A regular Citigroup Inc board meeting to talk about quarterly results took an unexpected turn on Monday night, when simmering tensions between Chairman Michael O'Neill and then Chief Executive Vikram Pandit came to a boil.
O'Neill criticized Pandit for being too detached from the bank's day-to-day operations, and told him to get more involved, according to sources briefed on the situation.
Instead, Pandit, who had been thinking of leaving for some time, decided to resign. O'Neill did not stop him, the sources said. John Havens, the bank's chief operating officer and a close confidant of Pandit's, also followed in his boss's footsteps out of the third-largest U.S. bank.
In the ensuing scramble, the board pulled out its succession plan and installed Michael Corbat, head of Europe, Middle East, and Africa, as CEO, announcing the changes to stunned employees, Wall Street and investors early on Tuesday morning.
Pandit believes he is leaving the bank in good shape, but analysts said that Corbat has a good deal of hard work to do. Citigroup faces a shifting regulatory environment, a weak global economy, and questions about its expenses, and many analysts and even employees at the bank wonder if the bank is too big to manage.
Pandit was known to have adamantly opposed any break-up of the bank. His exit could revive that talk, particularly in light of comments this summer by Sandy Weill - the man who pioneered the financial supermarket model - suggesting big banks should be broken up.
But on a conference call, Corbat emphasized that he does not wish to change the strategic direction of Citigroup.
"There is no question that Vikram laid the foundation to support Citi's long-term growth," Corbat said.
Corbat, 52, is known for being skilled at operating businesses, which the board believed Pandit was not, sources said.
Citigroup's shares closed up 1.6 percent on Tuesday.
A Citigroup spokeswoman declined to comment on accounts of friction with the board.
Tensions between the CEO and the chairman had been mounting almost since the day O'Neill took the reins of the board in April, people briefed on the matter said.
The board's relationship with Pandit was already under pressure after shareholders rejected the CEO's pay package in an advisory vote in April. He was awarded more than $15 million in 2011 compensation, but 55 percent of shareholders voted against it. The pay issue was thought to still be a source of friction internally, though O'Neill "categorically" denied it.
Although Pandit delivered third quarter earnings earlier on Monday that were better than many analyst estimates, O'Neill was not happy with the results, which included the charge from selling the brokerage business to Morgan Stanley at a loss.
O'Neill and Pandit did not clash over strategy, sources said, but over the CEO's execution, which was marked by a series of high-profile snafus such as the bank's failure to win regulatory approval to buy back shares or boost its dividend in March.
O'Neill, who turns 66 at the end of the month, also was increasingly irritated with Havens, a longtime Pandit associate, these sources said.
Pandit helped run investment banking at Morgan Stanley, where Havens rose to head equity trading. The pair left in 2005 to start a hedge fund that they sold to Citi in 2007 for $800 million. The bank subsequently shut the business because of poor performance.
When Havens was named to the top posts in January 2011, Pandit called him "indispensable to the turnaround of Citi". But O'Neill viewed the 56-year-old Havens as divisive, according to people familiar with the bank.
Havens could not be reached for comment.
O'Neill's performance in his short time as chairman could signal a new era for the Citigroup board and reflect a new toughness on the part of directors nationwide, as investors press for more oversight of management.
In the past, the board mainly deferred to the chief executive and asked few tough questions, stepping in only if problems developed. In contrast, O'Neill appears to be challenging management, said a person familiar with the bank.
Pandit and Havens, who was Citi's highest paid senior executive in 2009 and 2010, can salve themselves with the $100.3 million each received last year as part of a deferred payment for their hedge fund.
In an interview, Pandit, who is 55, said that he had been thinking about early retirement for a while.
"It was never my ambition that this would be the last thing I do in my life," he said. "We wouldn't have done this if we did not have a succession plan in place".
RUN IN WITH REGULATORS
Investors were taken aback by the news.
"It's not a shock that (Pandit) is no longer there, but the surprise is this is all happening very quickly. Why is he leaving immediately?" said Mike Holland, chairman of New York-based Holland & Co, which oversees more than $4 billion of assets.
"I'm not a Citi shareholder, but if I were, I'd be disappointed that Havens is gone, in some ways more than Pandit," Holland added.
Pandit has long faced questions about whether he had the right experience to lead Citigroup. Born in Nagpur, India, Pandit obtained two electrical engineering degrees and a doctorate in finance from Columbia University.
Critics later charged that Pandit was too cerebral to run a big consumer bank.
"He was not beloved by Wall Street. He was thrust into that position - he's a hedge fund guy," said Matt McCormick, banking analyst and portfolio manager at Bahl & Gaynor in Cincinnati.
Those questions did not go away during the depths of the financial crisis, as regulators took a dim view of his performance and they continued to haunt the executive.
In one recent and embarrassing failure, Pandit had convinced analysts in March that the bank had recovered enough to win permission to raise its quarterly dividend to 10 cents a share from a penny, only to see the Federal Reserve reject his plan after conducting stress tests.
"Regulators want to work with people who they understand will not try to pressure them or game them and who understand the regulatory process," Sheila Bair, the former chairman of the Federal Deposit Insurance Corp, said in an interview.
O'Neill, when asked by an analyst about the rejection of the capital plan, praised Corbat for the relationships he has developed with regulators while overseeing the Citi Holdings portfolio of troubled assets.
"He is very well viewed there," O'Neill said. "So, from a regulatory perspective, I think that we are in good shape and likely to get better."
The personnel changes did raise concerns at Moody's Investors Service, which changed the outlook on Citi's ratings to negative. The ratings agency said the personnel changes could raise questions about the bank's efforts to improve its risk management.
On the conference call, Corbat said that Brian Leach, the bank's chief risk officer, and John Gerspach, chief financial officer, are staying at the bank.
Corbat has held a number of senior roles at Citigroup, including running Citi Holdings, the unit established to house businesses and assets that the company wants to shed.
O'Neill, the chairman, said Corbat knew he was under consideration for the job for "quite some time".
Sources familiar with the situation said the board had drawn up the succession plan by the summer.
Weill, the legendary former Citi boss, endorsed the new chief executive.
"I know Mike Corbat very well, and I applaud the decision the board has made to name him CEO. He has been a great manager for Citi in all of the important positions he has held," he said in a statement.
Citigroup said Tuesday afternoon that Corbat will receive an annual base salary of $1.5 million.
Corbat was a standout football player at Harvard and once had aspirations to play professionally. But in a 1982 profile in the Harvard Crimson, he said he was perhaps not big enough to make it in the National Football League.
A fixed-income salesman by training, Corbat started out at Salomon Brothers in 1983. More recently, he has been credited with successfully restructuring some of Citigroup's consumer and credit card units.
In a letter to Citigroup staff after he was named CEO, Corbat said he expected to make some organizational changes after a review, but that he was generally pleased with the company's direction.
"I believe the fundamentals we have in place today are strong and that we are on the right path," he said in the letter, a copy of which was obtained by Reuters.
(Reporting by Rob Cox of Breakingviews, Matthew Goldstein and Jed Horowitz, Additional reporting by David Henry, Charles Mikolajczak, Phil Wahba, Dan Wilchins, Katya Wachtel and Edward Tobin; Writing by Ben Berkowitz; Editing by Paritosh Bansal, John Wallace, Jan Paschal, Steve Orlofsky and Ken Wills)