Why It's Time For Sheila Bair To Apologize To Citi's Pandit

(MoneyWatch)  Federal Deposit Insurance Corporation (FDIC) chairman Sheila Bair got a well-deserved kick in the teeth this week when consultant Egon Zehnder International endorsed Citigroup's chief executive Vikram Pandit. According to people who claim to have read the report, Pandit received "a positive assessment" by Egon Zehnder in the independent review which banks on TARP aid are required to undergo.

Bair has been one of Pandit's most furious and public critics so far this year. Her feuding came to a head in June, when it was reported that Bair pressed regulators to lower the government's health ranking of Citigroup. The move was aimed at giving the FDIC more control of the bank, so that it could meddle in a top-management shake-up, of which Pandit would be the first casualty, according to sources. Bair's views were not shared by other regulatory officials, however.

The consultant's review, which criticized three other top managers, has drawn a skeptical response from FDIC officials:

People familiar with the situation said the FDIC signed off on Citigroup's selection of Egon Zehnder to conduct the management review. FDIC officials vetoed a consulting firm that the bank initially proposed for the job. After vetoing the consulting firm favored by Citi, FDIC officials sent Citi "a list of approved firms acceptable to them," and one was Egon Zehnder, one informed individual said.

Now, though, some FDIC officials are skeptical of the findings. One person close to the agency described the outside report as "a total whitewashing." Some agency officials also are having second thoughts about the qualifications of Egon Zehnder, which largely runs executive searches for clients.

It's no secret that I'm a fan of Vikram Pandit, and agree with Egon Zehnder's conclusion that the brunt of Citi's woes are more likely caused by the failure of the bank's administrative and financial controllers than they are by the top man. I wrote as much here at BNET Finance in August, when it was revealed that hedge fund manager John Paulson had been accumulating the firm's stock (see story here).


But in this case, it is clear that the FDIC's response is simply childish, more aimed at saving its own face than in attempting to find constructive solutions to re-building one of the nation's largest financial institutions. Back in June, New York Magazine's Jessica Pressler put Bair's faulty conclusions into some pretty succinct prose:

We're sorry, but this is just wrong. First of all, we've said it before and we'll say it again: Citigroup's problems are not Vikram Pandit's fault. And, awkward Zen garden moments aside, he's done a pretty effective job in the last six months. Citigroup performed well in the stress test, unloaded one of its most profitable units, and has exhibited an almost pathetic willingness to do whatever the government wants. Has the company moved too slow? Maybe, but it's been six months. Certainly this is not reason enough for a federal coup, especially when there are bigger companies with bigger problems that need tending to.

In fact, labeling the consultants' report a "whitewash," as the FDIC has done, merely shows how many of Pandit's achievements the regulator is willing to ignore in order to protect Queen Sheila. Pandit has disposed of Smith Barney, an organizational mis-fit, for a healthy sum back when there was scarce capital around in the banking industry, bolstered emerging country market share at a pace which makes many rivals envious, and hired some of the best traders and managers around in London and New York. It's hard to see how Bank of America, which gets much less flack from Bair and her bureaucratic gang, has managed to accomplish any of these feats so far in 2009.

Ongoing tensions between regulators and managers never produce satisfactory long term results. When they arise, it's either the job of the firm to change its management structure, or for the regulator to apologize and admit that it was wrong. In this case, it would be encouraging to see the FDIC show that it has the business intelligence among its staff to do the right thing.