Perhaps Citi’s “Bora Bora” Should Be Called Tora, Tora, Tora.

Students of World War II know that “Tora, Tora, Tora” was the signal sent by fighter-bomber pilots to their aircraft carriers during the sneak attack on Pearl Harbor on December 7, 1941. The exact meaning of the term Tora is disputed by scholars, but the consensus is that it was an abbreviated form of a longer term that meant lightning attack. (The Japanese planes were using telegraphs, not radios, so shortening forms of words was efficient).

The term came to mind when reading about Citi’s latest reorganization plan called “Operation Bora Bora.”

Citi CEO Jane Fraser has failed to increase margins, hit profit targets, or improve returns on capital. She has been a failure across the board. Citi’s stock price to book value ratio is a miserable 0.49%, less than half its peer group and only one-third of JPMorgan.

At this point, Fraser is reduced to doing what all CEOs do when everything else has failed – cut costs. And in the banking business, cutting costs means layoffs – big ones.

Citi has 240,000 employees. Final figures have not been announced, but the Citi layoffs could be as high as 10% of the workforce, meaning 24,000 job cuts. That’s huge by any measure.

These job cuts will not be aimed at clerks and receptionists. They’ll be aimed at investment bankers, senior account officers, regional managers, and other senior staff positions.

Fraser’s goal is to get returns on capital up to 11%. That’s not a very ambitious goal considering that the cost of capital is around 10% once regulatory requirements are taken into account.

I started my career at Citi in 1976 and retired as a senior officer in 1985. In those days, our targeted return on capital was 15% and we often did better than that. Even with the reduced expenses, Citi will have trouble hitting the 11% goal partly because the U.S. economy appears headed into recession. Loan loss reserves will grow for bad debts in credit cards, commercial real estate, and high-yield debt.

Citi may already be underwater based on its portfolio of Treasury securities, which has declined in value because of the steep rise in interest rates in the past two years. We wish Citi well, but investors can’t be blamed for staying away from the stock. As for employees, when the reorganization announcement comes out in January it should probably say Tora, Tora, Tora instead of Operation Bora Bora.

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