Why Pandit must sell Phibro
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.