Citigroup (C) Needs To Pay Phibro Head His $100 Million

The inclination of the Administration’s “pay czar” will be to pressure Citigroup (C) not to pay $100 million due to the head of its Phibro energy trading unit. The amount is an embarrassment to Citi and the government which now owns 34% of the large bank. Many members of Congress and the public will looks at the pay package as a symbol of all that is wrong with greedy Wall St. and ask why financial firms that have been bailed out by the government should hand out such huge sums for compensation.

Citi faces two vexing issues with the payments due to Andrew J. Hall, the head of Phibro. The first is that Hall has a contract which is apparently based on sharing in the profits at Citi’s energy trading unit. The banks faces legal liabilities because of that agreement

The more severe problem is that people like Hall account for significant and important profits at banks like Citi, banks that are still at risk for posted huge losses from commercial real estate loans, credit cards, and investments in derivatives. Hall may be well-paid for his work, but the fact is that he makes a positive contribution to Citi’s bottom line. Cit needs those earnings to partially offset severe trouble in may of its other businesses.

Citi has a chance to alienate Hall which will almost certainly cause him to leave the bank and may trigger a lawsuit over the compensation contract. The government “pay czar” may simply prevent Citi from paying out the money due to Hall. That will send a message to all of the other star employees at big banks that it is time for them to leave and work for smaller, privately held firms or start their own companies, and that will pull billions of dollars in profitable business out financial firms in desperate need of maintaining their most profitable operations.

Douglas A. McIntyre