“What do you call a stock that’s down 90 percent? A stock that was down 80 percent and then got cut in half.” This light hearted but insightful quote from hedge fund manager David Einhorn explains why investors should heed caution on “discounted” stocks. If Einhorn were to ask the same question this week, some would simply respond, Citigroup (NYSE:C).
The Board of Directors from America’s third largest bank by assets announced on Tuesday that Vikram Pandit, chief executive officer, stepped down and will be replaced by Michael Corbat. The decision went into effect immediately, and by the time traders had finished their second Red Bull of the morning, all traces of Pandit were wiped clean from Citigroup’s website. The move was abrupt as the bank reported headline pleasing earnings the prior day, which caused shares of Citigroup to close more than 5 percent higher. John Havens, chief operating officer, president and long-time associate of Pandit, also resigned.
Given the timing of the corporate shake up, speculation continues to build as to why Pandit and Havens resigned. After-all, the earnings release was one of Citigroup’s finest moments in years, and Havens was already set to retire at the end of this year. Theories range from the Libor scandal issues escalating to dangers hidden in the bank’s balance sheet.
In a press release, Pandit claims, “Given the progress we have made in the last few years, I have concluded that now is the right time for someone else to take the helm at Citigroup. I could not be leaving the company in better hands.” In a post-departure interview, he also said it was his decision to leave and that he had been thinking about resigning for a long time.
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While sources within and outside of Citigroup indicate that Pandit left due to months of friction with Chairman Michael O’Neill over compensation, many shareholders are left thinking it’s about time! Pandit took a $1 annual salary for 2010 and even had his $14.9 million pay package in 2011 rejected by shareholders, but still managed to rake in big bucks. Over the past five years as Citigroup’s CEO, he stands to walk away with $261 million, including $165 million for the bank purchasing his hedge fund in 2007 that led to his CEO role. Shortly afterwards, Citigroup closed down the hedge fund and took a whopping $202 million write-down. On the other hand, shareholders are walking away with an epic stock plunge.
Pandit took over as Citigroup’s CEO in December 2007. As the chart below shows, shareholders have been brutalized during his five year reign of terror. Citigroup’s stock price has crashed 90 percent. Although the other Too Big To Regulate banks are also in the red during the same time period, Citibank is clearly the worst. Bank of America (NYSE:BAC) has dropped 79 percent, while Morgan Stanley (NYSE:MS) is down 64 percent. Goldman Sachs (NYSE:GS) and JPMorgan Chase (NYSE:JPM) have declined 41 percent and 8 percent, respectively. Furthermore, Citigroup was the only big bank on the list to fail the Federal Reserve’s Stress Test earlier this year.
In addition to needing a bailout to stay afloat, shareholders have seen their equity in Citibank become diluted through equity offerings. Zero Hedge notes, “Some forget that as part of its numerous rescue operations in early and mid-2009, Citigroup had no choice but to issue equity, and more equity, and then issue some more equity (with even the US government having to step in an be a Citi share and warrant buyer of last resort on occasion), in order to raise cash.” Under Pandit, shares outstanding have surged from 500 million to 3 billion, adjusting for the 10-1 stock split that occurred last year to give shares artificial support.
Pandit can cite “progress” all he wants to, but any stock down 90 percent over the past five years clearly needs more than just progress, or even a CEO change. There are still very concerning fundamental issues at Citigroup, but at least Pandit stepping down opens the possibility of a new chapter for the bank. Although some may be considering a position in Citigroup after its executive shake up and massive price plunge, investors should keep in mind that until a stock hits a price of zero, there is always the potential to lose 100 percent of one’s investment.
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