Wednesday, August 26, 2009

Benmosche Bests Pandit

08/26/09 - 09:07 AM EDT


By Eric Jackson

NEW YORK (TheStreet) -- The federal government is running some of America's largest and formerly most influential companies, including Citigroup, AIG(AIG Quote), Bank of America(BAC Quote) and GM.

The track record of government managing -- let alone turning companies around -- businesses is poor. Still, it's calling the tune at the moment, sitting in on internal meetings, pushing out CEOs (like GM's Rick Wagoner), CFOs (like Citigroup's Ned Kelly) and directors (see the reconstitution of the Bank of America board since its April shareholders meeting), and determining whether prearranged pay packages should still be treated as valid contracts.

Yet, the government, with all the best intentions, will never turn around these companies. It's the companies themselves and their employees who must turn things around. AIG and its new CEO Robert Benmosche get that, while Citigroup and its CEO Vikram Pandit don't. Both companies are extreme corporate basket-cases now controlled by the government on behalf of taxpayers. Yet, the styles of Benmosche and Pandit couldn't be more different.

Pandit's been the quintessential invisible CEO: quiet, passive, and immediately forgettable when he does speak. Benmosche is on the other end of the spectrum: straight-talking, aggressive, asking challenging questions, and lots of slaps on the back. Benmosche doesn't suffer fools gladly; Pandit appears to suffer fools for years without saying boo.

As horrible as AIG has been as an investment since last fall, Citigroup has been worse. AIG's stock price is 15% higher than Citigroup's since the government took over the company. When the market learned of Benmosche's hiring and digested some of his positive comments on the company, it responded positively, sending up AIG's stock by 35% last week (and still higher this week).

Although I've yet to meet with a Pandit apologist (maybe the only ones are Citigroup's directors who hired him), if I did, they'd likely say he is just one man and certainly didn't cause Citigroup to be the unmitigated disaster it is today. They'd also say one person -- even the CEO -- isn't responsible for a company's stock price.

Certainly there are many people who also deserve blame for Citigroup's current state of affairs: John Reed, Sandy Weill, the entire board, including Dick Parsons and Bob Rubin and Chuck Prince. Yet, Pandit's been in the corner office for almost two years during the crisis. Citigroup's stock price fell in lockstep with Bank of America's from the fall through the March lows. Yet, since then, Bank of America is up 90% more than Citigroup. Yes, assets and past underperforming loans matter, but so does leadership. Pandit's been a dud as CEO, and that affects investors' interest in the company.

Recall that back in early October last year Citigroup was trading at $23.50 after the Federal Deposit Insurance Corp. backed it to buy Wachovia over a competing offer from Wells Fargo(WFC Quote). Five months later, Citigroup's shares touched 97 cents. It's been a breathtaking evisceration of the former king of the American financial world. Pandit has done little to inspire investor confidence.

Pandit's response to being owned by the government since taking TARP money has been to shrink back even further from public scrutiny and contact with staff. The introverted, bookish professor has become even more bookish.

When he has spoken up, it's irked regulators and peers alike. Jamie Dimon of JPMorgan Chase(JPM Quote) called Pandit a "jerk" under his breath on a conference call with Treasury last fall. Lloyd Blankfein has joked that Citigroup was crazy. One business journalist summed it up to me this way: "I've never seen a Wall Street CEO who gets punked that often."

Where is the leadership going to come from? Sheila Bair is not going to turn this company around. Neither is Tim Geithner or Ben Bernanke. Did Citigroup also sign an addendum to receiving its TARP funding that it had to manage its affairs as if no one were really in charge?

Contrast Pandit's style with Benmosche's, the former head of MetLife(MET Quote) and new head of AIG. If any company is a ward of the state more than Citigroup, it's AIG -- it's actually a $182.5 billion ward.

Yet, here was Benmosche coming out swinging last week. He said in an internal town hall meeting that he sees the government as only one of several critical stakeholders -- the others being clients in the U.S., Asia, and Europe; employees, and then "the people we owe money to" (otherwise known as the government).

Benmosche said undoubtedly AIG would have to sell some of its businesses to pay back the government but ruled out an imminent sale for its investment advisory business and said other asset sales could wait until the company received full value. "I don't liquidate things; I build things," he said. "If the government wanted this money back quick, they shouldn't have come in in the first place."

Benmosche even had the nerve to suggest his management team should have the flexibility to pay its employees more if they've just "shot the lights out" in a given year.

Financial blogger Barry Ritholtz called him "totally absurd" to think he's going to pay back the government "in our lifetime." Maybe. But, if you worked for AIG (or were a stockholder), you cheered last week. It's clear who's in charge at this company. It's not the regulators but actually the AIG and its employees. This is quite a contrast in styles from his caretaker predecessor, Ed Liddy, and of course Pandit.

Benmosche finished an employee town hall meeting recently, warning: "My fear is that you'll say, 'I don't know if Treasury wants it, I don't know if the Fed wants it, I don't know if the lawyers want it, I don't know whatever.' If you sit there every day not making the right decisions to take us to the next level, we'll miss an opportunity."

And, he's exactly right. I'm for leaders who see the facts clearly and don't lead their organizations off a cliff. Both Citigroup and AIG went over the cliff a long time ago. They're down in the valley -- but they're still going concerns and they still need leaders. They're not going to be shut down and shouldn't be led by CEOs who would be suited for winding down companies -- like Pandit.

Ask yourself, if you were working in the bowels of one of these companies, who would your dig deeper for: Benmosche or Pandit? That hidden effort will start to show itself in the operating results and stock price in the coming quarters.

The government would be wise to get out of the way of these companies as quick as it can -- assuming there are competent management and directors. The government and taxpayers deserve the best long-term return on their investment, but they aren't suited to micromanage the businesses. They should get the right managers, get the right risk management and get out of the way.

The CEOs of Citigroup and AIG should push back on government requests when they are unreasonable or at odds with the long-term interests of the business. Benmosche appears well-suited to do that; Pandit doesn't.

We got into the current mess by too many people at AIG, Citigroup, and other firms playing fast and loose with other people's money with poor or no risk management. To fix that, we've needed government intervention.

We've got to get back to a true free market system. To heal these firms and our economy, leaders and employees at AIG and Citigroup need to treat assets they oversee as if it's their own money and -- with proper risk oversight -- start making free choices again on how to grow those assets.

-- Written by Eric Jackson in Naples, Fla.

At the time of publication, Jackson had no positions in stocks mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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