Citi’s Desperate Straits

America, we have a problem. Citigroup is the largest bank in America, with a balance sheet of over $2 trillion — and it’s also the most dysfunctional. Since Vikram Pandit took over, Citi has lost not only $20 billion but also more than 70% of its market capitalization, making it now worth significantly less than, say, Genentech. Cue major board-level squabbles:

The board of Citigroup Inc. is growing increasingly dissatisfied with the financial giant’s performance, and some directors are considering replacing Sir Win Bischoff as chairman…

The possible replacement of Sir Win comes as the New York company’s board is adopting an increasingly assertive stance toward overseeing Chief Executive Officer Vikram Pandit and his tightknit team of executives. Those executives took power last December after Citigroup’s previous CEO, Charles Prince, stepped down amid mounting losses. Some directors have grown concerned that Sir Win, who is based in London, hasn’t been exercising adequate oversight…

Over the summer, several directors complained to Mr. Pandit that he hadn’t adequately kept them in the loop about his plans. In recent months, the board has been holding meetings twice a month and trying to be more assertive about supervising management decisions. That change has irked some Citigroup executives, who said the board’s involvement in the negotiations to buy Wachovia Corp. slowed the process and gave Wells Fargo & Co. time to re-emerge with a superior offer.

So the board’s unhappy with management, management’s unhappy with the board, and, to top it all off, the chairman now looks like he’s going to be ousted in a high-level coup. This would be farcical if it wasn’t so tragic.

Back in June, I was already worried about Citi being too big to rescue — and that was before the TARP even existed, let alone was divvied up among dozens of different institutions. Citi closed on Wednesday at $9.64 a share — a level which prices in a very high probability that the stock will go all the way to zero.

Citi might well turn out to be Hank Paulson’s largest and biggest headache. There’s no one he can sell it to — it’s far too big already. Which means that Paulson’s only real option, if things deteriorate much further from here, is nationalization. Bits of it could be sold, at a price — the retail bank to Santander, perhaps; other bits to JP Morgan or Goldman Sachs — but the losses to the taxpayer would be enormous, and the disruption associated with breaking Citi up and then trying to integrate the pieces in the middle of a major financial crisis would likely be devastating to the economy.

The one option being mulled right now — replacing Win Bischoff with Dick Parsons — is clearly taken straight from the deckchairs-on-the-Titanic playbook. Parsons, remember, is the man about whom Joe Nocera said that "all his professional life, he’s wanted to be seen as someone who never seems to break a sweat". In any case, Bischoff isn’t the problem. The problem is that Vikram Pandit gave himself altogether too much time to get smaller, and then decided his best chance at salvation was to get bigger — by buying Wachovia. Now, it’s too late: the die has been cast. Will Citi buy Chevy Chase Bank? It really doesn’t make any difference either way.

In rough seas, it helps to be big and heavy — up to the point at which it helps to be smaller and lighter. Citi is the biggest and heaviest ship in a storm of unprecedented magnitude, she’s creaking badly, and there’s nothing the captain can do about it: you can’t fix a vessel like that in the middle of a hurricane. All you can do is hold on tight, and pray.

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