What's Happening At Citigroup?

Of all the banks embroiled in the Troubled Asset Relief Program, Citigroup has to be the one that's taken the brunt of the bad-mouthing. Even as investors have bid up shares in beleaguered rivals such as Bank of America and Wells Fargo, no one wants to admit that Citi might just go on to live another decade.

While shares in most major financial services companies have soared lately, Citigroup is still stuck in the doldrums, hanging around the $3 level.

For sure, there's been little PR effort at Citi. Having taken $45 billion of government bailout funds, the bank is now being criticized for having skirted Treasury Secretary Timothy Geithner's guidelines on pay at banks, due this week.

Earlier in the year, Citi paid London bankers Rachel Lord and Stefanos Bitzakidis over $3 million in guaranteed bonuses to move from Morgan Stanley. That has left taxpayers and government officials enraged, while Citi says that the sums were necessary to attract top talent.

"In this economy, I would imagine they would be able to recruit talent without having to pay huge bonuses," Douglas Wigdor, a New York attorney who is representing five women suing Citi over their layoffs late last year, told Forbes.com.

Three months behind schedule, Citi announced Monday that it would begin a $58 billion stock swap in order to replenish the bank with the $36 billion in losses it has assumed in the previous six months. That will give the U.S. Treasury Department a 34 percent stake in the bank.

There was another reason for Citi shareholders to be glum Monday, too: it marked the first day of trading with the bank being excluded from the Dow Jones Industrial Average. Last week, News Corp. announced that it was replacing Citi with Travellers Insurance, a bizarre move seemingly aimed as a shot at the bank rather than a compliment to the insurer.

Citi's prognosis is a far cry from rivals JP Morgan, Morgan Stanley and Goldman Sachs, which are all being given the go-ahead by Treasury today to pay back TARP funds.

Tough at the top ... but juicy in the middle
Typically, Citi's problems don't begin and end with its balance sheet. For many, the financial chaos the bank is in is merely a reflection of the careless management practices of chief executive Vikram Pandit. Indeed, one of the reasons for the delay in the stock swap was Federal Deposit Insurance Corporation chairman Sheila Bair's probing of Pandit's suitability to lead Citi from here on.

FDIC officials seem keen to depose Pandit, and many now say his fate will turn out similar to that of Bank of America's Ken Lewis, who was ousted as chairman of the bank earlier in the year. But a management crisis is the last thing Citi needs as it hangs by a thread of stability amid the turbulence of loans, debts, and criticisms no end.

Fortunately for Citi, it's not all that bad. The bank turned a profit in the first quarter (albeit dubiously), and the big hires with guaranteed bonus checks should pay off in terms of real performance.

There's already some sign that they are. Arguably, Citi's new hires are beginning to have a notable impact on turning around the bank's traditionally shy approach to doing business.

In fact, while Citi's hiring policy might seem inappropriate in the current climate, the bank has acted much more competitively than rivals such as Morgan Stanley, which is doling out large basic salaries in order to compensate for lost bonuses. While Citi will be forced ultimately to incorporate similar uncompetitive schemes into its franchise, it has staved the inevitable off for as long as possible.

In other words, while Vikram Pandit will probably lose his job, Citi will retain lots of incentivized, aggressive bankers in the middle of the organization who will keep the bank's wheels turning faster than many think.

In a recently cocksure environment, being underestimated may turn out to be Citigroup's biggest advantage of all.

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