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Citigroup's Chief Shrinks Company, Looks for Growth

Citigroup is getting smaller, and maybe even better.

Just 13 months ago, Citigroup’s chief executive, Vikram S. Pandit, was facing the unthinkable. After bailouts worth $45 billion, the federal government had become the largest shareholder of a bank that was once among the biggest on the planet.

Citigroup’s shares were selling at barely a dollar each, having fallen from about $20 a year earlier and $50 a year before that.

There was even talk of nationalization, a move that would have wiped out shareholders and cost Mr. Pandit his job and his legacy.

Fittingly, New York magazine called Mr. Pandit the “Most Powerless Powerful Man on Wall Street.”

Vikram Pandit
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Vikram Pandit

Today, Mr. Pandit is still at the helm, and through a series of small but important moves, he is quietly asserting his influence. Piece by piece, he is shedding complex businesses like the insurance and retail brokerage units, shrinking the bank’s balance sheet and stabilizing its finances.

Slowly, Citigroup is breaking with its troubled past. Indeed, when the Financial Crisis Inquiry Commission begins hearings this week on Citigroup’s near collapse, the panel will focus not on Mr. Pandit but on his predecessors: the former chief executive Charles O. Prince III and Robert E. Rubin, an influential board member and adviser.

Mr. Pandit, who is accepting only $1 a year in pay until his bank is consistently profitable, still would not make anyone’s short list of powerful Wall Street executives. But his stock is rising steadily along with that of Citigroup, which climbed 2 percent on Monday to close at $4.26.

Some of Mr. Pandit’s most trusted advisers notice a new bounce in his step and say he is more energetic at meetings.

“Vikram is looking and sounding a lot more confident and secure,” said one top lieutenant. “He has a smile on his face. He sees the day when he is going to earn more than a $1 a year.”

That day, of course, may still be months away. With unemployment still high, losses tied to Citigroup’s mortgage and credit card businesses have continued to climb. New financial rules, still being determined in Washington, could dampen profits further.

Even so, with the markets and the economy over all on the rebound, Citigroup could beat Wall Street’s break-even consensus estimate and turn an operating profit for the first quarter. It reports on April 19.

What is more, the government will soon begin selling off its 27 percent stake to private investors — welcome news to taxpayers who stand to turn a multibillion-dollar profit.

“He inherited a huge hole and is doing the best he can,” said Charles Peabody, a longtime banking analyst at Portales Partners in New York. “But he has had to mortgage the future earnings power of the bank to repair the balance sheet.”

“That is what I am having a hard time envisioning — when will that earnings momentum emerge?” he added.

That question has been posed from the day Citigroup was forged by the blockbuster merger of Citicorp and the Travelers Group in 1998. At the time, Sanford I. Weill, its co-chairman and founder, vowed that the bank would become an earnings juggernaut with operations all over the globe.

Mr. Weill promoted the idea of a financial services supermarket that could offer customers “one-stop shopping” among businesses as varied as retail banking, credit card lending, investment banking and insurance. The poor performance of one business or region could be offset by stronger results in others, helping to reduce risk.

But those benefits never materialized. Instead, the bank’s vast size and complexity made it difficult to manage — and all of its businesses were devastated at once by the financial crisis.

Today, Mr. Pandit is peeling off pieces of the financial conglomerate and slowly but surely turning it back into a global bank modeled after the original Citicorp. “We are breaking it up,” he told the Congressional Oversight Panel last month.

Mr. Pandit is hesitant to boast about his successes, a humility that many longtime colleagues attribute to his Indian heritage. (He would not be interviewed so close to the bank’s earnings announcement.)

But his results are starting to speak for themselves.

Indeed, Mr. Pandit has substantially shrunk Citigroup’s giant balance sheet. It now stands at $1.86 trillion, down about $500 billion, or 21 percent, from its pre-crisis peak.

Pandit's plan to get paid

Much of that reduction has come from Citi Holdings, a unit set up in early 2009 that contains the businesses and assets that Mr. Pandit hopes to sell. Even in a buyer’s market, he has reduced its size to $547 billion, from $662 billion last year — without being taken to the cleaners.

Part of the shrinkage has come from the normal churn of residential mortgages and riskier private-label credit cards, which together make up about 60 percent of Citi Holdings. Another chunk has come from the sale of billions of dollars of steeply marked-down subprime mortgage bonds, giant buyout loans and other assets — often at a profit.

Mr. Pandit has also divested the bank of 30 or so businesses as varied as the prized Smith Barney brokerage unit and an investment in a Japanese ski resort.

Just this quarter, he sold Citi Property investors, the bank’s $12.5 billion real estate arm, to Apollo Management; entered talks with SkyBridge Capital to sell its ailing hedge fund unit; and began seeking a buyer for its $10 billion private equity group. (Mr. Pandit all but endorsed the so-called Volcker Rule, which would restrict banks from sponsoring private equity and hedge funds.)

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Last week, Mr. Pandit pulled off a $320 million initial public offering of Primerica Financial after years of trying. He turned it into an attractive company by holding onto its weakest pieces, like its reinsurance assets, and securing Warburg Pincus as an anchor investor.

Mr. Pandit has even begun convincing regulators that he is making progress. Although tensions remain between Citigroup and the Federal Deposit Insurance Corporation, some of the bank’s other regulators recently raised their regulatory rating on the bank’s management, according to people briefed on the situation.

They even signed off on a deal that allowed him to increase an investment in a foreign bank. Last month, he spent $519 million to increase the bank’s interest in the company that controlled Banco de Chile, by exercising options from a complex deal in 2007.

That government nod would have been difficult a year ago.

Citigroup employees generally agree that management of the bank has improved. Both risk oversight and Citigroup’s 15-person board have undergone makeovers. Top executives say business reviews are more comprehensive, too. Bankers are now rewarded for winning client business over the long term, not just for booking big quarterly profits.

Even amid the turmoil, it is remarkable how many leaders Mr. Pandit has managed to keep. Some middle-level bankers and traders fled to rivals over the last year. But only two of Citigroup’s top 25 executives, and just one member of the investment bank’s 34-person management committee, departed in 2009.

And for the first time in years, Mr. Pandit may be laying the groundwork for an orderly leadership hand-off in the investment bank. Many Citigroup insiders say they believe that Jamie Forese, the head of its large trading unit, will succeed John Havens in running the group.

Even so, Mr. Pandit has a long slog ahead. In the near term, Citigroup must contend with tougher oversight from Washington, including new credit card regulations and new accounting rules that will require the bank to bring tens of billions of dollars of off-balance-sheet assets back onto its books.

There will also be more red ink. For example, Citigroup has already marked down some of its commercial real estate securities a mere 6 cents, to 94 cents on the dollar. Analysts say more markdowns are almost certain.

There also does not appear to be a coherent strategy for Citigroup’s North American consumer banking franchise, which has struggled for years. Even Mr. Pandit’s closest advisers say they do not know his plans.

Over all, he must set a course for growth even as he shrinks the company. And with nearly 28 billion shares outstanding — a side effect of the government’s extraordinary intervention — it will remain difficult to move the stock price higher.

This may be Mr. Pandit’s most vexing problem yet — and one that could take another few years to get his arms around.