Citigroup: Too Big to Manage

Okay, so Mike Mayo finally got his meeting with Vikram Pandit and the rest of Citigroup's senior management, and he even had some nice things to say about the people who run the place, while upping his price target for the bank's stock 50 cents to $4 a share.

So we all can feel happy that the big lumbering Citigroup, which required more bailout money and protection than any other bank during the financial crisis, is finally on the straight and narrow, with management that has the wherewithal to avoid the same mistakes that plunged the bank into despair during the darkest days of the financial crisis two years ago.

Don't bet on it.

I'm not saying that Citigroup is about to fail anytime soon, but make no mistake about it, Citi is a fucked up place. Despite efforts to downsize, it's still way too big, and its management way too feeble to be running a bank of its size, particularly given the competitive pressure Pandit, the CEO since 2007, and his team will face from investors who are pretty tired of holding onto a $4 stock (it closed Monday at $4.03).

That means possibly the most underwhelming group of managers in banking will now be embarking on a "growth strategy" -- to coin a Wall Street cliché -- during a time of incredible uncertainty in the financial business. And you wonder why I'm worried.

It's not that I have anything against Pandit; I've met him exactly once in my career and he seems like a nice enough fellow. He's supposed to be smart. He has a PhD., taught finance, and is said to understand complex investments, like the ones he inherited and which led to Citi's near demise in 2008.

But for all Pandit's smarts, he never quite got the reality that the business model of Citigroup -- known as the universal banking model where individuals and institutions can find all their financial needs taken care of at one place -- could never work.

Citi reminds me of the old Soviet Union, a massive bureaucracy run by people who thought they were smarter than the free markets. Citigroup imploded in 2008; but for years it was failing, unable to meet even the barest definition of a integrated universal bank, and falling behind in profit margins. But like the Soviet Union, Citi was doomed for failure. For the bank to have succeeded, former CEO Chuck Prince and later Pandit and his team would have had to become experts in commercial banking, investment banking, ATMs, and mortgage lending, to name just a few businesses.

They would have to know a lot about risk management in all these areas, and how to integrate the entire massive conglomeration, so products can be "cross sold" -- meaning stock deals underwritten by the investment banks could be sold to small investors as they deposit money into their checking account.

It never happened and never would, yet in early 2008, Pandit held out the dream that he could make it work and keep Citigroup intact, despite calls from analysts that it needed to be broken up and fast.

It was lunacy of the highest order, yet no one stopped him; not the great Bob Rubin, the former US Treasury Secretary, then a leading board member; or another board member and ultimately company chairman Dick Parsons, whose name inexplicably has been leaked by the White House as a possible replacement for its chief economist Larry Summers.

And in the end the country paid dearly when Citi went down in flames.

Rubin, of course, has left Citigroup, but Parson's remains as chairman of the board, which should scare the daylights out of investors and regulators worried that Citigroup might once again implode. Pandit, and Parsons, of course, will tell you that the 2010 version of Citigroup is much different than the bank that imploded in 2008. There are more safeguards in place. Management is engaged in downsizing the bank. It's in the process, for example, of handing Morgan Stanley its massive sales force of retail brokers.

Maybe so, but Citigroup is still big and unwieldy, and based on past precedent, too big for the current team of managers to manage. There are, of course, many reasons why Citigroup was the largest casualty of the 2008 financial collapse: Too much risk taking being at the top of the list.

But even higher on that list was management, or lack of management.

Pandits' predecessor, Chuck Prince, appeared clueless to the amount of leverage and investing in toxic assets his managers had engaged in, not because he didn't work hard (all the evidence points to the contrary) but because he was working hard on other matters and didn't have time to deal with risk management the way he should have.

To be sure, Pandit came in and inherited this mess. But back in early 2008, he didn't see Citigroup as a mess at all. Rather, he saw a shining Citi on the hill with the capacity to grow its way out of the financial crisis, and achieve the greatness envisioned by the company's founder, Sandy Weill, back in 1998 when the big bank was created through the merger of the Travelers Group brokerage and investment bank with Citicorp.

Remember, this is the same guy running the 2010 version of Citi, which may now be marginally profitable, but it is also still big and lumbering much as it was back in 2008. It is still burdened with businesses its management shows no real expertise in running, and still capable to do something stupid when no one is looking.

After his meeting with Pandit last Friday, Mayo issued a report which, among other things, took issue with Citigroup ATM machines. Apparently they're outdated, Mayo wrote.

For my money so is the rest of the place.