FDIC Ready To Undermine Citigroup’s (C) New Board

The Fed and the Treasury have put pressure on Citigroup (C) to create a new board of directors. Richard Parsons, the bank’s chairman, is well on his way to doing that. The hopes are that a new board with more members who have backgrounds in banking and finance will be better able to steer the company through its balance sheet problems making it less likely that taxpayers will have to put more capital into the bank.

The FDIC has decided that the current management at Citi is not up to the task of turning the financial firm around so it is pressing for senior executives, including CEO Vikram Pandit,  to be pushed out. Several other federal agencies say that the FDIC has no business meddling in the bank’s business and that its oversight should be left to the Fed.

According to The Wall Street Journal, The FDIC, under Chairman Sheila Bair, also recently pressed a fellow regulator to lower the government’s confidential ranking of Citi’s health — a change that would let regulators control the firm more tightly.

It is too early to know whether the FDIC will get its way, but the entire process is a slap at the independent board that Citi is meticulously building. It also raises the question of whether boards of publicly held banks will be allowed to act as true fiduciaries or will instead be forced to act as agents for the government. It is almost certain that no one joining Citi’s new “blue ribbon” board is willing to be elected on the basis that they will be told by federal authorities who will run the bank as CEO.

Several large US banks, especially Citi and Bank of America (BAC) are under government pressure to build qualified boards. SEC regulations stipulate the the boards of public companies are elected by the shareholders and have a completely independent say over who will run the firms where they serve. The FDIC wants to overturn  a basic tenet of the fiduciary role of American boards. Its plans may face more resistance than the fight it is having with the Fed and Treasury.

Douglas A. McIntyre