WWE Sells (Out) to Saudi

Good afternoon, 

Banks are getting ready for shrinking profits, a recession…and beefed up security against coffee brands shilling for free exposure by tabling outside offices that just cut free coffee. Oh, and security against the thousands of people they’re firing. 

The CPI drops tomorrow, and the Fed is making a full-court-press effort to convince you they won’t be slashing rates before year’s end.

Let’s dive in.

Bottom Line Up Front

• Binance plans a 30% hiring spree in 2023 (CNBC)

• Tesla is close to sealing a preliminary deal to set up a factory in Indonesia. It also applied to expand its gigafactory in Austin, Texas, for $775.7M (Reuters)

• Coinbase is laying off 20% of employees (NPR)

• Wells Fargo is “significantly” shrinking its mortgage servicing portfolio through asset sales (CNBC)

• Nearly half of top foreign policy experts reportedly stated that they believe Russia will become a failed state or break up by 2033 (Yahoo)

Invest in your sleep.

Humans spend roughly one third of their lives sleeping. A good night’s sleep is vital for every human to survive. So why not get the best out there? Enter Eight Sleep.

Eight Sleep is a high-tech smart bed system that has taken Silicon Valley by storm. With built-in heating and cooling system, multiple foam layers to deliver comfort, and analytics tracking to help you optimize your sleep and recovery, Eight Sleep is the complete package.

They’re currently running a great Black Friday special on their signature mattresses and mattress covers, so be sure to check them out if you’re in the market for a new mattress or want to upgrade how you sleep.

Check out Eight Sleep.

Deep Dive: How Citi Bike Sunk Citi's CEO 

Citi Bike was painted a success within 6 months of launch. So how did it take a bike less than 12 months to get Citigroup’s CEO fired? 

Let’s discuss. 

This week was supposed to be one of big bank earnings. Instead, Goldman quickly kicked off massive layoffs across Wall Street that are expected to continue through 2023. 

These layoffs will mark the most at Goldman in over a decade. But let’s go back to last decade’s most surprising layoff: Citigroup CEO Vikram Pandit. Could the bikes NYC tourists bargain their lives on a daily basis on be to blame?

Call a spade a spade – he was fired

Wall Street was left bewildered in October 2012 at the stunning exit of Pandit. At the time, he told CNBC he stepped down voluntarily. Insiders, though, said Pandit was forced out.

There was no explaining the unusual timing of the announcement.

Pandit's tenure was bookended by extremes — he stepped in as the credit crisis was about to explode across the financial markets and the global economy. He walked away just as it seemed the firm might be finding some stable ground.

The job slated for Jamie Dimon 

Pandit joined Citi in July 2007, just as the bank was about to realize the extent of the losses it had suffered in the sub-prime and leveraged finance sectors. 

Citi unraveled very quickly in the autumn of 2007. One minute, CEO Chuck Prince was still laughing; the next he was gone. Citi had revealed it would post subprime losses of $11 billion and sought a $7.5 billion capital injection from the Abu Dhabi Investment Authority.

At the same time, the board was looking for a new chief executive. Rumors were rife about who would get the job. None of them included Pandit’s name. At the time, the Street thought Jamie Dimon would be persuaded to return to the bank that he had once been heir apparent to, before his falling out with Sandy Weill. 

It was a whirlwind six months for Pandit. He joined to run Citi Alternative Investments. But before long, he had been asked to come in and sort out the problems within Citi’s banking and markets divisions. 

Rough start

When Pandit became CEO, the world had just changed. The previous environment of seemingly limitless pools of liquidity and capital had come to a sudden end. Citi had to change too.

By the time Pandit was officially appointed CEO, two weeks before Christmas in 2007, those write-downs were growing. In early January 2008, he was forced to announce Citi was compelled to sell $12.5 billion of convertible preferred securities to investors. 

Pandit and his team immediately got to work. Nine months later, the problems they faced were no longer Citi-specific: 

Lehman fell. The crisis officially became systemic.

All the way through the crisis, while Pandit was raising capital and dealing with a share price that had been wiped out, he was trying to define a new business model for Citi. “Lehman changed the rules of the game for us and every other bank,” Pandit said at the time. Now, it faced collapse, as the markets could no longer give Pandit what he needed to survive. 

So he turned to the US government. Not long ago, Citigroup had been the biggest bank in the world. It was on its knees begging for help. Worse, Jamie Dimon even thought he was better than them. 

That culminated in a third bailout for Citi, when the US government agreed to convert $25 billion of preferred stock into common equity. Citi’s tangible common equity had plummeted to just $29 billion at the time. Its stock was trading at just $1.50.

Coming out of the crunch 

Citigroup’s first-quarter 2010 earnings, announced in mid-April, were some of the most impressive in the industry. Citigroup produced net income of $4.1 billion. Compare that with Bank of America, which is widely thought to have emerged from the crisis faster and stronger than Citi, made $3.2 billion over the same period. Or Barclays, a bank that supposedly came out of the crisis a clear winner, had first-quarter net income of about $2.2 billion. Or JPMorgan, the bank least impacted by the credit crunch, had first-quarter 2010 net income of just $3.3 billion.

One quarter does not make a recovery. Citi posted a loss for six of the nine previous quarters and a loss in Q4 2009 of $7.6 billion. Most analysts had expected the bank to break even. Not produce over 4 billion dollars in net income. 

But Pandit still had big critics, including: 

Federal Deposit Insurance Corp chair Sheila Bair who, in 2009, had angled for Citi to be broken up quickly and for Pandit to be replaced as chief executive. 

Sandy Weill, the creator of the Citi supermarket, who let it be known that he was unhappy with the way Pandit was running Citi. Weill was evidently grumpy that he had not been consulted, having publicly backed the bank through a share purchase in January 2008. 

Seeking a new strategy

Everything in Citi was in silos when Pandit arrived. Each business had everything replicated – from buying the coffee to doing the accounting. 

Pandit’s biggest decision was to place businesses and assets that were no longer core to the bank’s strategy in a separate entity, Citi Holdings. Run by former Salomon veteran Mike Corbat, Citi Holdings aimed to reduce assets as quickly as possible while providing – let’s say our favorite line together – the best return possible for shareholders. 

That left Citi with what Pandit considered its three core businesses: global transaction services, securities and banking, and regional consumer banking. 

Citi had a unique take on consumer banking. Think of it like Goldman’s – but profitable. Its core retail strategy was to be an urban bank, serving customers in the top 100 cities around the world and the 10 biggest metropolitan areas in the US. 

That’s where Citi Bike comes in. 

An early story of success 

Pandit “walked away” just as Citi was rejoining the top of the leaderboards. And getting plenty of press and street attention for it. 

Citi Bike exemplified Pandit’s vision of making Citigroup the premier consumer bank. At the time, just about every bikeshare program in existence required one thing before you undocked a bike: inserting some plastic. That’s why it was a natural partnership when Citigroup shelled out $41M to brand New York’s bicycle share program “Citi Bike” in September 2011. 

In a city famous for complaining about just about everything, that’s not because New Yorkers got tired of whining. But less than six months into the Citi Bike program, it was already declared a success. Early adopters encountered some technical and accessibility kinks, but the numbers told a home-run story for Citi Bike.

The real winner in the bikeshare program wasn’t the bike, but the bank splashed across it. A Bloomberg BusinessWeek on “How Citibank bought a city (cheap)” asked if the Citi Bike campaign is “the greatest marketing ploy of all time?” 

The author, Nick Summers, pointed out that not too long ago Citigroup took $476B in public bailout funds and guarantees — more than any other bank during the financial crisis. The firm paid $41M — 0.008% of its rescue tab — for naming rights on the bikeshare program. Citigroup reported a net income of $7.5B in 2012, and turned a profit of $3.2B in the third quarter of 2013.

So, Citi Bike appeared to have paid off for Pandit, and then some. Summers reported that from May to July 2013, Citigroup’s own brand tracking poll saw a 17 point increase for respondents that had a “favorable impression of Citi.” Agreement that “Citi is for people like me” jumped 14 points over the same period. 

But the most interesting poll move was perhaps the 12-point increase for those in agreement with this statement: “Citi is a socially responsible company.” That’s a big jump in the age of “too big to fail” backlash, especially considering the periodic probes into possible Citigroup misconduct pre-Pandit.

So why push out Pandit just as he was seemingly bringing the bank back into its old glory?

The exit

Pandit’s exit was more dramatic than Jim Cramer realizing Bear Stearns was going down. Even the Treasury Department, who at the time owned ~27% of Citi after the bail out, was unaware that a change in Citi leadership was imminent.

The press portrayed it as, ultimately, a clash of ideas — a bank looking to steer a post-crisis direction, being led by a chief executive whose name will always be linked with the institution's darkest days. 

"The timing and the way in which it was done are unsettling, but I think a lot of people wanted to see Vikram Pandit gone, " Erik Oja, equity analyst at Standard & Poor's Capital IQ, said in an interview at the time. 

Your great aunt’s favorite stock picker, Jim Cramer, reported that Pandit was forced out in a disagreement with the board. His reporting was a stark contrast with what the Citi board was trying to sell to the press as clashes “centered on strategy and performance.” 

In other words, they weren’t fans of Pandit’s direction. 

Pandit’s departure was announced, ironically for this week in bank earnings, the same week of Citi’s quarterly earnings. Kind of. 

One analyst of Citigroup’s stock said the earnings announcement "exhibited few (if any) of the characteristics of a typical CEO succession, let alone for a company of Citi's prominence.” Analysts called the timing “abrupt” and flagged it as “highly concerning,” given that Citi refused to mention Pandit’s departure at all during the course of the earnings report. This was allegedly done in attempts to not expose the firm to potential legal liability. 

So Citi’s board was willing to downgrade its stock in the short-term because it didn’t like what it saw in Pandit’s long-term vision for the firm. 

Death by Citi Bike

Pandit’s departure, analysts believe, ultimately came down to the board asking tough questions about why Citi was not such a dominant player in mortgage banking, as JPMorgan and Wells Fargo were.

Instead, Pandit had been the face of Citi when the company was fighting for its life during the financial crisis. As the bank navigated its way out of the crisis, Pandit was taking a salary of just $1 a year. 

Pandit's resignation revived questions that were asked from the day he took the job: whether he had the right experience to lead Citigroup in the first place. 

But it does teach the lesson: you don’t need f**k you money to go out on top. Just make your culminating initiative one that every employee and board member in the city is reminded of every day they walk outside. 

Forecasts powered by Kalshi

As always, these market forecasts are powered by Kalshi, the first regulated prediction market in the US. Trust data, not pundits, and get your forecasts from people with real skin in the game.