Business - Citigroup;Seeking a partner at the dance

ANDREW ROSS SORKIN

“As long as the music is playing, you’ve got to get up and dance.”
Remember that classic? It came from Charles O. Prince III, then chief executive of Citigroup, in July 2007, just as Wall Street’s dancehall was about to burn down. “We’re still dancing,” he said.
Here we are, more than a year later. Mr. Prince is long gone. But Vikram S. Pandit, who inherited Mr. Prince’s mess, is dancing fast — and increasingly, it seems, all by himself.
Everyone else seems to have found a partner.
Goldman Sachs waltzed Warren Buffett. Morgan Stanley tangoed with the Japanese. Bank of America got down with Merrill Lynch.
Mr. Pandit looks like the wallflower. He got nothing — except, that is, for $25 billion by way of Treasury Secretary Hank Paulson. Citigroup was among nine big banks that received more than $125 billion from the government on Monday as part of a unprecedented bailout of the financial industry.
Most of all, what Mr. Pandit hasn’t gotten so far — notwithstanding earlier investments from Abu Dhabi and the like — is the kind of deal that will guarantee Citigroup’s standing in America’s banking industry. The hobbled global giant he inherited is now left to play catch-up with rivals that have become even bigger. The government investment only masks the longstanding problems inside the sprawling Citigroup empire, including a lot of worrisome assets.
“They still have to sell the sofa and dining room furniture to make this month’s rent,” said Meredith Whitney, an analyst at Oppenheimer & Company. “They have all this junk on their books.”
Just how much junk will be the focus of investors on Thursday, when Citigroup will report what Ms. Whitney says will be “ugly” third-quarter results. Citigroup has already marked down the value of $22 billion of mortgage-linked securities on its balance sheet to 61 cents on the dollar — a figure some analysts say they believe is still far too high.
But Mr. Pandit doesn’t deserve all the blame. It didn’t have to be this way. And only two weeks ago, frankly, it wasn’t.
For a brief, shining moment, Mr. Pandit looked like the new Jamie Dimon, the banking rock star who runs JPMorgan Chase. Then, in a blink, some thought he looked more like a Keystone Cop.
Mr. Pandit had agreed to buy the Wachovia Corporation’s banking business for next to nothing — a $1 a share — in a deal orchestrated by the Federal Deposit Insurance Corporation. The purchase would have added to Citigroup’s deposit base seemingly overnight, making it more stable than ever. And it would have given Citigroup a serious retail banking business, something it has struggled to build on its own.
Enter Wells Fargo. The San Francisco-based bank — and the F.D.I.C., which played turncoat — pulled the rug out from under Mr. Pandit at the 11th hour.
By now you probably know what happened: Wells Fargo, which had lost the original auction for Wachovia, came back with a surprise bid of $7 a share. Wachovia accepted that superior offer after a series of court hearings.
But the Wachovia deal was more important for Citigroup than many investors realized. Indeed, in parts of Washington and Wall Street, some whispered that the Citigroup-Wachovia tie-up was actually a backdoor bailout for Citigroup, not just Wachovia.
“We believe the F.D.I.C.’s role in the Citi-WB transaction might have been as much about helping Citi as it was about helping save the WB franchise,” wrote John E. McDonald, senior analyst at Sanford Bernstein, in a report to clients. “This view has not been stated by the F.D.I.C. but is our opinion.”
By all accounts, the F.D.I.C. switched allegiance because the Wells Fargo deal looked better for Wachovia’s shareholders and, perhaps even more important, for taxpayers. Under Citigroup’s original proposal, the F.D.I.C. had backstopped $42 billion in Wachovia’s debt. Wells Fargo’s deal got taxpayers off the hook.
But some suggest the F.D.I.C.’s about-face created even more problems. “We believe the question of ‘which deal is better for the F.D.I.C. and America?’ is actually a tougher question than it appears on the surface,” Mr. McDonald wrote. In other words, Mr. McDonald thought that Citigroup’s status might be more perilous than anyone believed.
Citigroup maintains that it is well capitalized, but there’s little question that Mr. Pandit got thrown under the bus. Sure, he could have bid more. And perhaps the language in the deal contract — which was a simple term sheet — could have been tighter. But a deal is supposed to be a deal, and with the government’s backing, it is hard to argue this outcome was ever imaginable.
Without Citigroup’s offer — which was struck in a matter of hours in the middle of the night — Wachovia would have been toast. It might never have survived long enough for another suitor show up.
Now, Citigroup is left battling it out in court for a consolation prize: billions of dollars in cash. (You could call it a form of capital-raising.)
“Citigroup exposed itself to substantial economic risk by publicly committing to rescue Wachovia with less than 72 hours’ due diligence, as well as the risk that it would be used as a stalking horse for other bidders who might come in later after Citigroup’s action prevented Wachovia from failure,” Citigroup said in a court filing.
In a memorandum to employees last month, Mr. Pandit told employees: “It is clear our industry is in a state of change, but I am confident that this should be an opportunity for Citi.”
So Mr. Pandit is still dancing.