Citigroup sheds Philbro for $250M, avoids row over massive pay package

Citigroup Inc., the recipient of a multibillion-dollar bailout from taxpayers, said Friday it sold its commodities trading unit to Occidental Petroleum Corp. for $250 million, defusing a potential showdown with the government over a lucrative pay package for a star trader.
Citigroup, already closely watched by the government because of its $49 billion in aid, was under further scrutiny because of the estimated $100 million in 2009 compensation for Phibro trader Andrew J. Hall.
However, in avoiding a possible confrontation with the federal government, Citigroup will lose a unit that earned an average of $371 million annually during the past five years, a heavy price to pay for a bank that needs to generate income to repay the Treasury.
In return for the money it provided Citigroup, the government now holds a 34 percent stake in the bank. Citigroup said it did not agree to the sale because of government pressure. Meanwhile, officials at the Treasury Department declined to comment directly when asked whether the government had pressured Citigroup to dump Phibro, its huge pay packages and the volatility that goes along with trades in the energy market.
It also was not known whether the Obama administration’s pay czar, Kenneth Feinberg, would continue to review Hall’s pay package following the sale to Occidental. Feinberg is reviewing compensation at Citigroup and the six other banks that have received exceptional assistance from the government.
Treasury spokeswoman Meg Reilly said in a statement, “We are not going to provide a running commentary on that process, but it’s clear that Mr. Feinberg has broad authority to make sure that compensation at those firms strikes an appropriate balance.”
While the government has questioned banks’ pay practices since the financial crisis that erupted a year ago, it has also taken issue with the companies’ trading units. Many banks drove their profits higher by dealing in risky securities and commodities, and they turned to the government for help when they piled up billions of dollars in losses.
The sale of Phibro could be the first in a series of actions taken by banks to satisfy the government.
“What you should expect to see is other banks — whether it’s Bank of America or J.P. Morgan or Wells Fargo — will also be forced to sell divisions like this,” said Richard Bove, a banking analyst with Rochdale Securities. “You should expect to see pressure on Morgan Stanley and Goldman Sachs to reshape their business so they do less proprietary trading.”
Proprietary trading includes transactions such as stock, commodities and bond purchases and sales that banks do for themselves in hopes of increasing their profits.
Los Angeles-based Occidental said Phibro’s management team, including Hall, will stay with the company. Phibro executives agreed to make a significant investment in the trading firm, with returns on those investments tied to company performance. The company said current and future bonuses for the management team will be retained by Phibro, and paid out later.
Phibro has been profitable each fiscal year since 1997, making about $200 million per year in pretax earnings from 1997 to 2009, Occidental said.
The sale consists of cash, marketable securities and commodity positions. The sale is expected to close by the end of the year.