Citi's Pandit is the Right Man For the Job - at Bank of America

Bank of America Corp.'s (NYSE: BAC) search for a new boss to succeed the deposed Kenneth D. Lewis had ground to a complete halt. Nobody was willing to take the job for the compensation the Obama administration's "Pay Czar" was willing to authorize.

Now Bank of America is repaying its Troubled Asset Relief Program (TARP) funds in order to get out from under the pay czar's tyranny, in the hope the big bank can attract a worthy chief executive officer. That's a good strategy, and it just might help BofA attract the most obvious candidate of all: Vikram S. Pandit, the embattled (and $1-a year) CEO of Citigroup Inc. (NYSE: C).

Pandit got the Citigroup job after 11 years at Morgan Stanley (NYSE: MS) and founding the Old Lane hedge fund, which Citi bought for $800 million - only to shut down less than a year later.

Typical Citigroup decision. It paid $800 million, when even in 2007's frenzied market you could have landed a head of investment banking (Pandit's first job) or even a CEO (which Pandit became in December 2007, two months after he was hired) for probably a quarter or a tenth of that amount.

The entire transaction was staggeringly financially inefficient - Pandit himself got only $165 million of the $800 million, so the other $635 million was sheer waste. And at least for the top job, it hired the wrong guy.

Pandit's tenure at Citigroup has been marked by disaster after disaster, culminating in a record-breaking bailout that has left the bank 36% owned by the U.S. government. Most of this isn't Pandit's fault. Banking disasters generally take a long time to arrive, and the dodgy subprime mortgage deals and investment banking flim-flam that brought Citi down were almost all committed before Pandit joined the bank - indeed many of its problems stretch back several decades.

Even as Citi is asking Pandit to turn Citi around, the CEO's salary is set at $1 for 2009 and whatever the pay czar decrees for 2010.

Pandit is a very smart guy. But he's not the right guy to run Citigroup because he has the wrong background.

Citi has an investment banking capability (his strength) - but it's not a very good one. Citigroup bought Salomon Brothers and Smith Barney - two big investment banking names - in the late 1990s. But it lost many of the good people at Salomon (which was already troubled by scandal and well past its best when Citi bought it).

Then there's Smith Barney. In the turmoil last winter, Citi sold 50% of it at a knock-down price to Morgan Stanley, so Citi really doesn't control it any more. Citi spent $11 billion on expansion in 2007, buying the No. 2 Japanese broker Nikko Cordial (PINK ADR: NIKOY), but has now sold that, too.

So, in an ideal world, the best solution for Citi's investment banking would be to sell it or close it, before it finds a new way to lose a fortune, probably at taxpayer expense.

Citi's non-investment banking business, on the other hand, is huge, very valuable, and located all over the world. It has a bank in Brazil that is thinking of doing an initial public stock offering (IPO) - following the highly successful, $8 billion IPO of Banco Santander SA (NYSE ADR: STD) in October.

Citi owns the largest bank in Mexico, Grupo Financiero Banamex, SA de CV, which it bought in 2001. It has big operations in Korea and Japan. And it has one of the largest credit-card operations in the United States.

That's a hugely complicated mishmash of businesses - so complicated, in fact, that it may be impossible for anyone to manage. But the bottom line is that we're talking chiefly about retail and commercial-banking businesses, all of them very much brand-based, the whole of which is pretty much irrelevant to Pandit's experience and knowledge base.

Bank of America is a very different animal, however. At its most basic level, BofA is an overgrown, Charlotte, N.C.-based regional bank, with simple businesses in consumer and corporate banking (the former North Carolina National Bank).

NCNB, by then calling itself NationsBank, bought the former Bank of America in 1998, but Bank of America, a rival to Citi in 1980, had survived a near-death financial experience in the 1980s and been forced to sell off most of its complicated bits and starve the rest of capital.

So going into 2008, Bank of America was primarily a huge-but-simple U.S. bank - with an investment-banking operation that was somewhere between a second-tier operator and a joke.

In January 2008, BofA bought Countrywide Financial Corp., the leading U.S. mortgage originator, a catastrophically stupid deal, but one in a sector in which BofA already had oodles of experience. Then, in September 2008, BofA seized a golden opportunity and bought Merrill Lynch, a hugely important investment banking franchise.

Superficially, now, that mix may look similar to Citi's. But it isn't. The old BofA is a fairly simple business, and is filled with experienced folks who understand how to run it.

That's not anything like the situation at Citi, where all the non-investment-banking businesses are a highly complex collection of businesses that may, indeed, be impossible to run as a coherent whole.

By contrast, BofA's Merrill Lynch invest-banking-business is a crown jewel, albeit one that has been tarnished by its own mistakes in the mortgage market. But Merrill Lynch may well disintegrate, with its best people leaving, as happened at Salomon and Smith Barney after Citigroup bought them - investment banking types don't like being told there's a pay czar monitoring their bonuses. That would not only ruin Merrill's value, it would transform it into an unfixable business.

That's where Pandit comes in. He doesn't have to worry about his experience deficit with the "old" BofA (the former NCNB), because he doesn't need to - it has the talent pool in place to run itself.

But Pandit does have the skills that are so badly needed to run the Merrill Lynch investment-banking unit. More importantly, Pandit has the skills needed to keep Merrill Lynch disintegrating, if anyone can, and his appointment would show the Merrill Lynch guys that BofA's board of directors really care about them.

And having made $165 million in his Citigroup hire, Pandit will be perceived as being more sensitive than "mere" commercial bankers when it comes to the delicate and lucrative question of investment-banking bonuses.

Bingo. Problem solved. I look forward to being appropriately rewarded. The average top headhunter's fee is one third of first year's salary - and no, if Pandit agrees to work for $1 a year, a 33-cent recruiting fee won't suffice!

[Editor's Note: As this commentary underscores, Martin Hutchinson understands what makes the capital markets tick. That's why he's excelled at finding the so-called "hyper-profitable" investment plays that he writes about for subscribers of his Permanent Wealth Investor trading service. In a new report, Hutchinson not only uncovers the very best profit plays available today, he guarantees triple-digit gains. For more information, please click here.]

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