Late word is that the hedge fund business that Citigroup (C) CEO Vikram Pandit sold to the bank for $800 million has lost a huge amount of its value. All of the outside investors in the fund, Old Lane, hit the exits.

According to The New York Times "Citigroup said on Friday that “substantially all” outside investors redeemed their investments, leaving the fund with about $1.5 billion." Old Lane had $4.5 billion under management last summer.

The sale of Old Lane to Citi is what got Pandit in the door at the money-center bank. As CEO, his track record is short, but poor. Most of what he has done is raise money which has diluted shareholders and claim he will make huge cuts in the company’s cost base. Since the beginning of the year, Citi’s shares are down 10% while those of rival JP Morgan (JPM) are up 10%. Pandit has not sold a single one of the bank’s many unrelated assets to improve its capital base.

Citi’s board has shown bad judgment once again. It allowed Chuck Prince to mis-manage the firm and make huge gambles on mortgage-backed paper. Now it has promoted an executive who could not even manage money well for his own investors, and that will cause the bank to take another $200 million plus write-down.

Pandit has only been CEO for a brief time, but almost every sign points to the fact that he is not up to the job and needs to go.

Who should replace him? Perhaps Robert Rubin, Chairman of the Executive Committee at Citi and former Goldman Sachs (GS) co-chairman. Much of the trouble at the bank occured on his watch. Now he can help clean it up.

Douglas A. McIntyre

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