Wachovia's deposits attracted Citigroup

The bank that some are branding as Wachovia's rescuer is on shaky ground itself.

In the past year, New York-based Citigroup has racked up more than $40 billion in write-downs and other losses, fallout from the subprime mortgage meltdown. It is already in the midst of cutting thousands of jobs and selling off some units, and it is about to announce its fourth straight quarterly loss in the billions of dollars.

To pay for the Wachovia deal, it will have to raise $10 billion on the market and slash its payout to shareholders for the second time in a year.

Citigroup leaders, in explaining their decision to buy Wachovia, cited Wachovia's strong consumer banking presence. That's an area in which Citi has long been eager to expand.

But Joe Gordon, managing partner of Gordon Asset Management in the Raleigh area, says Citi's purchase wasn't based on just a desire for bragging rights. "Citi," Gordon said, "needs Wachovia to survive."

Buying Wachovia will nearly triple Citigroup's U.S. deposits, to more than $600 billion. Like other banks worried by the tumultuous financial markets, including Morgan Stanley and Goldman Sachs, Citigroup is eager to build deposits because they're a low-cost and stable source of funding.

The man who is about to lead the bulk of the old Wachovia, Vikram Pandit, became chief executive of Citigroup in late 2007. That was just months after he started at the bank, which he came to when it bought the hedge fund where he worked.

Pandit, like Wachovia CEO Bob Steel, succeeded a disgraced chief executive and was brought in to clean up a discredited company. Pandit's predecessor, Charles Prince, was dismissed last November when it became clear that Citigroup would lose billions on subprime mortgages.

The India-born Pandit, who boasts a Ph.D. in finance from Columbia, is praised for being smart and pragmatic.

"The sense you get is extraordinary intellect," is how Citigroup director Robert Rubin describes him.

In his first day as CEO, Pandit was asked how he wanted Citigroup to be remembered under his tenure. "As a productive business," he replied.

But the 51-year-old Pandit, like Steel, lacks retail banking experience, which is the gem of Wachovia. And the hedge fund he co-founded in 2006, Old Lane, was shuttered this summer, 11 months after Citigroup bought it, because of middling returns and a run on investments.

Time to divest

Citigroup is a global player in many aspects of finance, including investment banking and credit cards. But some investors have said the bank should shed some of the units it has cobbled together.

When Pandit became CEO, he told investors the bank would "undertake an objective and dispassionate review of all our businesses."

In July, Citigroup said it would sell its German retail banking operation. In May, it decided to sell a benefits administration company.

Under Pandit's watch, Citigroup has had to raise at least $17 billion from investors. By mid-July, it had shed 14,000 jobs, about 3 percent of the total.

On Monday, Chief Financial Officer Gary Crittenden said Citigroup expects to lose between $2.5 billion and $5.1 billion in the quarter that just ended.

Those earnings will be announced Oct. 16. In the past three quarters, Citigroup has lost $17.1 billion. Wachovia in the same period has lost about $10 billion.

Pandit said that he has known Wachovia CEO Steel for almost two decades. But unlike Steel, a Durham native and Duke graduate, Pandit has no obvious connection to the Carolinas.

Culture clash looms

Pandit said that no decision has been made about keeping the Wachovia name, though he said the bank believes "it is essential to maintain a strong presence in Charlotte."

Analysts are already speculating about the challenges of integrating the two banks, both of which are used to being the acquirer. And Wachovia has traditionally been more averse to risk taking, and more customer-centric.

"There will be culture clashes," said Gerard Cassidy, an analyst at RBC Capital Markets. "The difference will be worked out over time, but it will stymie the integration effort."