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