Citigroup can’t keep Phibro

By Felix Salmon
April 30, 2009

Citigroup is upset that it can’t pay its star trader, Andrew Hall, gazillions of dollars in bonuses, because of the government’s pay restrictions. Doesn’t your heart just bleed?

The fact is that Citigroup is no longer in a position to pay hedge-fund-like bonuses for hedge-fund-like behavior. Here’s part of Barack Obama’s interview with David Leonhardt:

That doesn’t mean that, for example, an insurance company like A.I.G. grafting a hedge fund on top of it is something that is optimal. Even with the best regulators, if you start having so much differentiation of functions and products within a single company, a single institution, a conglomerate, essentially, things could potentially slip through the cracks… I think you can make an argument that there may be a breaking point in which functions are so different that you don’t want a single company doing everything.

What’s true of AIG is true of Citigroup: you don’t want to graft a hedge fund on top of it, even when the hedge fund is called Phibro and has been consistently profitable for 15 years.

A year ago, I said that Citi should just leave Phibro alone. But we’ve passed that point now, and Citi should let Andrew Hall and his extravagantly-remunerated energy traders do what they’ve been threatening to do, and just leave. All good things must come to an end, and Citi should just be happy that it’s managed to make so much money out of Phibro over the years without it blowing up.

Besides, Hall owns a castle, which means the optics are insurmountable. Jessica Pressler nails it:

Let him go. Spin off the unit, sell it to Japan, hire a monkey to trade oil futures at Citi. Anything to spare us from the histrionics that are sure to ensue once cable news finds out about the castle.

Citigroup should be trying very hard to become a very boring bank which can’t blow up. Phibro has no place in such an institution, and it’s undoubtedly a non-core asset. So I hope that Geithner tells Pandit that, no, he unambigously can’t continue to pay Hall his nine-figure bonuses. Those days are over.

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