Citigroup spins off subsidiary to pay trader $100 million
By Andre Damon
14 October 2009
Citigroup announced Friday plans to sell its energy-trading subsidiary Phibro to Occidental Petroleum, the fourth largest US energy company, by the end of 2009. The $250 million sale appears largely designed to fulfill Citigroup’s obligation to pay one energy trader, Andrew Hall, a promised $100 million bonus.
Citi last year received $45 billion dollars in federal bailout money, which, unlike rivals Goldman Sachs and Morgan Stanley, it has not paid back. Citi’s bonus payments are thus subject to scrutiny by the federal government’s so-called pay czar, Kenneth R. Feinberg, who has power to approve the pay packages of top executives at firms receiving “exceptional” government assistance.
Last year, Citigroup paid Andrew Hall, the head of Phibro, $98.9 million, and was slated to pay him another $100 million this year. With the latest arrangement, Hall will still receive this bonus, but from Occidental, the firm’s new owner, and not Citigroup.
The deal came after “intensive” discussions between the Citigroup and Feinberg, who indicated that a decision by Citi to pay Hall his bonus would be unacceptable, according to sources quoted in the Wall Street Journal and New York Times. The Times indicated that Feinberg thought that the popular outrage sparked by such a payout would be more than White House wanted to deal with.
In response, Citigroup sold off Phibro, along with its obligations to pay Hall, at a bargain basement price. Hall’s pay package now falls outside limits of Feinberg’s oversight, giving the White House a cover to drop its complaints.
The Financial Times LEX column laughed off suggestions that the sale was motivated by anything other than Hall’s pay package. “Only someone just emerging from a lengthy coma” it wrote, “would have swallowed Citigroup’s explanation for the sale of its Phibro commodities unit as ‘consistent with Citi’s core strategy of a client-centered business model.’ Not unless that business model involves intentionally losing money.”
The column continued, “The sale was all about reconciling public anger with banker pay and an ironclad contract with head trader Andrew Hall for a $100m bonus. The sale price, said to be about Phibro’s net asset value of $250m, would have been a steal even at the height of the financial panic.”
Citigroup’s compensation practices in respect to Hall were dubious, to say the least. A source told the New York Times that 20 percent of Phibro’s profits were allocated to a fund controlled directly by Hall. Moreover, there were no set rules for compensation at Phibro, leaving it up to Hall’s discretion to dole out bonuses equivalent to the incomes of several thousand families.
Earlier this year, the federal government announced it would take a 36 percent equity stake in Citigroup by converting the $25 billion in loans that it had already made into stock. This was on top of another $20 billion that the government handed over to the company earlier last year.
After Citigroup received its $45 billion in aid from the federal government last year, it proceeded to lavish hundreds of millions of dollars on its employees. Over 738 employees got over $1 million in bonuses, while 143 each received between $4 million and $10 million, according to an investigation by the New York attorney general.
The purchase price of Hall’s company was set at $250 million, about 2.5 times Hall’s income last year. But even the huge bonus paid to this one trader is not extraordinary by Wall Street standards. Ray Irani, the CEO of the company buying Phibro, is estimated to be even wealthier than Hall. Irani received $49.9 million dollars last year, and has earned more than $884.8 million over the last 16 years, according to figures cited in the Wall Street Journal.
Andrew Hall is—in the most technical sense—a speculator, placing complicated bets on whether the prices of oil and natural gas will go up or down. He and his fellow traders analyze the movement of prices using computers, then place rapid bets whenever they detect any unusual patterns. What he does is of no use to anybody except wealthy investors—while contributing to the spikes in energy prices that drive millions around the world into destitution. For this he is paid fourteen thousand times the average person’s income.
In yet another example of the financial aristocracy gorging itself it was recently announced that Ken Lewis, the ousted CEO of Bank of America—which was given a $45 billion government bailout—is slated to receive a retirement package amounting to $68.8 million, including a $53.2 million pension fund. Lewis will also walk away with $81.8 million in stock and other compensation that he accumulated over his career, according to an analysis of corporate filings by an independent consulting firm.
Lewis, along with executives at the other big banks, shares much of the blame for speculative practices that produced the worst economic crisis since the 1930s.
According to the New York Times, “The government-appointed compensation czar, Kenneth R. Feinberg, does not have authority over any pay that was legally binding as of last February, so much of Mr. Lewis’s compensation package may go untouched.”
U.S. Pay Czar Tries Again to Trim A.I.G. Bonuses
The federal pay czar is trying to force the American International Group to reduce $198 million in bonuses promised to employees of its trading unit, where problems posed a threat to the global financial system last year.
But the Treasury’s special master for compensation, Kenneth Feinberg, is running into legal hurdles because those bonuses fall outside new rules against bonus payments at companies receiving government assistance. The bonus agreements at issue were struck before last year’s emergency rescues by the Treasury and the Federal Reserve, and thus are not directly covered by the new rules.
The problem is a recurring one. A.I.G. payments early this year to the same employees elicited public outrage, though government officials said then that they had little legal authority to rescind pre-existing contracts.
To strengthen his hand, Mr. Feinberg is threatening to reduce the compensation packages he does control, according to a person close to the talks. That could mean shrinking the pay of other A.I.G. executives — including its new chief, Robert Benmosche — if the firm does not claw back part of the bonuses for the people in its trading unit, known as A.I.G. Financial Products.
At companies that received extraordinary government support, Mr. Feinberg’s task is to monitor and enforce rules governing new pay packages. He can approve or reject cash pay that exceeds $500,000 for top executives.
Mr. Benmosche, hired by A.I.G. late this summer, received a compensation package that includes $3 million initially and about $4 million in stock that he must hold for five years, as well as annual bonuses based on performance.
A.I.G. has a variety of employee bonus programs. The Financial Products group began a two-year retention program in January 2008, before its government rescue, designed to keep skilled employees from leaving and jeopardizing its derivatives portfolio .
After A.I.G. paid $165 million in retention bonuses to that group in March, it promised to try to recover much of the money to quell the uproar that ensued.
But the insurance company has recovered only $19 million of the $45 million it asked the recipients to repay, according to an audit of its compensation program and the government’s oversight.
A company spokeswoman, Christina Pretto, said in a statement that the people who had received that money had “until the end of the year to fulfill their commitments,” and that the company believed those people would honor them.
But the special inspector general for the Troubled Asset Relief Program, Neil M. Barofsky, who conducted the audit, said some of the money appeared to be unrecoverable, because the employees had resigned rather than return the pay.
Other people are still weighing tax issues arising from those bonuses, and some have asked the insurer to dock their paychecks in the future, rather than make a single payment now.
The inspector general’s audit will be the subject of a hearing Wednesday by the House Oversight and Government Reform Committee.
The report stated that Mr. Feinberg had “informally advised A.I.G. not to pay the full $198 million,” scheduled for payment next March, but did not reveal how sharply Mr. Feinberg hoped to pare the bonuses.
The amount of the bonuses at A.I.G. is quite small relative to the record amount of government assistance received by the firm over the last year, roughly $182 billion.
The $165 million in bonus pay made last March coincided with the news that A.I.G. had just posted the biggest loss in American history and would need a bigger rescue package. That led to stormy Congressional hearings and tours of the suburbs where some bonus recipients lived.
Company officials argued at the time that only a handful of the employees of financial products bore responsibility for the disastrous derivatives trading, and it was unfair to blame everybody for the harm caused by a few. The company also said it wanted to honor its commitments because skilled people might resign en masse if bonuses were rescinded.
The new audit pointed out that the bonus program for the Financial Products unit was unusual because it included payments to unessential people. It cited a $7,700 bonus for a kitchen assistant, a $7,000 bonus for a mailroom assistant and $700 for a file administrator.
The audit also described the lack of coordination between the Federal Reserve and the Treasury over A.I.G.’s compensation program. It said Fed officials had their own conversations with company officials about compensation last fall, and were further briefed over the winter by compensation specialists at Ernst & Young brought in to help.
But the Fed did not convey any of the information it had gathered to the Treasury until just before the bonuses were scheduled to be paid in March. Then, the Fed sent an e-mail message to the general counsel at the Treasury, the report stated, warning that the looming bonuses had “garnered press and congressional attention” and would “not be easy for Treasury and the Fed to defend.”
That message promised to supply more detail, but nothing followed for about a week.
“Despite the strong language” of the Fed’s messages, the audit found “that the e-mail did not raise any flags in Treasury.”
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