Citi's Pandit to take $1 salary, no bonus

Stung by criticism about use of billions of dollars in government aid, Citigroup's Indian American CEO, Vikram Pandit has vowed to take a token salary of $1 and no bonus until the ailing banking giant returns to profitability

'I get the new reality and I will make sure Citi gets it as well,' Pandit said Wednesday as lawmakers grilled top executives from eight of America's largest financial institutions about their apparent lack of willingness to lend despite collectively receiving $165 billion in capital.

'We will hold ourselves accountable for what we do, and that starts with me,' said Pandit, who collected a salary of $1 million last year. Citigroup has lost more than $20 billion in the last five quarters.

Appearing before the US House Financial Services Committee Pandit, 52, said taxpayers were right to expect a return for their investment, adding that the bank will pay $3.4 billion in annual dividends on the debt.

'There is a great deal of anger in the country, much of it justified, about past practices,' committee chairman Barney Frank noted in his opening remarks.

The banks have come under fire from lawmakers who criticised bonus payments and corporate expenses such as new executive jets at a time when people across the country are struggling to stay in their homes or losing their jobs. President Barack Obama last month called the bonuses 'shameful' and the 'height of irresponsibility.'

Citigroup, which has accepted $45 billion in government bailout money, last month reversed a decision to buy a $50 million corporate jet under pressure from the government. Last week the bank cancelled a convention in Atlanta for its Primerica Financial Services Inc. unit.

The CEOs were asked to disclose their salaries and bonuses for 2008 and 2009 at the hearing. The highest paid CEO for the year was Bank of America's Ken Lewis with a salary of $1.5 million, while the lowest was Goldman Sachs Group Inc.'s Lloyd Blankfein with a $600,000 salary. None of the executives took a bonus for 2008 or will have a salary increase in 2009.

Many of the CEOs at Wednesday's hearing defended their actions, noting that while credit standards have tightened, they were continuing to issue loans. Several of the CEOs added that without government assistance, credit would be even harder to obtain.

'We are still lending, and we are lending far more because of the TARP (Troubled Asset Relief Programme),' Bank of America Chairman and CEO Lewis said.

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Citigroup to limit top executives' pay, bonuses

The recipient of a $45 billion infusion from the US government, Citigroup Inc on Wednesday said it would place strict limits on management's compensation, including no severance for its top five executives.

Under pressure from lawmakers, Citigroup Chief Executive Vikram Pandit and Chairman Win Bischoff opted to forego their 2008 bonuses. The company's new executive pay limits also feature a clawback provision in which Citigroup can recoup executive pay ``that over time proves to be based on inaccurate financial or other information.''

The compensation restrictions come as the New York-based bank signed an agreement with the federal government to receive an additional $20 billion on top of the $25 billion it received in October. Restrictions on expenses, including the use of corporate aircraft and costs related to entertainment or holiday parties, also will be put in place.

Part of the $700 billion bailout program authorized by Congress, the capital infusions to Citigroup and dozens of other banks are the government's main tool for attempting to stabilize the financial services sector and spur lending between financial institutions and to customers.

Citi said it will issue $20 billion in preferred shares to the Treasury Department, and warrants to buy about 188.5 million shares of common stock at a strike price of $10.61 a share, according to a filing with the Securities and Exchange Commission.

In doing so, members of the company's senior leadership and executive committees will see pay cuts and limits on severance packages, according to a memo sent to Citigroup staff Wednesday.

In the memo, Pandit announced measures that will tie executive pay more closely to performance.

``We are fully committed to paying for high-performance people at all levels of the organization and at competitive rates, in the context of the company's overall financial results,'' Pandit said.

The most senior leaders will be affected the most, Citi said. Pandit said he and Bischoff thought it ``fair'' to forgo their bonuses ``in light of the challenges of the year and the need for compensation elsewhere in the organization,'' the memo said. Robert Rubin, a Citigroup adviser and former Treasury secretary, also will decline a bonus.

Pandit added that senior leadership committee members will see their bonuses ``substantially reduced,'' while executive committee members will have larger proportions of their bonuses in deferred compensation than other employees.

As a condition for receiving government money, lawmakers are making companies reel in bonuses. The congressional backlash and public outrage followed a series of high-profile cases involving Wall Street executives walking away with millions of dollars after their firms received taxpayer money.

Last month, American International Group Inc. said it would be limiting how much it pays its top executives, including granting a $1 salary for 2008 and 2009 to its CEO Edward Liddy.

New York-based AIG has received a roughly $150 billion rescue package from the federal government.

Shares of Citi fell 9 cents to $6.71 Wednesday. The company's stock shed more than three-fourths of its value in 2008.

Source: Agencies

Top Citi bosses like Pandit to forego 2008 bonuses

Citigroup Inc.'s Indian American chief executive Vikram Pandit and chairman Win Bischoff would forego bonuses for 2008, the ailing banking giant announced as it formalised its bailout agreement with the US government.

Bonuses for other top executives will be "reduced substantially," Pandit said in a memo to Citigroup employees Wednesday.

Citigroup has received $45 billion in federal capital infusions and a government-financed arrangement to insulate it from hundreds of billions of dollars in potential losses after the bank lost three-quarters of its market value.

"The harsh realities of 2008, primarily our earnings results, mean that our bonus pool is dramatically lower," Pandit said.

Citigroup, the biggest recipient of US bailout funds, completed an agreement for a $20 billion government investment, Pandit said in the memo. That was on top of an earlier $25 billion and a US guarantee on $306 billion in troubled assets.

Pandit is cutting 52,000 jobs worldwide after four straight quarters of losses tied to bad loans and failed investments with the last quarter alone accounting for a loss of 2.8 billion dollars.

Citigroup expects "major challenges" to continue into 2009, Pandit said, describing the proposed actions as part of a major overhaul of executive compensation to confront the problems for the company and banking sector.

The new plan may also include "clawbacks" to "recoup executive compensation that over time proves to be based on inaccurate financial or other information," according to the memo.

"The most senior leaders should be affected the most," Pandit said. "Win and I believe this is fair, in light of the challenges of the year and the need for compensation elsewhere in the organization."

The memo said bonuses for the "senior leadership committee "will be reduced substantially." Members of Citi's executive committee would see bonuses "cut even more" and in some cases given as deferred compensation.

Pandit said the principles to guide the company's executive pay would include "pay for performance" and "meritocracy," adding that "compensation will vary based on each person's performance - again, relative to the overall performance of the company."

Severance compensation will be subject to "significant new limitations" for executives and that the top five executives "no longer can receive severance," said Pandit, who became Citigroup CEO in December 2007.

Those affected executives are Pandit, Bischoff, Chief Financial Officer Gary Crittenden and Vice Chairmen Lewis Kaden and Stephen Volk.

Pandit noted that former treasury secretary Robert Rubin, an advisor to the company who has no direct management responsibilities, "has elected to take no bonus for the second consecutive year."

"The overall objective for all of us at Citi is to build shareholder value, serve our clients and customers superbly well and create growth opportunities for our employees," he said.

"Adherence to the principles of compensation outlined above is fundamental to achieving these goals."

Pandit, 51, received 1 million shares from Citigroup as part of a "sign-on" bonus in January, in addition to a $2.5 million "retention equity award," the company said in March. He was paid $250,000 in salary in 2007.

Pandit got $165 million from Citigroup in 2007 when he sold Old Lane Partners LP, the hedge fund he co-founded and ran. Citigroup closed New York-based Old Lane in June and took a $202 million writedown on its $800 million investment.

Source: Agencies

Will US govt bail out Bank of America next?

US government rescue plan has eased investors’ concerns about Citigroup, but mines lurking in the balance sheets of rivals including Bank of America still tempt shortsellers. Bank of America, the No 3 US bank by assets, has loaded up on mortgages as the world’s largest economy wrestles with the worst housing market since the Great Depression.

The Charlotte, North Carolina-based bank further heightened its exposure to home loans by acquiring Countrywide Financial, the largest US independent mortgage lender and agreeing to buy Merrill Lynch, which owns the world’s largest retail brokerage.

If losses on mortgages and other debt securities mount significantly, the bank may see the ratio of equity to risk-weighted assets, known as Tier-1 capital, dwindle to alarmingly low levels.
“I would expect there are more banks who are in dire straits and more who can expect to be helped,” said Michael Farr, president of investment management company Farr, Miller & Washington in Washington, DC. “The share price makes it look like Bank of America might be next in line,” he said.

Before Monday’s stock market rally, Bank of America shares had lost 52% in November alone, making them the second biggest decliner for the month in the KBW Banks index after Citigroup. Analysts at independent research company CreditSights forecast that in a scenario where the commercial and residential real estate markets really tank beyond banks’ expectations, Bank of America would have a Tier-1 capital ratio of 7.15%.

The minimum that regulators seek to consider a bank “well capitalized” is 6%, but any ratio near or below 7% tends to spook investors. Bank of America declined comment. CreditSights also expressed concern about Wells Fargo, which it said would have a Tier-1 capital ratio of 6.98% under its worst case scenario. Wells Fargo recently agreed to buy Wachovia.

Under the same assumptions, and before the government’s latest investment, Citigroup would have a Tier-1 capital ratio of 8.64%.

American Express CEO for Citi Bank?
Vikram pandit may thank the TINA (there is no alternative) factor for still being in job as Citigroup CEO, as the US government reportedly did not push for his ouster in its rescue package. A day after the mega rescue plan, it has now come out that the authorities discussed whether to replace Pandit as Citi CEO, but there was an disagreement over the issue. A report from a US business daily has said that the name of American Express CEO Kenneth Chenault had emerged as a possible replacement.

Source: Reuters

US govt bails out Citigroup, but will it survive?

“Amazing how much damage the lame ducks can do in the time remaining.” — Paul Krugman, Noble Prize Winner in Economics, on the bailout of Citigroup by the incumbent US government
America’s cup of woes is spilling over, rather messily, with its long-venerated financial institutions suddenly faced with obliteration and forced to seek a bailout.

Citigroup, the latest in a list getting longer, has just been promised a $20 billion cash injection, besides a whopping government guarantee for its troubled assets and mortgages.
As its stock price fell 60% over last week, the world’s largest financial services firm with revenues of around $159 billion last year, kept repeating over and over that it had “very strong capital.”

US govt agrees to $306-b rescue plan for Citigroup
It took just one weekend for it to go from very strong to very weak, necessitating a bailout of this order.

On Friday, the stock tumbled by over 60% to $3.77, down from a peak of $56 in 2006.
Predictably, the bailout news did it some good on Monday. At the time of writing this piece, the stock had gained around 61% to $6.08 on the New York Stock Exchange.

Barclays gets $10 b as Citi rescue resounds
DNA Money attempts an overview of the situation, the intervention and its implications near and far.

What’s the rescue all about?
The US government has decided to guarantee $306 billion of troubled mortgages and other assets of Citigroup. The Treasury department will also inject $20 billion of cash into the firm.
This will be over and above the $25 billion Citigroup got under the Troubled Asset Relief Programme (TARP, as the $700 billion bailout package is officially named).

On its part, the firm will issue preferred shares worth $27 billion to the government and pay a dividend of 8% a year.

Analysts following the firm have been expecting this move. “While the conventional wisdom says Citi is too big to fail, the reality is it’s too big to manage,” wrote Vernon Hill, founder and former chairman, president, and chief executive officer of Commerce Bancorp on www. seekingalpha.com a couple of days back.

“As a result, the company has become a publicly traded incarnation of Murphy’s Law: anything that can go wrong almost certainly will — and probably sooner rather than later. And $25 billion in TARP money isn’t going to do much to turn things around.”

What will be the cost of the bailout?
Citibank will have to pay a dividend of $2.16 billion per year to the government on the preferred shares. It will also have to pay $1.25 billion @5% on the $25 billion it received through TARP. This means the bank will have to make a profit of more than $3.41 billion before the shareholders can take home anything.

Citigroup shareholders will be diluted in the “near term by the cost of the incremental preferred stock,” Morgan Stanley analysts Betsy Graseck and Cheryl Pate wrote in a report on Monday.

Who will absorb the losses?
Citigroup will have to absorb the losses to the extent of $29 billion, including the reserves. Beyond that, any losses will be shared between the government and Citi. The government, through its three agencies — the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp — will take on 90% of the losses, leaving 10% for Citi to bear.

What are the conditions associated with the bailout?
Under the terms of the deal, the institution has been prohibited from paying common stock dividends of more than $.01 per share per quarter, for the next three years, without the approval of the US government. Further, any executive compensation plan including bonuses to employees must get the approval of the US government.

But experts aren’t happy with this move. Robert Reich, a former labour secretary of the US government under Bill Clinton wrote on his blog : “This is not a particularly good deal for American taxpayers, but it is a marvellous deal for Citi… The senior executives of Citi, including those who have served at the highest levels in the US government, have done their jobs exceedingly well.”

Ironically, the same executives who got Citi into the mess in the first place, continue.

Who was responsible for the mess?
Like other banks and financial institutions in the US, Citigroup also got carried away while investing in sub-prime mortgages. Also, its risk management system had stopped working.
New York Times said in a report said that Charles O Prince III, Citigroup’s chief executive before Vikram Pandit took over, learnt for the first time in September 2007 that the bank owed $43 billion in mortgage related assets. At that point, Prince asked Thomas G Maheras who oversaw trading at the bank if things were okay.

Maheras replied in the positive, then and every time the question cropped up. By the time the risk management team of the bank got around to assessing the risk related to these mortgages, it was too late. The bank had to announce billions of dollars in losses.

Analysts are even questioning the business model of Citigroup. They feel the company had spread itself too thin. “The whole idea behind Citigroup was flawed from the start. Unbeatable scale in financial services? Forget it. We now see the good Citi’s size has done for investors: the company has an incoherent, unworkable business model. It is run by a senior management team that’s largely unproven, with scant experience, operating a large financial institution,” wrote Hill.
Will the bailout and the guarantee be enough?
This is a tricky question. Citigroup has assets worth nearly $2 trillion on its books. It also has nearly $1.23 trillion in off-balance sheet assets.
“The roughly $300 billion pool of assets that are included in the rescue plan represent only a sliver of the company’s more than $3 trillion in assets, including its holdings in off-balance-sheet entities. Jitters about such “hidden” assets helped trigger the nose-dive in Citigroup’s stock last week. Among the off-balance-sheet assets are $667 billion in mortgage-related securities,” the Wall Street Journal reported.

Also, the troubled assets are not being taken off Citigroup’s balance sheet, and this has not gone down well with analysts.

What next?
Analysts are sceptical of the bailout.
“No one knows who’s going to lead it, over the medium term; hell, nobody knows who’s going to own it, over the medium term. The US government might have guaranteed a chunk of Citi’s assets, but it’s done nothing about Citi’s liabilities, including hundreds of billions of dollars in unguaranteed deposits,” Felix Salmon, a widely followed analyst in the US wrote on www.seekingalpha.com.

“Nothing in today’s announcement makes Citi immune to a bank run, which means there’s a very good chance the stock will remain under significant pressure. Given that it was the tumbling stock price which was responsible for this deal in the first place, one wonders if there was any point to this exercise at all,” Salmon wrote.

Analysts also feel that after the Citi bailout, it will be very difficult for the US government not to bail out the likes of General Motors, where so much more is at stake.

Source: DNA Money