Should Head of "Phibro" Unit Have His Contract Honored?

An interesting showdown is shaping up between the head of a lucrative trading unit at Citigroup and the US government.

Multiple reports have Andrew J. Hall, head of Citigroup's lucrative "Phibro" energy trading unit, contending that he is eligible for around $100 million dollars in compensation this year.

Here's the situation:

1. Hall is the leader of a lucrative trading unit that is a part of Citigroup, Inc.

2. Hall has a signed contract with the company that calls for him to be compensated based on Phibro's performance.

3. Phibro is making great gobs of money for Citigroup, and is one of the company's most profitable units.

4. Hall contends that he should be compensated accordingly, based on the language in his contract.

The problems?

a) Citigroup has received about $45 billion dollars in total government aid.

b) The US government has a large stake in Citigroup.

c) Citigroup has lost around $30 billion dollars over the past year and a half.

d) There is ZERO tolerance right now for large compensation packages at firms that have received government funds.

Remember the outrage when AIG paid out all that bonus money AFTER receiving hundreds of billions of dollars in government aid?

The US government is trying to avoid going down this road once again.

Enter Kenneth Feinberg.

Feinberg is a lawyer who is responsible for overseeing compensation packages at companies that have received the largest amounts of government aid.

Feinberg has the authority (granted by the US government) to reject pay packages that are deemed to be "excessive". Many people are of the opinion that Feinberg would reject the $100 million dollars in compensation that Andrew J. Hall is reportedly asking for.

Here's where it gets complicated though.

The US government wants for Citigroup to eventually return to profitability and become a strong company once again.

"Phibro" is one of Citigroup's most profitable divisions. If Hall leaves, "Phibro" almost certainly dies.

Hall has a signed contract with the company stating that he will receive a certain amount of compensation based on the overall performance of "Phibro".

If the government (which owns a significant % of Citigroup) decides to reject Hall's request, then Hall will very likely:

a) sue, and
b) move to another firm

Firms such as Goldman Sachs and JPMorgan Chase & Co. could pay Hall whatever they wanted, as they recently paid back their debt to the government. This means that they are no under any government scrutiny in terms of compensation packages.

So, if you are the US government, what do you do?

Do you pay Hall what he is asking for (and what his contract with Citigroup stipulates that he should be paid) and retain one of Citigroup's most profitable units?

Or do you reject his request, which would almost certainly result in him not only launching a lawsuit, but also walking to a firm such as Goldman Sachs? If Hall walks, then hundreds of millions of dollars in profits walk out the door with him, and this will weaken Citigroup even further.

If you are an American, then YOU are a stakeholder in Citigroup.

Would you give Andrew J. Hall the finger and let him walk?

Or would you pay him what he is asking for, thus preserving one of your most profitable units?

Source: AP - Citi Exec's Pay Package May Spark Gov't Showdown

Filed under: General Market News

37 COMMENTS - What Say You?

Comment by Monique on July 26, 2009 @ 2:59 am

I would pay to keep him. Professional sports is a good example. You pay the top players the most so that they keep your team alive. If the team dies, it costs a whole lot more to revive and return it to previous standings.

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Comment by JJJJJ on July 26, 2009 @ 3:01 pm

Pay the man. think of risk reward. The risk is citigroup pays 100 million. Reward, hundreds of millions of dollars in prfot, far exceeding what they pay him. Would you pay a man $1 a year if he could make you $10 a year?

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Comment by Hank on July 26, 2009 @ 7:52 pm

Citi group should never have gotten a dime from the government. They should pay the man what they agreed to pay him, but their loan from the government should be paid first. They can defer his payment until they own their own company again.

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Comment by Mike Young on July 26, 2009 @ 8:00 pm

Let him walk-see if he can continue his-LUCK-assign IRS and FBI, see if he is legal and pays taxes.
Who signed the contract with Hall?
Did the Board approve and does it meet Citi's Charter and operating proceedures?
Some of the board members should be brought up on criminal charges.
The contract itself is most likely illegal.
As we look over the entire compensation issue, there is very little special talent-mostly luck!And
a hard working staff that gets nothing.

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Comment by Gary on July 27, 2009 @ 3:21 pm

If I were able to earn north of 100 million trading, I would NOT be willing to take home a salary of even 50 million...why would anybody else. He deserves a significant portion of the money he makes becasue HE MADE ALL OF IT. Citi at this point needs to be counting their blessings for having boated that bass, and be fair about how they pay the man.

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Comment by Allison on July 27, 2009 @ 4:44 pm

Absolutely. The business world is all about reputation. If Citi denies a top performer his/her pre-arranged contractual pay, then who's to say that the same wouldn't happen to you (my guess is you probably don't bring as much money in as Hall). Such a breach of a contractual arrangement would result in good people staying clear of those companies. If we, as taxpayers, ever want to see Citi thrive and do well, we had better retain good people.

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Comment by cs on July 28, 2009 @ 2:40 pm

Mr. Hall�s compensation is ludicrous for the following reasons:
1. �Phibro�s contribution was especially important. In 2007, Phibro contributed $686 million to Citigroup, and $487 million in 2006, according to the annual report.� These are not earnings but revenues of which between 30-35% went for bonuses and another 15-25% went for operations, salaries, premises and brokerage commissions.
2. Given that existing Citigroup shareholders have been diluted 35% prior to the preferred shares for common exchange and another 75% after the exchange paying the increment bonus has been an extremely costly exercise to shareholders.
3. Morgan Stanley and Goldman Sachs have been making in excess of $2 billion dollars a year in commodities for the past five years. While best year for Citigroup was around $700 million in 2006. The former only pay around 15% of their revenues as bonuses to their trading teams. Also they have promoted growth and expansion while Phibro has stuck with an archaic and inflated pay scale and has no incentive for growth.
4. If Mr. Hall were to leave to form his own hedge fund he probably could raise billions of dollars, but he would only get 20% of the upside and be subject to high water marks. At Citi he has received upward of 35% with no downside clawbacks. Plus, he would have to devote a substantial amount of his time to investor concerns and fund the new operations and compensation and benefits. Mr. Hall�s cost of capital at Citi is zero because they don�t charge him for his use of this expensive and risky capital. In the outside world, investors would be extremely wary. At best it would take him six months to raise the capital, set new guidelines and build the infrastructure to setup a hedge fund. If traders left Citi all their non-vest shares and options would and should be voided because they are tied to being employed by Citi. This could represent millions for many.
5. Mr. Hall�s is not always right. After the planes flew of the aircraft carriers on the way to their first strikes in the first Gulf War of the 1990s Mr. Hall lost a purported $200 million that day and subsequently lost much more. Adjusted for inflation and the higher volumes and volatility that would be upwards of a billion dollars today.
6. Commodities trading is not without risk. In fact it is zero sum where participants over time will have an expected value of zero and is extremely risky. Mr. Hall�s style of being an uber-bull will eventually come up and bite him. Ask the investors an Amaranth, SemGroup, MgAg, Enron, Mitsui (copper), Ospraie, and MotherRock.
7. Mr. Hall made money this year I oil trading. But, I suspect much of it came from the shape of the oil curve. The curve was in steep contango and Hall was able to buy physical oil in the front end of the curve and store it tankers and sell it into the higher forward market and reap returns in excess of 40%. This doesn�t take extraordinary ability and it only takes a balance sheet and cheap funding to execute the strategy. Why should Citi pay 30% for these types of transactions?
8. Lastly, why should the government subsidize a business that is against the interests of the American public. Mr. Hall has made a fortune by driving oil prices up in 2005-2009. Congress is looking to place limits on energy trading and it should start with Mr. Hall.
There is no doubt Mr. Hall has had some successes, but it is as much due Citi�s ignorance on capital allocation, lax risk management or Citi�s blind eye towards the risks involved as long it creates revenues. Isn�t that how Citi into it current mess? But, I guess a so-called trader and a failed hedge fund manager like Vikram Pandit can�t see the obvious.

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Comment by cs on July 28, 2009 @ 3:12 pm

The wealthiest 1 percent have never had it so good.

"According to government figures, 1-percenters' share of America's total income is the highest it's been since 1929, and their tax rates are the lowest they've faced in two decades. Through bonuses, many 1-percenters will profit from the $23 trillion in bailout largesse the Treasury Department now says could be headed to financial firms. And most of them benefit from IRS decisions to reduce millionaire audits and collect zero taxes from the majority of major corporations." -Hammer

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Comment by Jack Harris on July 31, 2009 @ 5:25 am

A contract is a contract. The amount of money is worth him sticking to Citi. But then again, I am sure there are other firms out there that love to get their hands on this guy..

What is a contract worth if not played by?

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Comment by azumaguy on August 01, 2009 @ 8:25 pm

Another talented greed-head who seemingly made millions by jacking around with petroleum pricing and such that brought us nearly $5.00/gallon gasoline last year. What a jerk!

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Comment by Michael on August 02, 2009 @ 9:57 am

PAY THE MAN!!!!

This has nothing to do w/ how much YOU paid for gas. If you want someone to blame for that, blame CHINA for growing and blame the rest of the world.

Citigroup has a pre-existing contract with Hall, before the bail out, before the company went South. If Citigroup won't honor its contract with Hall, and employee that made huge dollars for the company, why should it uphold any of its other contracts, ie. the contract w/ the government?

I don't think most of the country understands the real issue here. PAY CITIGROUP EMPLOYEES TO PERFORM, AND THE COMPANY WILL PERFORM. DON'T PAY THEM, AND 45 BILLION DOLLARS WILL BE LOST.

The press and government is making it sound like he Madoff-ed the country or something.

Pay Hall or Citigroup with become the next government owned, inefficient and unprofitable bank with zero intelligent employees.

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Comment by Darryll R on August 03, 2009 @ 9:21 pm

This is not a question of whether he is owed the money. That answer is a yes. This is not like a hedge fund either, as Mr. Hall is under contract. So with that said, the question is should he be paid a bonus while other executives of bail-out companies were not. Based solely on that, it is a clear "No". His performance ($2 billion over 5 years)is exemplary. However, this is now a political decision and it is unlikely he will receive his well earned bonus.

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Comment by Tyler on August 03, 2009 @ 9:29 pm

You need to pay the man he has made Citi $2 Billion over the past 5 years, they are fools if they don't pay the man.

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Comment by bob the builder on August 03, 2009 @ 9:41 pm

let the prick sue, take control of the company and let the government profit what it can. the bailout was a bad idea from the start and so they need to take more responsibilty.

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Comment by Bob on August 03, 2009 @ 9:51 pm

The problem isn't Hall, it is a system which is based upon, and allows, such trading.

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Comment by DCS on August 04, 2009 @ 4:18 am

uh, yeah by contract he must be paid,but can't anyone see the kind of corruption going on?? This greedy little bastard Andrew J. Hall should rot because that money rightfully belongs to the American people, remember the $4per gal gas prices?? yeah I have been working two jobs for the last two years because of greedy fucks like him. Legality of contract aside, that is not his money and it is stolen, this country is falling apart because of this shit, its pathetic

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Comment by Brooklynite on August 04, 2009 @ 8:34 am

I agree with "Monique."

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Comment by Eric on August 04, 2009 @ 8:35 am

$4/gal gas has nothing to do with supply and demand. It has to with greedy puds like Hall trading in a commodities market they don't belong in. Supplies were up and demand was low and they still drove oil prices over $100/bbl. The government should stop this outrageous fleecing and Citigroup should be able to pay his bonus AFTER they pay back their bailout WITH INTEREST!

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Comment by Mel on August 04, 2009 @ 8:41 am

Is Andrew J. Hall Repubiclan? Democrat?

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Comment by Brian on August 04, 2009 @ 9:13 am

With such a large sum of money, a payment plan would definitely be in consideration.
Because of contracts of this size, future agreements should be restructured.

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Comment by Joey B. on August 04, 2009 @ 9:15 am

This appears to be a legal issue and nothing more. A contract is a contract, period - end of story. It should be honored, regardless of the bias shown in the comments herein. Whether one thinks that oil commodity trading is immoral, unethical, or otherwise, the practical fact remains that Mr. Hall is owed money via a duly-sworn and signed legal document.

Pay the man, please, and move on.

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Comment by Jonathan D Steffen on August 04, 2009 @ 10:33 am

Give him the finger and let him walk if: He does not donate 50% of his money to food pantries and other people in need in America. Would Hall have a company to work for in the first place if it wasn't for us, the American people? Seems fitting to me that he return a portion of his profit sharing to the very people he made the profits off in a good faith effort to offset OUR forced willingness to help his company.

-Jonathan D. Steffen
suitefivemedia@yahoo.com
www.SuiteFiveMedia.com

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Comment by Lou on August 04, 2009 @ 11:22 am

I don't see what all the fuss is about. The man signed a legally binding contract with Citigroup. He made millions of dollars for the company. Why should he be "punished" b/c the other departments inside Citigroup failed? Put it this way, one could argue that Citi would have failed even more had it not been for the revenues he brought in. And in regards to telling him to donate half the money to charities - get a life. While I'm all for making charitable donations, I would imagine he is already doing so (we just don't know b/c it hasn't been discussed). How many of you make donations of even 5% of your annual earnings? Not many I presume. Stop crying b/c he made millions for himself. Hall takes very calculated risks in his job everyday. He gets no salary - he keeps what he kills. For those here who are telling the government to give him the finger, he'll just sue and go somewhere else. There's no one here in the comment thread that didn't have the same ability/opportunity to go get a securities license, get a job with even the most abysmal of trading firms and do what he does. And in regards to those of you who say he shouldn't be paid simply b/c of the oil that he trades, well that's not his problem, that's OUR problem. Until the Feds and the SEC stop allowing people to trade certain commodities, then they're gonna continue be traded, people will make and lose millions, and we'll be the one's who win or lose.

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Comment by Dwayne Nelsen on August 04, 2009 @ 11:31 am

Fire this junkyard boy, he is not worth 100 mil!!!!!!!!!, What a joke he is. Use the money to help with fuel cost.

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Comment by dj on August 04, 2009 @ 11:40 am

Funny no investgation (sp)in how the players made oil go to $147...they gamed the Oil trading market by pushing very large oil contracts around ,not a real demand side market(GIT)....anyone have a link to detail money flow?

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Comment by Christopher on August 04, 2009 @ 1:03 pm

Even though I don't think at this time in America no one should be getting that type of pay off, he is legally entitled to that money. I would hope he is a caring human being and will donate a lot of the money to charities or something of that sort, but never the less you can't deny the man his money. He did what he said he would do for this company, exceptionally at that, so he should get what he was promise. Even if it is unreasonable at a economical time as this one.

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Comment by Lionel on August 04, 2009 @ 1:16 pm

Mr. Hall prolly has more money under the seats of his couch in his home then I even have in my whole bank account. I'm no where near rich or even just well off. But even I can see that Mr. Hall is just doing a job that he was paid to do and should get his money no matter what we think. The man not killing or stealing illegally. He just doing his job and buy shit like everybody else. Pay the man Citibank he just one person and you are many. He may have a small part in the gas prices going up and down, but don't be fooled... there are alot more assholes in that mix we don't know about that has alot to do with it also.

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Comment by Larry O on August 04, 2009 @ 6:49 pm

Mr. Hall if you think you should get paid $100 million dollars in bonus money from a company that took bail out mony from tax payers and you help to drive up the price of gas, made self employeed trucker lose there jobs all over the united states with this price jacking. Then take the money and spend it well...you really derserve it !!

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Comment by Jay on August 05, 2009 @ 2:28 am

All these people arguing against Hall being paid are just jealous. Hate him or love him, he is apparently a good trader (from all I have heard, and noting I am not a professional in this things). And he does have a contract. And no matter whether some people (who probably have no idea about contract law) think the contract is illegal or not, it is still a contract and valid in law. I doubt Citigroup, with all its armies of lawyers, would sign an "illegal" contract". And trust is the basis of such business as banking and finance, and if Citigroup breaches this contract, they are NO good. This case is NOT an issue of morality, but rather a simple contract, signed and stamped, that has to be fulfilled. bringing politics into it is simply stupid. And bringing jealously into it is just plain petty and amazingly stupid. If some people think bringing in large amounts like Hall does is easy, how comes they don't do it? The guy worked hard, made loads of money and is up for his payday. GIVE HIM HIS MONEY!!!!!

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Comment by Pete on August 07, 2009 @ 7:15 am

It's not what you deliver- it's what you negotiate. Pay the man.

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Comment by Hollis Dick on August 10, 2009 @ 3:01 pm

The Us Government should have allowed citi Group to go Bankrupt file Chapter 11. Pay mr hall 10cents on the dollar or some such number .

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Comment by MAx on August 13, 2009 @ 3:52 am

Agree with Monique. Basketball is just a game, but paying Lebron James $20 million a year is a business decision. He wins, he sells, you earn.

Similarly, paying Andrew J. Hall $100 million to make many times that amount for your company is a smart business decision, and is indeed the essence of capitalism. Furthermore, whereas Lebron will get paid his $20 million even if he gets hurt, plays badly or his team has a terrible year, Mr. Hall is paid his mega-millions IF AND ONLY IF his group at Citi makes huge profits. His pay is issued as a proportion of his earnings.

The fact that Hall's group happens to be one bright spot on a sinking ship does not give the US government the right to penalize him. IF IT WASN'T FOR HALL, THEN THE GOVERNMENT, AND THE US TAXPAYERS, WOULD BE FORCED TO BAIL OUT CITI WITH MORE MONEY!!!! He was personally responsible for SAVING the taxpayers BILLIONS by helping Citi fall slightly less hard, and boosting their balance sheet towards the positive (albeit still hugely negative).

Capitalism and the free market are the essence of American society and the American dream. Don't destroy it. Nurture it.

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Comment by Mike on August 13, 2009 @ 2:38 pm

Here's some free legal advice for you all. If Citigroup owes Hall $100 million, then a judge will order Citigroup to pay Hall $100 million. That's what contracts are all about. You can whine and cry call people names, but Citi can't "pay him 10 cents on the dollar." If they don't pay him, they will end up spending $500k to litigate this and will end up paying Hall's fees also. They Citi will be out $101 million and Hall, as opposed to $100 million and keeping Hall. That's what you get when Obama enters the game.

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Comment by Jim on August 13, 2009 @ 2:42 pm

CS- if you know so much about energy trading, why are you blogging?

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Comment by Barack Obama on August 15, 2009 @ 3:48 pm

So you Americans want me to pay this guy $100 million after he drove the price of gas to around $4 last summer to make money for a company you own as a taxpayer? Ok, I will especially if you want to spend $60+ to fill up your tank and waste your tax dollars on bailouts! I think we should let him walk and regulate the "energy trading" industry. Why should we let them drive up the prices of ga and oil????

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Comment by Taowave on August 15, 2009 @ 4:07 pm

Pay the man his money as he earned it.HOWEVER,have a lockup period of 5 years or so,or place some restrictions on paying in full.These firms still havent learned their lessons.Traders must have a significant vested interest if they are allowed to "punt" s large as they do.You simply cn not have performnce based payouts for short trading window.If you dont have a high water mark,the trader has the perfect arbitrage opportunity with shareholder/taxpayer money...

Mr Hall and the rest of the masters of the universe need to have significant skin in the game

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Comment by Daniel on August 17, 2009 @ 12:50 am

Pay him. But tax him at 75% above the first 2 millions.
As a matter of fact tax every single $ above the first 2 millions at 75%.
Give a break only to those guys directly investing and creating jobs in USA.

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