Captain's Blog, Stardate: 12/17/07

(NEW YORK) Fortune -- ON CITI AND MERRILL: Take a step back and think about the removal of Chuck Prince and Stan O'Neal and the ascension of Vikram Pandit and John Thain at Citi (C, Fortune 500) and Merrill (MER, Fortune 500) respectively. Talk about tradin' in and tradin' up! No question both institutions end up with much better CEOs.

I know, I know, the jury of course is still out, and there are many questions particularly about Vikram, but hear me out. At Citi, Chuck and the rest of that dog's breakfast of a management team had been underperforming for years. In two words, Citi was 'totally dysfunctional' with the wrong people in the wrong jobs, and arguably a big-time lack of talent. Sure, it took a mega crisis and huge losses to clean house, but at least it happened. As for Vikram, yes Citi paid a reported $800 million to buy his Old Lane hedge fund and yes Old Lane has been lagging this year, but no question Vikram is analytical and super-smart.

According to the Telegraph of Calcutta: "Pandit, born in Nagpur [India], arrived in the U.S. in his teens as an undergraduate student at New York's Columbia University. Although he was an electrical engineer to start with, finance was his calling: he continued at Columbia to do his Masters and PhD, after which he joined Morgan Stanley (MS, Fortune 500) in 1983." Look what he has done already: Put $49 billion of SIVs onto its balance sheet - tough but necessary medicine - and seen to the removal of ineffectual COO Bobby Druskin.

As for Merrill, O'Neal had been perceived as doing an okay job during his tenure - what with the Black Rock deal, etc. - until the subprime storm hit. Oh, EXCEPT for one tiny thing. O'Neal lead by FEAR. He was imperious and despised by Merrill management. He fired many many people...okay sure, he has to have his own team, but it really became a reign of terror down there. As for John Thain, just look at what he did at the NYSE. Took a warring, barely functioning entity and made it better, not perfect, but waaaay better than it was. And see today that Merrill is slashing bonuses. (BTW, Fortune writer Jon Birger picks Merrill as a stock to buy for 2008 in our latest Investor's Guide.)......So no question there is upside at both C and ML, but you may not see it in the stock prices for a while because of other shoes dropping elsewhere.

MORE WALL STREET: I still say there will be more pain to come on Wall Street. That is hardly news, but I really believe that we will see some sort of major transaction/merger take place. Think about the players: Bear Stearns, Bank of America (BAC, Fortune 500), and Wachovia, plus Lehman Brothers (LEH, Fortune 500) and Morgan Stanley at some point when Dick Fuld and John Mack look for exit strategies. (Though I would not expect Morgan Stanley and JP Morgan to be reunited any time soon.) (I also wonder if a bank like BoA or Wachovia might have even more exposure to bad mortgages....) Another note: Kate Kelly's piece in the WSJ mentioned that the guys who created some $4 billion in profits at Goldman Sachs mortgage business will be paid between $5 and $15 million. Seems like a small price to be paid when you consider that our own Carol Loomis points out that the abovementioned Bob Druskin, the number two guy at Citi who just 'decided to spend more time with his family' made some $15 million last year (and who knows how much this year, while presiding over the LOSS of billions and billions of dollars!)

PEOPLE I MET WHILE YACHTING: Spent some time with (JP Morgan CEO) Jamie Dimon and investment banking honcho Jimmy Lee the other day. JPM has been notable by its absence from the headlines...i.e., yes they have some subprime and derivative problems, but nowhere near the extent of the aforementioned Citi and ML. There was no denial of problems at JP Morgan, but maybe some satisfaction that they were not in the soup. My take away was how unquantifiable the fall-out continues to be on Wall Street, and as for how bad it gets for the U.S. economy, well that's another unknown..........Spoke with Tom King who runs Citi's investment banking business in Europe. Tom's business is still humming, it's a bit removed from all the hoo ha over here, though certainly not immune.....Also, a big shout-out to David Wheeler of CSFB....At CBS's annual holiday, the pigs 'n' a blanket were fabulous as usual. Hand-rolled by Gil Schwartz and then left too long in the steam tray to make them al dente. Chatted with Harry Smith who had just put in a long day....At Victor Neufeld's party saw Alina Cho and Richard Liebner in fine form, among others....Nice to see Bruce Francis of Salesforce.com, a recovered TV journalist. You could see in his eyes how much he misses Lou Dobbs...Delighted to imbibe with Miles and Sandy O'Brien, the other night....

LOOSE CHANGE: Today's Deep Blue report: "Citigroup makes large downgrades in Financial Stocks: Bank of America (BAC), Countrywide (CFC) First Horizon (FHN), JPMorgan Chase (JPM), MGIC (MTG), PNC Bank (PNC), Wachovia (WB) and Wells Fargo (WFC) ALL CUT TO HOLD; Capital One (COF), Comerica (CMA), M&T Bank (MTB), Radian (RDN), and US Bancorp (USB) ALL DOWNGRADED TO SELL.....Hmmmmm -- I think they might be missing someone. I'll spot you the 2 "I' s".....How about some 'Dragflation' : period of out-of-control price inflation but with higher output growth, neutral unemployment, and eventually leading to not knowing where the economy is going." Thanks for those uplifting words Blue!...Movies: Saw "Control" the movie about the tortured late singer Ian Curtis leader of Joy Division. Certainly worth seeing. The actors play the music and it truly rocks. Also really dug "The Good Shepard" with Matt Damon, directed by DiNiro, a vastly underrated movie....Saw some of "Smokin' Aces," more pulp fiction....Speaking of movies, isn't it amazing how screwed up the DVD rental business is!??!? I would say one out of every five DVDs I rent from Blockbuster skips so badly it is unplayable. It's my own damn fault for continuing to do business with them! Speaking of movies again: I went to the U.S. premier of movie "Shades of Black," on Conrad Black, based on Fortune writer extraordinaire Richard Siklos's book. It was fab! The best part besides Lara Flynn Boyle as Mrs. Black, was that Jason Priestly played Siklos's character! LOVE IT....Journo luminaries like Kurt Andersen and Johnnie Roberts were there, as was Richard's wonderful wife Laine, (their son, the dauphin, Henri, was at home.).....Books: I just finished reading "Confessions of a Bangkok Private Eye." Um, can you say pulp fiction again?......Reading "Woz" about Steve Wozniak, co-founder of Apple. Kinda geeky.....So we had our Christmas party, and yes I made a fool out of myself! Some of the young people there MADE me do shots. They were called "Snakebites," Southern Comfort and limejuice. You feel REALLY good the next day. Happy to report the party ended with a fight including a bottle being thrown (Interlopers don't you know...almost as crazy as one of those Marin parties - teehee!).....Sadly Dan Fogelberg died yesterday. This from the Denver Post: "After dropping out of the University of Illinois at Champaign, Fogelberg met Irving Azoff, then a rising regional music businessman. The two had plans to head to Los Angeles. Azoff left and gave Fogelberg $200 for the trip west. But Fogelberg ran out of money in Estes Park, where he stayed for a week while waiting for Azoff to wire him cash. It was enough time to sell him on Colorado." I remember thinking about you in Nederland, CO many years ago Dan, RIP.