The management challenge @ Citi

One of the most coveted corner offices in global corporate world has an in Vikram Pandit, a person of Indian origin as an occupant. The challenge for the new boss at the corner seat of citi is to ensure that he does not get cornered.

He comes to Citi when the banking giant faces four major risks. The first is the possibility that the sub prime crisis may yet cost the wall street major more than the $11 billion that it has already written off. The second comes from a very real possibility of a US recession. The third peril is held out by the increasingly vocal shareholders who have seen an alarming 40 per cent decline in the value of the city stock over the last one-year. The fourth threat looms in terms of cultural and integration issues that will inevitably crop up from the investment of $7.5 billion that the Abu Dhabi sovereign investment fund has pumped into the troubled bank. That investment is on top of the nearly 4 per cent stock that a Saudi prince already holds in the bank.

Will Pandit measure up to all these risks and other yet unknown pitfalls? Alas his past as a manger of a hedge fund and head of institutional securities at Morgan Stanley does not give much hint of his ability to manage a bank of this vast scale.

He has talked of cost cutting as a priority. Clearly this is needed but it is something new at Citi which has been build on an expensive and aggressive growth path by acquisitions and expansion during the legendry Sandy Weil era. The problems at Citi are clearly deep set and will cause pain. Analysts are nearly unanimous in their opinion that some of the bank’s business may even have to be put on the block. That is never an easy decision especially for a relative outsider. Wall street watchers have hinted that Citi’s belligerently built credit card division may have to go. The job hasn’t started on a positive note for this global India. His former employer Morgan Stanley has put sale on citi the day Pandit took over. He will have to prove them wrong and that will clearly take some doing

Banking oversight alarming

There are frauds and then there are frauds, however for sheer audacity the loss heaped on Société Générale by Jérôme Kervie through trader has few equals in corporate history. That a 31-year-old junior trader can cost a conservative French bank $7 billion in looses before he is discovered show astounding lack of corporate accountability and auditing oversight.
It appears that the trader consistently placed wrong bets on the derivative markets through investments that reduced stock futures. What is mysterious in this whole affair is the amount of money that was hedged. It is difficult to believe for an outsider that a 31-year-old junior executive can have access to funding on that scale in a multi national bank.
It appears that nothing as been learned by international banking system from the collapse of Bearings another bank that had its impressive legacy junked by a relatively junior trader Nick Lesson in 1995. If anything the money involved in that disaster $1.38 billion appears small in comparison to the latest loss faced by the French banking giant. That is if a billion dollars can be termed as small beers in the first place.
The Indian banking industry will do well to learn lessons from this collapse. At the center of the fraud is the working of derivative products that shift risk from one owner to another. In times of economic dynamism, banks and investment firms put premium on risk taking; the juicy yearly bonuses are determined by profit from trading in complex derivatives, which shift risks almost as soon as an instrument is closed to another more intricate mechanism.
While there is a clear economic advantage in allowing risk to be diversified if the process of this risk diversification is not in the ambit of either internal audit or external regulations the result can be a catastrophic.In India the derivative market is in its infancy. It would be prudent to act quickly and put in place regulations especially regarding positions that an individual or an entity can take vis a vis actual underlying value of its assets. Not regulating the derivative markets could well lead to a banking collapse in India in the near future. Regulators need to keep up with the mathematical models that rule today’s stock markets.