t so pathetic. Remember, this is the same guy who just served up enormous dilution to these same shareholders he now says he’s so concerned about.
The hardest part of the letter to take, though, comes toward the end, where Pandit lays out the four factors that he believes give Citi its competitive edge. They are (and, yes, you’ve seen this before): a) Citi’s global presence, b) its legacy of innovation, c) its determination to build a culture of meritocracy, and d) its commitment to make a difference in the communities it operates.Â
I kid you not. That is of course the same list of “advantages,” more or less, Sandy Weill would have given you back when he ran the company, and Chuck Prince would have listed when he was in charge. And look, exactly, at how things have turned out. Citi’s vaunted global presence, for example, wasn’t much use in helping prevent last year’s $28 billion loss. And its “legacy of innovation” (in CDO underwriting, perhaps?--or Dr. Evil trades?) may have even contributed to the company’s problems. As for Citi’s new commitment to meritocracy, from what I can tell that’s still a figment of Pandit’s imagination. I don’t know why that last item, Citi’s commitment to its communities, is even on the list, except that maybe Maxine Waters made Pandit put it there.
By the time Pandit winds up his final paragraph, he has left our world and entered some weird parallel universe: “With the top team in the industry,” he writes, “we will succeed.” Top team in the industry? Vik—hello! In fact, your executive suite has a revolving door that has seen, among other things, the arrival of three CFOs in the past three years. Citi nearly drowned in red ink last year, required a vast amount of government assistance as well as a loss-sharing agreement, and then inflicted needless dilution on common shareholders. Please don’t say the company is run by the top management team in the business.Â
I know I know, Citi’s shareholders letter must have been tremendously difficult to write. Even so, I don’t see how Vik Pandit could have done a worse job. Read the whole letter and be prepared to wretch!
What do you think? Let me know!
Thomas Brown
www.bankstocks.com
