Citi’s other prop desk

October 10, 2009

Now that Citi is unloading it’s much-hyped Phibro energy trading group maybe the media can start focusing on the part government-owned bank’s other proprietary trading desk–its Principal Strategies Group.

While everyone has been obessing over Phibro and the excessive $100 million payday for top trader Andrew Hall, Citi continues to quietly add prop traders to this little-known group that uses bank capital to trade stocks and bonds.

Back in the summer, I wrote about how Citi was committing up to $1 billion in new capital to this group of three dozen traders and analysts–even though Citi CEO Vikram Pandit said earlier this year the bank was moving out of prop trading. But the rest of the media remained focused on Phibro, in part because it’s far easier to write stories about Wall Street salaries and big bonuses.

So with much of the financial press blinded by Hall’s outsized compensation package, Pandit’s strategy of reconstituting a prop trading desk that lost a bundle last year continues to get little attention. In fact, The Wall Street Journal, seemingly oblivous to the Principal Strategies Group, didn’t bother to challenge Citi’s contention that its decision to sell Phibro “is consistent with its efforts to slim down and focus more on serving clients, instead of placing financial bets with the company’s own money.”

Excuse me, the whole intent of the Principal Strategies Group is to place “financial bets with the company’s own money.” In fact, a good number of the prop fixed-income traders in the Principal Strategies Group came from Pandit’s own failed hedge fund Old Lane that Citi acquired mainly to get Pandit as its CEO in waiting.

The Principal Strategies Group is really a collection of seven or so hedge funds that follow different trading strategies. So great, Citi is unloading Phibro. But Pandit is trying to make seven other mini-Phibros.

Do you have any confidence Pandit will have more success with these mini-hedge funds than he did with Old Lane?

One comment

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I agree with your point about Principal Strategies. Keep the heat on, it deserves plenty of attention.

But, please, before the Phibro story falls off everyone’s radar screen, have a think ( and maybe an article )about J Aron.

If Phibro was the thin edge of the ‘dismantle the TBTF wedge’, it’s now time to ask (often and rudely) “Why does J Aron still have a room in Goldman’s Financial Holding Company house?”
Now that one of its 3 TBTF FHC peers has had to shed its lucrative commodities trading business, putatively to appease the bonus czar, hasn’t the czar effectively granted the other 3 another sweet competitve advantage over the spun off Phibro, and every other commodity trading house? I’m sure that wasn’t his intent, but …

And just so we’re not just picking on Goldman, JPM got an oligopolst boost too.

Dismantlng the TBTFs isn’t going to come about through a grand legislative/regulatory effort. If its gong to happen at all its going to come from incremental outrages like Phibro, followed by subsequent, “Hey wait a minute” moments as people digest the significance of the unintended consequences wrought by players whose primary interest is somethig else, like the pay czar.

Getting Andrew Hall off the pay czars to do list shouldn’t be the end of this.

Personally I couldn’t care less if Phibro pays Hall 100m. I do care that CITI, as a ward of the state, could own a business that would pay him that. By the same token, JPM and Goldman, as wards by virtue of their FHC status, should also be required to shed those businesses.

At an enormous profit, of course.

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