Great news for Citigroup (NYSE: C) CEO Vikram Pandit! After overseeing a 96% drop in Citi's stock price, Pandit will get to keep his job as the U.S. converts its $45 billion investment in Citi preferred stock into common. There's just a little problem for the common shareholders -- the U.S. is shoving them aside. And that's going to cost people who invested before today a little more of their money -- 43% more to be specific.
And why not? The conversion will reduce the stake that existing shareholders hold in Citi to 26% -- giving new investors the remaining 38%. But the conversion is absolutely necessary because Citi's ratio of tangible common equity to assets is now 1.5% and 2% is the minimum level required to avoid the FDIC labeling it "critically under- capitalized." The conversion has the advantage of not requiring any additional taxpayer money.
And there are probably fewer Citi common shareholders -- which include Saudi Arabia's Prince Alwaleed bin Talal, the bank's largest individual shareholder, and mutual funds as Growth Fund of America and the Dodge & Cox Stock Fund -- than there are American taxpayers, so let them eat cake!
Meanwhile, Pandit's track record is worth reviewing. Since taking over as CEO on December 11, 2007, Citi's stock has dropped 96% from $33.23 to $1.41, destroying $174 billion in stock market capitalization while Citi posted a $27.7 billion net loss -- which includes a fresh $9.6 billion charge tied to the drop in value of its consumer banking franchise in North America, Latin America and Europe from the global economic slowdown.
In the bizarro world where bad is good, that's an outstanding performance. Just two questions: Why is the U.S. betting Pandit is the right person to fix Citi? And is there truly no way to let Citi fail in an orderly manner without pumping more money into this zombie bank?
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and is the author of You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns Citi shares.