The Citi Shouldn’t be Sleeping (Well, anyway)
Citi is in a troubled spot. There is clearly bad news that is anticipated to come out as securitized products do worse, but there are many criticisms being leveled at Citi and it’s senior managers for not doing enough to fix the situation. Here are a few suggestions (in case Vikram is reading):
1. Respect the conservation of risk. If you move assets into a special group you still own the assets! Now, it’s clear what the thought was–one could over hedge this book, work out of the positions, and make money doing it. Want to guess what happened? It didn’t work (isn’t working). The items that one can mark-to-model, and that seem to have solid credit characteristics, keep. As for the other assets, figure out fair value, contact fifteen smart firms with deep pockets, sell them these assets at a discount, finance the sale, and take a ten percent residual equity stake in any upside. Firms are doing this left and right. No more writedowns coming on toxic crap.
2. Cut the dividend. Actually, instead of cutting it, set a very specific plan (a formula, for example) for how much the dividend will be. In quarters where there is no revenue, or negative revenue, there is no dividend. Now your capital conservation is linked to your capital needs.
3. Senior management should align themselves with the shareholders. It’s somewhat a public relations move, but if they start taking all their compensation in options, announce a very public set of criteria for linking their pay to the performance of the firm, and even have some senior managers forgo compensation (they can afford it) then the amount of “skin in the game” will be elevated and it will be a big vote of confidence in the company. Maybe senior members whose purchases are tracked publicly should buy some shares.
4. Communicate. The market is left to rampant speculation if it hears nothing. Further, since not saying anything usually means there is nothing good to say, the worst is assumed. If there will be layoffs, announce that. If Citi will need to raise capital, announce that. The C.E.O. has said nothing of how he intends to remedy the situation (an oft-repeated criticism). And, though this relates to #6 (below), when you do “waves” of layoffs, the rumor-mongering and having CNBC report things that may or may not be true for all your employees to see, you risk a major exodus of anyone who is mobile (read: talented). This leads me to…
5. Focus on the problem. I have never understood how it becomes the formula for getting out of a big problem to cut jobs. It makes no sense. There is a top line (revenue) and a bottom line (profit), and costs (due to compensation, for example) are an important item in between, but there is a maximum impact managing that item can have. First of all, people that are paid on Wall St. are very efficient to carry–their bonus can be zeroed. If they leave, well, you would have cut their job anyway; if they stay, you have a free option on a known quantity if conditions improve. In any event, if revenues are negative, then you don’t look good by any measure, so spend time working on getting revenues up! I see the numbers, and the amount firms save from not having to pay for people per year, even if you assume they all make $2 million dollars, is a small, small fraction of what’s being lost due to writedowns. Going around the globe and have presentations made to you about Citi’s business in that country is a poor use of a C.E.O.’s time when there is still a set of assets on the balance sheet that have the potential for tens of billions of more dollars in writedowns.
6. End the war on morale. Really. Do I really have to point to examples? Naming old co-workers to key roles? Acquiring hedge funds that haven’t even raised money (well, $150MM)? Buying an odd-fitting shop comprised of former colleagues and giving them the same seat at the table as a large, much more established, group already operating within the firm? Siding with your old shop in a dispute, and agreeing to a worse deal (paying the other shop’s expenses!) than if the original trade has just been pushed through (and destroying value for third parties whose money you are supposed to be managing)? Seriously?
7. Consider breaking up the company. If you can find a buyer for the parts of the company with the toxic crap, then sell it and go from there. The theory is sound, but the execution has failed. There is not one culture, there many warring sub-cultures. Citibank versus Salomon Brothers versus Smith Barney … it sounds like a brawl, and quite often that’s what it is. When one calls over to Citi, no one there even answers the phone the same way (“Citi” “Salomon” “Citigroup”). Also, I would imagine that while the fixed income division at Citi had been producing great returns (from being in businesses that have produced billions in writedowns) it was getting more resources, resources (such as balance sheet) that could have been invested in areas that are now more stable and didn’t create a debacle. (An argument for companies to specialize? Perhaps.)
What do the above steps accomplish? Well, Citi’s balance sheet is freed of toxic crap. The people who work in this behemoth are given some clarity as to their future, they don’t feel like senior management is giving shareholder money to their friends at a breakneck pace, and they all have a set of goals to work towards (once the course is laid out). Oh, and hopefully their employer can remain financially solvent!