Why Pandit must sell Phibro
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Maria Woehr has a rather confusing column on Andrew Hall and his $100 million bonus. It’s worth reading, however, for two reasons: firstly, she’s aggregated a lot of good links, and secondly, she serves as a good guide to what the received opinion on such matters is on Wall Street.
Woehr believes that “the figure that the government would like to see Hall accept is something like $0″ — which I suspect is only true if, like Hall, you round to the nearest $50 million. There’s no reason to ask Hall to work for $1 or forego his bonus entirely, as the bank’s executives did, because he (unlike they) is not responsible in any way for the billions of dollars that Citigroup has managed to lose over the past couple of years.
But I think this is entirely wrong:
What’s sad is if Citigroup loses Hall and Phibro due to the bonus issue, it could pose more embarrassment for Citigroup’s CEO Vikram Pandit. The bank will be losing one of its most profitable unit and most likely suffer losses because of it.
It’s not at all embarrassing for Pandit to sell off an in-house hedge fund for a large sum of money. Citi isn’t and shouldn’t be in the business of running hedge funds, and the great thing about Phibro (compare and contrast Old Lane) is that the bank will have not only made billions of dollars in total profits to date but will also make a large gain on selling the business as well. How Woehr can spin that as Citigroup suffering losses I have no idea. All it will have done is remove a big risk factor from its list of businesses: like most highly-profitable hedge funds, Phibro has a lot of tail risk. If it can make billions, it can lose billions too. And since that tail risk can’t be hedged, it’s time for Citi to sell Phibro.
Dan Gross is much more succinct and correct: “When a company fails, it has to sell valuable assets,” he tweets. The good news for Citi is that not only is Phibro a valuable asset but it’s also an asset which Pandit should be looking to sell in any case. This latest flap over Hall’s pay just makes that decision easier.
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Phibro is not a hedge fund
Yes it is.
so bunge and cargill are too, haha.
When selling off a business unit, you’d normally run some sort of NPV analysis of value of asset gain vs. value of future profits.
If the sale of the unit is somewhat “forced”, I’d assume Citi would get significantly less for it than if they were selling simply for long-term strategic reasons. How significant that delta is will determine how hard Citi will fight to keep the unit.
Phibro is not a hedge fund.
@jck, if you google Phibro, you get this:
Provides hedging, derivatives and risk management services.
If you go to their website, they say they are a trading company.
Bunge and Cargill may hedge their business, but they actually sell things like food products, so they’re not quite the same.
so what’s your point?
Well, Phibro deals in commodities, physical and futures and whatever just like bunge and cargill. “Provides hedging, derivatives and risk management services.” doesn’t make it a hedge fund, cargill does that too, but as Felix has written in the past, they HAD plans to run outside money and it didn’t happen, so they are still just a plain commodities dealer.
Phibro is not a hedge fund, they may use hedging strategies in their overall trading, but just like cargill, Sempra, J. Aaron, and many others, they are commodities market makers & dealers. They had very profitable long term positions.
Can someone answer me one question: Does Hall have any personal downside exposure? In other words, is his deal “Make me X, and I will pay you X. Lose X and you owe me X”
If his downside exposure is only limited to zero payout, then this deal is absurd.
Felix its obvious you have zero knowledge about business, economics or making money in the real world. Why would anybody in their right mind risk losing Hall to a competitor? Citi needs to tell the government to get out of their way and allow them to be competitive. Felix like always is clueless.
@Terry, Citi can tell the government to get out of their way when they are able to pay back all of their government loans, and buy back the shares the government owns. Until then, they do have to listen to their largest shareholder and creditor.
And then when they have paid off their loans and bought back their shares, maybe they will stop risking other people’s money (which the government seems to have implicitly guaranteed).
Phibro may be making money now, but I haven’t seen any evidence that any trading company always makes money. And when Phibro does eventually lose money, it will be BofA customers, backed up by the US government, who pay that bill. Which is why a bank shouldn’t be gambling, I mean specualting, I mean “trading”.
and for those who compare Phibro to Cargill, hedging commodities is not Cargill’s main business, they do that to manage the risk of their main business, which is to process and sell unhealthy food.
just today at lunch, a friend of mine was saying “i’m considering buying citigroup stock.”
and i said, “until someone at citigroup can actually explain to you what businesses they are in and how they plan on making money, there’s no reason to own their stock. i’m willing to bet that pandit still doesn’t understand the full range of businesses citigroup owns.”
speaking as a part owner of citigroup, i’m with the likes of felix and keng: phibro should be somewhere else.
1. Cargill actually is something of a hedge fund – see Black River Asset Management and CarVal Investors.
2. It doesn’t sound like Hall & team have a noncompete. Why would a firm pay anything for Phibro without the talent that makes it profitable? This is one reason why hedge fund deals always turn out so poorly for the buyer.
Felix,
To help you connect the dots and defend your conflation that Phibro is a “hedge fund”, please see Raymond Learsey’s article. (link below)
The key takeaway is that repeal of Glass Steagall led to the “unintended” consequence that commodities trading became an acceptable banking activity, although at the time of repeal it was noted as extraordinary, but de minimus, in Citi’s case. As it turns out, other banks (GS and JPM most notably) were most grateful citi was the camels nose and they exploited the opportunity, as any rational capitalist would.
(http://www.huffingtonpost.com/raymond-j -learsy/citigroups-oil-traders-10_b_2515 12.html)
If we conflate the issues that a bank shouldn’t be involved in the commodities business (it shouldn’t) with the issue that commodities trading shops are hedge funds (not so clear, as your commenters point out) you’re in trouble.
Addressing the first issue, it’s pretty clear that banks shouldn’t be in the energy business. An amendment to the Glass Steagall repeal could solve this problem. Valid concerns were raised at the time of the original Gramm-Leach legislation. Those concerns , that banks really have no business being in the energy business (hasn’t Enron taught us anything) have proven to be valid. Legislation to preclude banks from this activity are warranted and could be implemented easily as an amendment to Gramm-Leach. That could be sped along by an orderly disposition of Phibro. This could be followed by an orderly disposition of the energy businesses at GS, JPM, etc.d
The camels nose that led the banks into the energy business may now be used as the camel’s nose that leads us (American taxpayers) out of this disastrous too big to fail banking tent. (Step 1 divest energy market risks, Step 2 divest “hedge fund” type risks)
The second issue of the banks acting as hedge funds is more challenging, although Volker’s view provides the best way forward (as described in the WSJ editiorial)
http://online.wsj.com/article/SB10001424 052970204313604574330513636682466.html
Former Fed Chairman Paul Volcker has been warning for months that such proprietary trading is incompatible—and intolerable—with a taxpayer guarantee against failure. But he was opposed by the Obama Treasury, White House powerhouse Larry Summers, not to mention the ghost of former Treasury Secretary and Citigroup exec Robert Rubin and most of Wall Street.
It sounds like Volker, once again, is the wisest voice in the room. That Summers has any role,or influence in, this debate is jaw droppingly stunning to anyone outside of Wall St ( or would be if they had a clue about his role in getting us into this mess) I’m sure most Americans would prefer a Pecora to a Wesley Mouch (Summers) [sorry for the Atlas Shrugged reference, I couldn't resist] to lead them to salvation.
In the years leading up to the repeal, the argument in favor was that universal banking,emanating from Europe, would put the US at a disadvantage. The European banks were expanding in the US and the american defectors from GS and MS,et al, wanted access to their balance sheets.
Access to ‘balance sheet’ meant leverage. Access to leverage means Prop trading. Prop trading with a solid, gov’t backstopped balance sheet translated to an advantage over hedge funds.
It’s time to strip GS, JPM, Citi, MS ,etc of that advantage.(provided by us taxpayers). Average US taxpayers don’t care if a bunch of rich guys (sophisticated investors in hedge funds) win or lose, but God help you when they finally realize that those rich guys have been speculating their retirement savings with the gov’ts approval. They get it.