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.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

I’ve got to disagree. I actually worked on Phibro projects when a newbie at Salomon, and having that as a diversified revenue contributor was good for shareholder interests.

I guess those have really faded.

You say this unit has been wildly profitable, so why ditch it when the other areas of the firm are strugging so mightily? Selling it would generate a drastically discounted price if buyers know it’s a firesale (don’t know if firesale is even the appropriate term in this case). Simply allowing this profit-generating asset to walk out the door for nothing seems like an even worse idea. The only reasonable option would be to keep it in-house in allow the future profits to contribute to weak capital base.

If the unit is a profitable as you say, just treat the 9-figure HR costs as costs of goods sold. You wouldn’t be advocating a struggling firm to shed a profitable division because it high COGS, if the COGS were non-HR, right?

Posted by Dave | Report as abusive

You get what you pay for. Cant ride a Ferrari for the price of a Kia. If the unit is profitable and the trader is good you need to pay. Its more important for us Taxpayers to make sure our money that is invested in Citigroup gets good returns.

Posted by Ram | Report as abusive

They could probably work around the restrictions if they wanted to. Maybe Hall could quit Phibro and form a consulting company that works for Phibro and charges a percentage of the profits.

But if it doesn’t work, who cares. the government is not propping up citi because we need to keep these hedge funds operating, it’s bailing them out because we don’t want to pay the cost of cleaning up after a massive bank failure. We don’t care of Citi no longer has hedge funds, we only care if their banking operations crash and take down a big part of the economy with them.

So here’s the deal, Citi (and BofA), if you don’t have enough capital to stay in business, you can take government assistance (often referred to as welfare), or you can choose to go out of business (scorched earth policy). If you choose to accept welfare, there are certain rules, like you can’t be using any of that money for operations that aren’t essential to the survival of the banking operations. Your choice.

Posted by KenG | Report as abusive

I don’t think that Phibro’s income is going to make or break Citi. I think politics (future funding for further bailouts/capitalization), the economy, and Citi’s existing ‘asset’ portfolio are going to make or break Citi.

Posted by Chuck | Report as abusive

Offer him a slave girl–better yet, one a week (how many do you think Jabba the Hut went through?). He’ll stay for peanuts. Peanuts and slave girls.

Let’s spin off ALL of the PROFITABLE divisions that had nothing to do with Subprime so that there will be nothing left with which to repay the tax payer bail-out. Brilliant.

Posted by JHawk | Report as abusive

JHawk, if the banks sell their profitable non-core divisions, they might have enough capital so that they won’t need any welfare to survive. Or are you in favor of the government buying common stock in these horribly mismanaged companies to keep them from failing?

Posted by KenG | Report as abusive

Andy Hall lives! Arrggghh I worked for Phibro Engergy aka Basis Petroleum which he and his traders drove into the ground so hard Salomon finally got disgusted and sold Basis to a medium sized refining company named …valero. Who promptly turned the refining around and make a handsome profit Andy couldn\’t. Their business model was shove every bad trade into the refinery and make them take the loss to preserver their numbers and bonus. Sounds like another energy trading company named…. Enron? Interestingly while at Phibro we had many friendly dealings with Enron in ventures and software boondoggles ala Next Computers (Mr.Jobs?).

I hope his time has come. He\’ll still have his castle and maybe the china and silver service I remember the traders ate off in their executive dining room.

Posted by whit r | Report as abusive

You are absolutely on point in your assertion, as is Obama in his observation. This type of operation has no place in the world of banking or insurance, which are vital to the economy and cannot be subject to the swings endemic to speculative trading outfits. (Can Congress bring back Glass Steagall?) Operations like Hall’s are speculative and volatile and subject to wild swings in earnings and losses. They make oversize returns when they bet right and incur oversize losses when they bet wrong. Such operations make and lose money through taking positions that are calculated and educated; yet these positions are nonetheless still nothing more than educated bets. AIG’s FP folks were wildly and consistently profitable too, until 2008 when their positions blew up. No doubt Hall is one of the best, but the activity he fills his days with does not belong as an appendage to a bank or insurance company. And despite his prowess and the insinuation that Phibro is consistently profitable, Phibro has in fact lost significant amounts of money at various times over the years. Ask Hall how his positions did during the Gulf War oil spike; better yet, ask someone who worked at now defunct Saloman Brothers, who were left to foot the bill for the trades.

Finally I have hope that the oversize bonuses shall become a relic of the past. Hall, like most other traders, is in a great position, he gets to bet other people’s money and keep a fat share of the winnings. If his bet pays off, he gets a big bonus. If his bet loses, he still has his oversized salary, no personal repurcussions and someone like Salomon Brothers picks up the tab. A better example, did Brian Hunter ever give back any of his $75 million bonus from the previous year after he blew up Amaranth?

Posted by Paul Thomas | Report as abusive

Good idea. Let them walk. Throw away a few more billion dollars in “taxpayer money” so that no one has to watch a news program about somebody’s castle.

Odd that Obama thinks it’s too complicated to run a hedge fund along with a bank, since he’s now running a hedge fund, a bank, an army, a navy, a retirement program, a medical insurer, an education system, a home-lunches-for-old-people-program . . . . Of course, he’s much smarter than the guys who ran Citi, and he’s got a lot more competent people under him, so maybe it will work.

If ( and when ) the socialists at Treasury finally tell Citi that they no longer can pay for performance at the consistently profitable Phibro, then it will be the pinnacle of stupidity in this witch hunt of 2009 in America…… the words ‘ cut off your nose to spite your face’ spring to mind. Despite many people thinking that ‘ people should just be happy with keeping their jobs’ …. the truth is that most talented people will not work for government mandated salaries. Geithner and Co should be careful what they wish for .. or else they will be left with a bunch of empty businesses that will have zero chance of repaying TARP.

Posted by realist | Report as abusive

you are v right. they’re due a blow up. citi should be pleased to flick them and do need to present a perception of risklessness.

not sure i agree with the rest of the logic though, swfs are currently rampaging through most markets like super hedge funds. They’re all tax payer owned, just not western tax payers…..

Posted by sweede | Report as abusive

So we want to let a highly profitable company at Citi go because they are paying a bonus? A bonus to a man who has made billions for Citi and hasn’t had an unprofitable year in 15 years? This company is so going down if we are actually dumping profitable sections to spare the company as a whole some bad press.

Govt guaranteed hedge funds are insane. Spin them off and good luck to them.

Posted by mcnet | Report as abusive

Whit -

With all due respect, Phibro and Basis traders kept separate books. The refining business was bad for a few years, and Salomon (and Andy Hall) had no patience given the bond scandal and the fact that oil refining and trading were not core businesses. Basis lost more than they should have because they didn’t hedge the clean product cracks. Hill, PEUSA, and Basis were acquired and operated for 10 years using the same business plan practiced by Bill Greehy and Valero. You might say timing is everything.

Posted by George | Report as abusive