Wake-up call

Citi's latest fail should stress Mike O'Neill

The Federal Reserve's rejection of Citigroup's buyback and dividend plan is bad news for Chief Executive Mike Corbat. It is the bank's chairman, Michael O'Neill, however, who should be more stressed than anyone.

It isn't immediately apparent from the megabank's balance sheet why it got pushback from the Fed. Citi holds enough capital to manage $6.4 billion of stock repurchases and a whopping increase in the annual dividend to just over $400 million. It will be all the more difficult for Citigroup executives and investors to stand by idly as rival Bank of America is granted permission to quintuple its dividend.

Citigroup's finances aren't the problem, though - at least, not directly. The regulator is worried about processes, including risk management, as it is with RBS Citizens and the U.S. arms of HSBC and Santander. In Citi's case, caution is warranted.

The bank has been singed by nearly every financial crisis of the past 30 years. And just last month Corbat admitted the bank had discovered a $400 million fraud in its Mexican operations. The 2007-09 meltdown showed just how fast supposedly strong financials can turn to vapor.

O'Neill's stewardship was supposed to hasten Citi's turnaround. Already a director, he was anointed as heir to Richard Parsons just a couple weeks before the Fed rejected the bank's 2012 capital plan and officially appointed a month later. A former bank CEO and finance chief himself, he quickly signaled his active intentions.

He organized a putsch of Vikram Pandit in October. And the Fed blessed the bank's capital plan last year - a $1 billion buyback. Since then, however, progress has slowed. Citi generated a return on equity last year of only 5.3 per cent, far below its cost of capital.

The Fed has provided a wakeup call to O'Neill. He confronts a harsher reality about what it will take to whip Citi into shape. The bank's communication with regulators, internal controls and even strategy, including the possibility of a breakup, will have to be a revisited. Simply changing the CEO isn't nearly enough.