Moody’s Damns the Citigroup Board

Ratings firm Moody’s did not think much of the decision by the Citigroup Inc. (NYSE: C) board to push out CEO Vikram Pandit. Moody’s changed its outlook of Citi’s Baa2 rating from stable to negative.

The negative outlook reflects the risk that this unexpected management change will negatively affect Citigroup’s ongoing efforts to install improved risk management practices throughout the firm.

In other words, Pandit was on the right track and the board’s decision is destabilizing. Moody’s also said matters would get worse if more senior managers leave.

And they will leave. New CEO Michael Corbat has said as much. He plans to do the same sort of top-to-bottom and bottom-to-top evaluation that all new chief executives do when they are appointed suddenly because of a perceived crisis. The suddenness means there must be profound disappointment from the board of business as usual. So, the mandate for change could not be clearer.

Corbat will be rewarded if he dumps businesses that he and the board do not consider “core.” And cuts are always a good way to get positive reactions from investors. One reason CEOs lose their jobs is that they, in the eyes of the boards, do not run their firms efficiently.

Unfortunately, the mania for change almost certainly will lead to swift decisions to show that the appointment of Corbat is sound. Citi’s fortunes have seemed reasonably good recently. Pandit’s critics like to say that the bank’s shares have not recovered as much of those of its peers have since the financial meltdown that almost took the world’s bank system down. But over the last six months, Citi’s shares are up about 5%. The “best run bank in America” — J.P. Morgan Chase & Co. (NYSE: JPM) — has handed shareholders flat results over the same time period, while the S&P is higher by 8%. Has Pandit been as good a steward as Jamie Dimon recently? Yes.

Corbat may be the best banker in the world. He may even be better than Jamie Dimon. But he cannot avoid the mandate that every CEO gets when his board signals there is a crisis. He will need to run a fire drill, and investors will have to hope he does not set anything important on fire.

Douglas A. McIntyre