The U.S. Federal Deposit Insurance Corp (FDIC) is challenging positive conclusions given to Citigroup Inc.’s (C) management in a government-requisitioned review.

Some FDIC officials are suspicious about the report, following the interviews of Citi’s management who rated the effectiveness of their colleagues. Uncertainty surrounding the integrity of the report may lead the FDIC to assign the report little weight during the next regulatory assessment of the company’s management.

The review was conducted this summer for Citi’s board by recruiting and consulting firm Egon Zehnder International. It was triggered by the government’s stress tests on top banks. Companies found to be in need of additional capital were required to conduct assessments of their management and report the findings to federal regulators.

The FDIC, which had concerns about the qualifications of Chief Executive Vikram Pandit and his top management team, required Citigroup to hire an outside firm to perform the review.??The report, delivered to Citigroup’s board on last Friday, gave overall strong marks to Citigroup’s management team and to CEO Vikram Pandit in particular. The review, however, gave less-favorable reviews to at least two of Pandit’s lieutenants, Vice Chairman Lewis Kaden and Chief Administrative Officer Don Callahan.

Citigroup’s board met on Tuesday morning to start discussing the findings and ways to respond to them. The company needs to inform the regulators this month about Egon Zehnder’s findings and how the board is responding to them. Options include removing certain executives and reassigning or clarifying their job responsibilities, but Citigroup directors could not come to a conclusion as yet.

One of the key factors used by regulators to determine financial-health ratings of U.S. banks is the management efficiency. Such ratings help determine whether banks should be kept on a more stringent regulatory control. The announcement last week that Bank of America Corp’s (BAC) Chief Executive Ken Lewis will leave the company spurred speculation that Citigroup’s Pandit could suffer the same fate.

The FDIC is likely to treat the management review as one factor in a broad assessment of Citigroup’s overall financial health. The report’s supportive spirit comes as a sharp contrast to the frustration building among some analysts, investors and Citigroup executives regarding Mr. Pandit’s leadership since he became CEO in December 2007, where he had become known to overly rely on a small group of advisers.

The FDIC’s relationship with top Citigroup executives, especially Mr. Pandit and Vice Chairman Ned Kelly, has been strained since last year, when Citigroup’s plans for a government-assisted purchase of most of Wachovia Corp. fell apart.??Citigroup, once the largest U.S. bank by assets, fell behind last year after a series of acquisitions by rivals. The bank has been severely hurt by billions in losses and write-downs of problem loans and toxic assets.

The U.S. government injected $45 billion in bailout funds into the bank, $25 billion of which was recently converted to a 34% equity ownership stake. Top-level management at the company is conceiving plans to downsize the government’s stake in the company through a multibillion-dollar stock offering.

Citigroup will release its third quarter 2009 earnings on Oct. 15, 2009 with a conference call scheduled later in the day to discuss its results.

Ahead of its results, we maintain our Neutral recommendation on the stock.

Zacks Investment Research
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