Calling out a new CEO is a very rare case, and we want to be clear thatwe are running this from the prediction-side of the equation in thiscase rather than from a public relations side of the equation.  He hasstill not officially been on for a year (Dec. 11, 2007 was his namingdate).  Frankly, any CEO taking over a troubled company deserveslonger.  Pandit deserves a longer tenure than he has been given by WallStreet.  The problem is that now Wall Street and Main Street expectchanges to come about as fast as a dot.com start-up business model.This is not fair and this is a function of things that started longbefore Pandit showed up.

Yet the calls for him to leave are already out in the media from moresources than can be counted.  For a board to have to offer theirsupport behind him and for Prince Alwaleed have to come out to defendMr. Vikram this fast is a true reminder of the situation.  But it isthe speed at which things move now.  If you will recall, Chuck Price,who we did say NEEDED to go was defended in public by the Prince and bythe board of directors several times.

Pandit is still being blamed for the magnitude of asset write-downswhether it is deserved or not.  These problem assets were all therebefore he arrived and if he could have seen the whole picture and howlong the problems would go on he might not have come on.  But eitherway, as CEO he is the one who has to take the blame.  Write-downs arelikely to continue as there are no markets for much of the paper. 

Pandit has been blamed for the lack of layoffs and the lack of unitsales or unit closures.  We think he didn’t want to have to send 50,000or 75,000 workers home, and frankly that is personally honorable.  WallStreet keeps a different scorecard, and what is honorable is not whatstockholders and analysts want.  His first round of cost cuts wascriticized from the start as being very abbreviated and as being toomuted.  This last round of huge layoffs is deemed as being 9 monthsbehind the curve by many pundits.  Citi could have sold off or spun off units as late as Q1-2008.  Unfortunately that time passed for now, at least for any dollar amount worth the sale process.

Pandit was even noted as perhaps "benefiting too much" from Citi’sbuyout of his Old Lane Partners hedge fund.  Citi paid $800 million ofthat and Pandit received a rather large pay day.  This was deemed as avery expensive hire on the part of Citi for a fund which had around$4.5 billion under management.  He then served as head of Citigroup’sinvestment bank and alternative investments group before taking overthe top spot at Citi.  It is certainly not Pandit’s fault that Citineeded him this badly.  Pandit was also not running Old Lane when Citidecided to close it down.  Why this closure was also being notedanywhere toward Pandit other than signing off on it is a mystery, butagain that is Wall Street for you.

Pandit was also given poor marks over the busted buyout where WellsFargo (NYSE: WFC) jumped in line to buy Wachovia (NYSE: WB).  Whetheror not that is a fault or a benefit is something that the history bookswill still decide.  But based upon the rumor mongering and liquidityfears that were being passed around Four-weeks to two-weeks ago whichdrove the stock to $3.00+ might have been enough to break Citi if ithad that leverage. 

Pandit did score with the last government stabilization plan where theywill do a good-bank bad-bank and backstop.  Yet he has been given verylittle credit for this. Perhaps after an 80% drop, Wall Street has nopatience and is too used to frowning.

The last issue that has been talked about is something on a personalnote.  In Pandit’s interviews he did not come across as a tiger nor didhe come across as an instrument of major change or rapid change.  After Wall Streetfinally got rid of Chuck Prince, it seems that they justwanted much more of an aggressive chainsaw wielding CEO who startedfiring and slashing regardless of the overall corporate culture.Being nice and being successful in other areas does not mean that you get good marks as a CEO.  Again, that might not be Pandit’s fault; but that hasn’t kept it frombeing his problem.

We think that the only thing that will keep Pandit on as CEO is a majorbull market recovery because the bailouts turned out to work betterthan expected and because the economy did not get as bad as most hadfeared.  As of today, that does not appear to be the case or at leastis not an above-average odds scenario.

Being the head of Citigroup is a job which few outsiders would want totake.  There is another angle here.  Win Bischoff is very unlikely towant to come back in even as an interim-CEO.  Bob Rubin cannot do itbecause he is currently under a cloud as well.  Most of Citi’s otherboard members are actually non-executive outsiders.  The long and shortis that Citi probably needs to keep Pandit.  Based on the currentenvironment and based upon the criticism, we wonder why he’d want tostay. 

We do not think that Vikram Pandit will get fired.  In fact, he shouldprobably not be fired because CEO’s have to be given time after they are broughton.  We think there is a strong chance that by mid-2009 he is likely to say, "What was I thinking when I took thisjob?  To hell with this mess." 

If you go through the list of 2008 CEO’s to go, almost all of those called out have moved on by now.  If you go through our list of 2007 CEO’s to go, you’ll see that most have hit the road. 

Jon C. Ogg
December 2, 2008

Citi’s announcement that it would acquire the remaining assets of the SIVs it manages at current fair value should not have caused the drop. If the contents of these were remarkably toxic, Citi would have disclosed that.

The firm’s decision to fire 53,000 more people is unfortunate, but it would usually be a modestly positive piece of news.

The only real explanation for the drop is that traders believe that Citigroup is headed in the direction that Lehman, AIG (AIG), and Wachovia (WB) did. The market lost confidence in these stocks because their weakened balance sheets were causing larger and larger write-downs, undermining their capital bases. This was causing customers to take capital and move it elsewhere.

Citi now appears to be in the same flat spiral. If so, before the end of the week the Fed and Treasury may ask the board of directors over to the offices of  The New York Federal Reserve. Someone from the FDIC will be in that meeting as well.

The conversation will be simple, and one-sided. Citi will be told it has a day or two to find a buyer. The FDIC may be willing to guarantee the value of some of the banks assets, if the right acquirer steps forward. Or, absent another financial firm wanting Citi, the government will step in with $100 billion in loans and own 80% of the bank.

What else could it be?

Douglas A. McIntyre

Over the last two days we have seen a 10% sell-off in the market.  Theselling came despite us knowing that the news is going to be bad forbeyond much longer than just this week.

That is the new climate for you, but this is one of the "In The Club"financial institutions that the government has mandated will be asurvivor.  It is also one of Warren Buffett’s only personal holdingsand is one of the companies we have predicted he has bought more ofvery recently.  We think Berkshire Hathaway (NYSE: BRK-A) has alsobought more, maybe in this offering.

Jon C. Ogg
November 6, 2008

Barclays did the sensible thing. It went out and raised money on its own. According to MarketWatch, the bank "struck a deal to raise up to 7.3 billion pounds ($11.9 billion) in fresh capital as the U.K. lender signaled its preference for cash from Middle Eastern royal families to the British government."

The excuse that US financial firms might give for not going the private capital route is that Barclays is doing better than they are. But, last November, the UK bank wrote down $2.7 billion in subprime paper. Last May it lost nearly $3 billion.

The stock market is usually not a bad test of how companies in the same industry are doing relative to one another. So far this year, Barclays shares are down 65%, which is more that those of JP Morgan (JPM), Citigroup (C), or Bank of America (BAC).

Barclays took a risk, perhaps a large one, by insisting upon raising private capital. That revives the question of what would have happened if the Treasury and Congress had not stepped in to provide tens of billion of dollars to US banks. Wells Fargo (WFC) did not ask for public capital for its purchase of Wachovia (WB). That is a useful bit of data.

The Barclays announcement indicates that the American banking system may have made it on its own. Some institutions would have been bought by others, probably at fire sales prices. That has already happened to companies like NCC (NCC). But, the valuations of the firms when they traded near their lows were probably attractive enough to bring in private equity and sovereign fund capital.

The bailout may not have been needed at all.

Douglas A. McIntyre

The Bank of England reckons the cost of the near-collapse of the financial system is $2.8 trillion. It does not say precisely how it came up with that figure, but in the guessing game that hardly matters.

Looking at the issue from a simpleton’s perspective, Citigroup (C) has lost $200 billion of is market cap. The number for Wachovia (WB) is more like $100 billion. The loses to Lehman and WaMu shareholders are of a similar magnitude.  By these calculations, investors in US financial companies have seen well in excess of $1 trillion go down the drain. Lost jobs are certainly worth hundreds of millions in tax revenue. Most of these out-of-work investment bankers were rich.

The fallen value of hedge funds cannot be tracked, but some of the larger ones such as Citadel are down by several billion. Investors in these firms may never see most of that money back.

The fallen value of real estate due to lack of a real mortgage rescue program must be well into the trillions of dollars, especially if that pool includes housing and commercial real estate worldwide. More liquidity would not have saved the real estate market, but it might have arrested its rapid decline. Banks getting capital from the US government are not lending that out again, defeating much of the purpose.

The Bank of England’s figure is probably a multiple of ten times too low. A figure around $25 trillion would be more accurate.

Douglas A. McIntyre

Now that Henry Paulson has $700 billion and some discretion about how to spend it companies from car manufacturers to airlines want a piece. So do some municipalities. Insurance companies are already in the "salvation system", or at least AIG (AIG) is. But, its $123 billion came from a pot all of its own.That means Treasury has a bit more money.

It is not unreasonable to think that "strategic" industries like automobiles should get a Brink’s truck of bullion. The trouble is that Treasury Secretary Henry Paulson may find financial firms need more money than projected. Right now Treasury has $250 billion earmarked for equity investments. Tens of billions of dollars, or perhaps more, will go for the original plan of buying toxic paper.

If Wall St. considers that massive write-downs that NCC (NCC) and Wachovia (WB) made when they were taken over, it gives some picture about how bad off banks may really be. NCC is a modest-sized bank and it will take almost $20 billion in charges. Wells Fargo (WFC), Wachovia’s new owner, says write-offs after the buyout could be a large multiple of the NCC number.

Several analysts recently wrote that Citgroup (C) may not make money until 2010. What the total cost of future capital going into the big money center banks is hard to calculate.

But, Paulson had better save the entire $700 billion for the banking system. He is going to need it.

Douglas A. McIntyre

The short interest in Citigroup (C) fell over 5% to 116.8 million shares. Probably due to its purchase by Wells Fargo (WFC) shares sold short in Wachovia (WB) dropped by 54% to 91 million. Short interest in Bank of America (BAC) dropped 14% to 94.1 million. Short interest in MBIA (MBI) fell 21% to 62 million.

The government bailout did not do much for AIG (AIG) is was the only big financial to see a sharp increase in shares sold short, up up 11% to 93.7 million.

Short sellers put their money into tech shares. Intel (INTC) saw its short interest up a fraction to 77.8 million.Shares short in Microsoft (MSFT) moved up 13% to 69.3 million. The short interest in Dell (DELL) moved up 18% to 40 million. Orcacle’s (ORCL) short interest was up 8% to 32 million. Shares short in Qualcomm (QCOM) moved up 24% to 21.8 million.

To no one’s surprise, shares short in Sirius (SIRI) jumped 17% to 232 million and the short interest in Ford (F) rose 8% to 295 million.

Data from NYSE and Nasdaq

Douglas A. McIntyre

NCC’s stock is down 20% on the news. PNC will pay a total of $2.23 a share or $5.58 billion.

The government had a hand in the deal and probably even forced it. PNC says it received a $7.7 billion investment from the government, under its $750 billion bailout plan.

The amount of the write-offs when the deal is done will be extraordinary. PNC’s CEO said $19.9 billion of losses on the National City portfolio will come in as write-downs at the time the acquisition closes.

That says a great deal about major US bank balance sheets. Wachovia (WB) reported a third-quarter loss of $23.9 billion on Wednesday, which say a mouthful about that state of its financials. Under the provisions of its merger deal with Wells Fargo (WFC), it was required to fess up to everything bad it could find. According to Reuters, loan losses from Wachovia could hit $74 billion.

Odd that the really big write-offs only get exposed when these firms are bought. It is almost as if those banks which are still independent are moving a bit slowly in getting all of their cards onto the table.

Douglas A. McIntyre

The financial sector could easily lose several hundred thousand jobs in the US. New York City expects employment in the banking and brokerage sector to fall by 150,000. Marriages like the ones between Bear Stearns and JP Morgan (JPM) and Wachovia (WB) and Wells Fargo (WFC) will clearly put tens of thousands of people out of jobs. Goldman Sachs (GS) apparently will let 10% of its workers go.

The trouble has spread well beyond banks. Merck (MRK), Xerox (XRX), GM (GM), and Chrysler just said they will push more poor souls out the door. Even a successful tech company such as Hewlett-Packard (HPQ) has taken significant numbers of people out of its workforce.

So, how many people, how many people in total could lose their employment over the next year?
In the recession which started in 1973, unemployment hit about 9%. As of last month, the comparable figure was at 6.1%. With a national labor force in the US of about 145 million people, that means 4.5 million more people could be out of work relatively soon. That does not take into account the “shadow” army of unemployed, the people the government says are no longer looking for jobs.

Economists, particularly those with a dark view of the world, are concerned that 9% may not be the end of it. As people lose work, retail spending drops which can lead to more layoffs. The housing crisis could get worse and foreclosures may rise. More people with mortgages could find themselves “underwater”, a term which lacks the power of describing the dilemma. Credit is rarely given to those with such substantial leverage, although it was common in 2005 and 2006.

The press and those in despair almost always turn to the government for answers to the most perplexing questions. But, in this case they will not get an answer. Short of what was done in the 1930s. there are no ready solutions and even a series of actions like those taken by Roosevelt might do no good.

Put bluntly, it is hard to imagine that at least another five million people will not lose their jobs over the next twelve months. No matter how much money is pumped into the banking and mortgage systems, the carnage cannot be prevented. It will be left to private enterprise to take advantage of the situation, a process which is fueled by opportunistic thinking and greed. Bottom fishing will become an art. Finding opportunities in the rubble will make some people rich. At that point, the economy will start to drive back up again. The rich willing to take risks almost always sense a bottom.

Douglas A. McIntyre

Wachovia  reported a net loss in the third quarter of 2008 of $23.89 billion, representing a net loss per share of $11.18, including a provision for credit losses of $6.63 billion to cover $1.87 billion in net charge-offs and to build reserves by $4.76 billion.

The third quarter 2008 net loss compared with earnings of $1.62 billion or 85 cents per share in the third quarter of 2007

The $18.8 billion in noncash goodwill impairment reflecting declining market valuations and the terms of the merger with Wells Fargo (WFC); the recognition of the impairment affected the retail and small business, commercial, wealth management and asset management subsegments.

Wachovia’s general bank which includes retail, small business and commercial customers, is the only unit which did well. It has segment earnings of $857 million down from $1.5 billion a year ago. But, at least it did not lose money

Douglas A. McIntyre