Give Corbat some time

October 17, 2012
Peter Eavis has the most dramatic of the second-day pieces on the shake-up at the top of Citigroup:

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Peter Eavis has the most dramatic of the second-day pieces on the shake-up at the top of Citigroup:

Some analysts believe Mr. Corbat could open the door to more radical moves at Citigroup…

The burning question is whether he has the resolve to get out of businesses that the bank doesn’t excel in, even if the near-term costs are high… In particular, some investors would like Citigroup to be quicker about selling assets in Citi Holdings, the bad bank that Citigroup set up for its unwanted and loss-making assets. Mr. Corbat ran Citi Holdings until the end of last year. Faster sales might mean Citigroup would not get the best price possible for the $171 billion in assets in Citi Holdings. That could lead to higher losses when sales took place. But selling assets more quickly could free up the capital the bank holds there…

Citigroup’s investment bank is the other obvious target for shrinkage. Right now, it is enormous… The unit is also seen as a black box, something Mr. Corbat will have to tackle if he wants to regain investors’ confidence, analysts say.

The quandary for Mr. Corbat may be that, if he increases disclosure, investors may balk at any alarming numbers and dump the stock. Even so, he may have to risk that outcome.

This is an intriguing idea, but it’s not going to happen, for various reasons. Firstly, if the board wanted a radical slash-and-burn artist, they would never have hired Corbat, a hugely competent Citi lifer. Corbat has shown very clearly how he likes to deal with the unwanted legacy assets at Citi Holdings: after all, he ran it for most of its existence. And he’s treating those assets much like Treasury has treated its stakes in Citi or AIG or General Motors: he’d love to sell them, but only if he can get a good price.

Secondly, it’s very hard to free up capital when you’re selling assets at a loss. It’s possible, if you sell at only a small discount. But any loss on the deal has to come straight out of the capital you’re supposedly freeing up — and it can easily eat up all of that capital entirely, and then some.

As for Citi’s investment bank, Eavis is absolutely right that with $900 billion in assets, it’s far too big. He’s also right that one reason Citi’s stock trades at such a large discount is that investors really have no idea what those assets comprise, or why the investment bank’s balance sheet needs to be so bloated. And in fact there’s a good chance that if Corbat reckons that Citi needs to get smaller, the investment bank is where he’ll start. He’s already done a good job at shrinking Citi Holdings, and Citi’s global commercial bank is the one core asset that should be encouraged to grow, rather get smaller. Which leaves all those traders and derivatives dealers and the like: Corbat knows how dangerous they are, having had a front-row seat for the Salomon Brothers bond-trading scandal.

What’s more, it’s pretty clear who’s really in charge of setting the strategy at Citigroup these days, and it’s not Mike Corbat, the man hired to implement it. Rather, it’s the chairman, Michael O’Neill, a commercial banker who would surely be much happier seeing traders getting axed than he would with branch closures or the like. In choosing Corbat, he’s chosen someone who can execute on the strategy which already exists, rather than some charismatic leader who promises to lead Citi to a land of high ROE and much-reduced balance sheet.

That makes sense: there’s a lot more competition in the lean-and-mean space than there is in the too-big-to-fail space. Investors don’t particularly like big banks these days, but Citi would be a miserable failure if it were to shrink: it doesn’t have a scrappy mindset, and it never will. Corbat has been on hundreds of sales calls, all over the world, talking about the strength of Citi’s franchise, how it has been committed to [insert country name here] for over a hundred years, etc, etc. Citi needs to stay big for much the same reason that banks used to build their branches out of heavy stone: the perception of weightiness and permanence is exactly what its clients are looking for — especially in the turbulent world of emerging markets, where most of Citi’s future growth is going to come from.

It seems to me that O’Neill knows exactly what he wants, that Pandit tried to deliver but wasn’t actually a very good manager, and that therefore O’Neill fired Pandit and replaced him with Corbat, in the hopes that Corbat can succeed where Pandit never really got traction.

All of which boils down to a very simple question: is Citigroup small enough to manage? The last time that the Citigroup’s senior executives were clearly in control of the company was during the Sandy-and-Jamie years. Ever since Sandy Weil fired Jamie Dimon in 1998, the top brass at 399 Park Avenue have had relatively little ability to steer this particular supertanker. Sometimes they manage to avoid a huge obstacle; sometimes they don’t. But in general, the best they have been able to hope for has been not-going-bust.

O’Neill thinks that he sees a route through the obstacles, at the end of which is a bright open ocean of prosperity and profitability. But he’s well aware that steering Citigroup is orders of magnitude more difficult than slicing off bits and pieces of Bank of Hawaii. And so he’s promoted the best skipper he knows, Mike Corbat, to take the helm.

Corbat isn’t viewed within Citi with the same mistrust that greeted Pandit — or even Chuck Prince, for that matter. For one thing, he has a proven history of actually getting things done at the bank, which is more than either of his predecessors had. That takes no little skill, given that Citigroup is one of the banking world’s most labyrinthine bureaucracies, complete with quarreling dukedoms in various different countries, regions, and asset classes. For instance, Eavis suggests that Corbat might take a leaf out of Santander’s book, and sell a minority stake in its very successful Mexican subsidiary. Corbat’s on-the-record response to that suggestion, on the call yesterday, was “I’ll look at those things and see what the numbers say”. But in reality, there’s no way that Corbat is messing around with Banamex unless and until he can get Manuel Medina-Mora on board — and that’s not going to happen for a while, given that Medina-Mora is probably a little bit sore that he didn’t get the CEO job himself.

As a result, if Corbat is going to succeed in executing on O’Neill’s vision, he’s not going to be able to rush things. The trick is to move with vision and purpose in the right direction, rather than trying to pursue some kind of magical overnight transformation. You can’t transform a company as large and old as Citigroup in a short amount of time: it’s simply not possible, and Corbat would be foolish to try.

Eavis says that “Corbat may have to impress quickly, given the pent-up frustrations among shareholders”. But the fact is that if he tries, he’ll fall flat on his face — and he knows it. Shareholders, and O’Neill, are going to have to be patient here. Given time, Corbat may (or may not) be able to turn Citigroup into a coherent and efficient global banking franchise. But if he feels the need “to impress quickly”, then failure is certain.

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