Now or never for Citi's new CEO

If he wants investors to overlook his flimsy resume, Citi's Vikram Pandit needs to take some radical steps, right now.

NEW YORK (Fortune) -- Judging by his resume, Vikram Pandit doesn't have the depth of experience to run Citigroup, but with some quick and decisive moves the bank's new CEO could win back many of the investors who've dumped Citi's stock as it fell victim to the credit crunch this year.

What might those moves be? Pandit's agenda will initially be influenced by the immediate severity of bad loan losses and other pressing problems at Citigroup, but within his first month investors will also want a clear indication of where he stands on important longer-term questions, like whether large parts of the bank should be sold off.

Pandit, 50, has been at Citigroup only since May, when the bank bought his hedge fund, Old Lane Partners. Before that, Pandit was at Morgan Stanley, where he won a reputation for his markets savvy. Charles Prince, Citigroup's previous permanent CEO, left the bank last month when the bank said it would take up to $11 billion of losses on mortgage-related securities.

Like all new CEOs, Pandit will have a short grace period during which he can take tough measures that would normally be considered defeat if carried out by a longer-serving CEO. For instance, don't be totally surprised if Pandit quickly raises a substantial amount of new capital, adding to the $7.5 billion of stock the bank sold to the Abu Dhabi Investment Authority late last month. Eager to see financial soundness at banks, investors are tolerant of capital raises right now - and the Abu Dhabi investment may turn out to be insufficient if fourth quarter earnings are worse than expected.

As a result, it may make sense for Pandit to issue at least another $10 billion now rather than in, say, six months, because a later capital raise would open Pandit up to the criticism that he didn't have a handle on Citigroup's financial condition. Indeed, having extra capital now would allow Pandit to bring Citigroup's huge distressed leveraged bond funds - called structured investment vehicles (SIVs) - onto its balance sheet like rival HSBC did earlier this month.

That move was a smart one by HSBC because it removed uncertainty about its SIVs and showed the bank was strong enough to consolidate them. And having extra capital may reassure investors if Citigroup's mortgage losses remain high in 2008, as some analysts expect.

For example, CIBC analyst Meredith Whitney thinks Citigroup could take large losses on many mortgages - prime and subprime - where the loan value is equivalent to 90 percent or more of the value of the house. Whitney calculates that Citigroup has $50 billion of these high loan-to-value loans, on which the bank could book up to $6.5 billion of losses next year.

The second big question Pandit has to settle is his lack of qualifications for running consumer banking operations, which account for over half of Citigroup's revenue. One solution may be to appoint a well-known and capable overall head of consumer operations. Right now, Citigroup doesn't have one such position, but effectively splits leadership between the international head, Ajay Banga, and the North America head, Steven Freiberg.

Happily, Pandit is thought to have exceptional expertise in capital markets, which should help him repair Citigroup's investment banking and brokerage division, where losses have been horrendous. Improving risk management and trading technology is central to rebuilding the capital markets business, says Richard Bove, banks analyst at Punk, Ziegel. That will be expensive, so if Pandit spends large amounts on risk management repairs and the like, he needs to communicate exactly what he is doing and why, since investors are likely to complain if expense levels are higher than expected in the investment bank. After all, a seeming inability to control expenses was a big part of what caused disaffection with Prince.

Last, and certainly not least, Pandit has to quickly give some indication of whether he wants to break off large parts of Citigroup and sell them. Some people believe this would make the bank more focused and streamlined. Today's Citigroup is a combination of many large institutions acquired chiefly under the reign of Sandy Weill. The pro-break-up camp says that the bank is too big to achieve meaningful synergies. Unlike any other bank, it has large consumer and capital markets businesses in the United States, as well as other parts of the world.

But since that hasn't led to superior earnings growth after several years of trying, Citigroup may as well split up, according to the breakup case. The counter case says that Citigroup has never actually had a management team that was up to achieving those synergies. Weill had faults, as did Prince.

So, imagine if Pandit were up to the job -- and picked some capable lieutenants. Investors might start to believe Citigroup could capitalize on the breadth of its businesses and geographical reach. Talking in such terms may seem very, very premature, as the credit crunch gets nastier. Eevn so, if Pandit wants investors and employees to bear the pain today, he has to hold up a vision worth pursuing.