What Citi CEO Pandit to-do list for his first month on the job

About 10 days ago, Vikram Pandit announced that Citigroup lost nearly $10 billion in the fourth quarter of 2007 and will be cutting its stock dividend by 40% and laying off another 4000 employees. Not surprisingly, Wall Street was not impressed at all and punished the stock some more. Worse, no one seemed to care that much that Pandit has been CEO for only a month at that time. I am frankly not impressed. In fact, I think it does not take a rocket scientist to figure out that Pandit probably overpaid for his education, sadly. CNBC's Mad Money host Jim Cramer said on Thursday's Squawk Box that the press release from Citigroup and Merrill Lynch were filled with financial fiction. This is one of the few times where I think Cramer got it right. Pandit might be a smart, bright and capable fellow, but I fear he is woefully ill prepared for this job. My advise in these cases is forget the board meeting and start laying off people in the investment bank and articulating a forward vision of what Citigroup need to look like in say five years.

One might be wondering whether I have any ideas as to what to do if I had the job. Well, broadly yes kind of. I would start by putting a hiring freeze on the investment bank and start laying off people in the fixed income division and hedge funds. An investment bank has four divisions, namely mergers and acquisitions, fixed income, equity and industry analysis. The problem is started with the fixed income division buying these securitized investments like structured investment vehicles, credit default swaps and collateralized debt obligations. The investment in sub-prime came from the fact it was perceived to be easy money. The entire sub-prime business was to cater to homeowners with spotty credit history and a low FICO score in need of a loan. Banks in the past, say 15 years ago, will not grant loans to such perspective homeowners with bankruptcy and foreclosures naturally. So private lenders or real estate investment trusts (REITs) may come in and arrange for such a loan at three to four times what the current Prime Rate was at the time. Banks lend regular borrowers with nomal FICO scores at Prime Rate. They would take these collateralized debt obligations and securitize it before selling them to large financial institutions. Citigroup, being the biggest bank by assets, obviously felt the need to outperform its peers and the fixed income division bought these so called triple A rated securities.

After cleaning house at the investment bank, I would start looking at selling certain businesses and combining businesses. I would have sold the private label brand credit cards like department store cards, Diners Club and American Express cards. Department store credit cards like Home Depot and Sears tend to cater to less credit worthy barrowers. American Express and Diners Club cards just increase the number of divisions and employees unnecessarily within the credit card portfolio. Hence, selling the private label brands, American Express and Diners Club cards would make that portfolio reduce the cost and the exposure to consumer defaults. At the same time, the credit card business should be folded into the commercial bank. In the process, the company could also reduce its labor costs by laying off some of the high paying management personnel including former Treasury Secretary Bob Rubin. There also needs to be a dramatic transformation within that division regarding Citigroup rewards, such as the variety of credit cards with or without rewards from Citigroup like cash back, value (or no annual fee) or Citigroup rewards like Thank You points. In all those cases, Citigroup should use the example of Canada's Bank of Montreal by providing consumers with modular credit cards where the consumer could choose what rewards or features one desires with a phone call anytime.

One of the top priority is a mew mission statement reaffirming its commitment to providing global banking services to the consumers, especially the high net worth international clients from the standard bank accounts to private banking to investment and brokerage services. Citigroup's biggest problem in commercial banking derives from their lack of presence in certain parts of the country like in the American South and the Pacific Northwest. It cannot be a world-class commercial bank when it has less than a thousand branches domestically, regardless of the depth of the service they can provide. No serious commercial bank would operate with so few branches. At the same time, one does not need five thousand branches all over the country; the way Bank of America operates. The other part of the problem is that some branches are within too close to each other to serve the company any good and in some places, I cannot find a branch anywhere like in Oregon or Durham, North Carolina. In the case of Oregon and Durham, they just do not have any branches. Citigroup needs to evaluate where their branches looks like Starbucks outlets and where they are utterly invisible.

Finally, a serious re-evaluation of Citigroup's home loan policy is needed. This entire fiasco could have been avoided if the loan officers thought about what they were doing before approving homeowners for loans. The only way to avoid these hazards is to check the barrower’s cash flow before writing check. It is insane to lend money to an individual earning $100,000 a year to buy a million dollar home when that person's cashflow is in the negative after taking on this burden. It does not take a rocket scientist to figure out that a bank should not lend such a perspective barrower money. Worse, the majority of his or her income is from commissions. Part of avoiding this fiasco in the future is to stop relying on the barrowers credit scores as a barometer of creditworthiness, stop originating exotic mortgages like option adjustable rate mortgages (or option ARMs) and other loans that could result in negative amortization, stop making home loans to costumers with zero down and 100% financing.

These are the sort of actions Pandit needs to be taking to reassure investors that Citigroup will have its house in order to prosper in the future and that Citigroup will be a lean mean banking giant with plenty of muscles and without all the proverbial excess fat. Raising capital to cover these losses is necessary in the short term, but in the long term is to increase deposits and reduce unnecessary spending in the form of high compensation packages.