Ooh, this is getting interesting. Sports fans may recall that as of last week, Citigroup was refusing to back down on the issue of the contract for Andrew Hall, the head of commodities trading unit PhiBro, which could be worth as much as $100 million this year.
A side comment: Hall seems to be trying to work out a deal to continue with Citi in some fashion, most likely as a spin out with Citi holding a minority stake. But query if this does anything to help the suffering American taxpayer. If Citigroup is still providing all or most of the funding for the business, there is no reduction in risk. Citi could conceivably wind up shouldering a lot of the funding risk and getting considerably less upside.
The fact that no one else appears to be wooing Hall is also telling. This seems to confirm a suspicion of mine, that Hall has to have cheap funding, meaning a big balance sheet. He probably can’t secure enough low cost, funding to make the same money he does at Citi. And raising funds (the equity for the fund) is hard and time consuming. To a person, everyone in the hedge fund and PE businesses says that fundraising is the most difficult and unpleasant aspect of the job.
So if Hall is such a money spinner, why are no other big bank wooing him? One reason might be that all the logical suspects are on government life support (not quite true but close enough) and they may feel they don’t want to press their luck. Or it may be that they know about Hall and don’t want to take him on (perhaps they don’t want to back big bets right now). A final possibility is they suspect he will earn less if regulators are successful in implementing measures to dampen commodities speculation, particularly in oil.
Back to the main thread. The last move was that Citi asserted that the pay chieftan, Kenneth Feinberg, had no authority over Hall’s contract because it was entered into prior to February 11, 2009, when the law establishing the pay czar authority took effect, at least according to the New York Times. That is certainly the view Citi is taking.
Yet Feinberg is now claiming broader authority to claw back funds under the TARP. This is certainly not what was provided for in the legislation, at least not as generally reported. The executive comp restrictions were seen as weak, applying only to golden parachutes. Now perhaps there is some ambiguity in the language, but I doubt it. So why would Feinberg assert he has authority he doesn’t, unless perhaps they can argue that the contract was somehow invalid?
Consider this report tonight from Reuters:
Kenneth Feinberg, the Obama administration’s pay czar, said on Sunday he has broad and “binding” authority over executive compensation, including the ability to “claw back” money already paid, and he is weighing how and whether to use that power.Feinberg told Reuters that Citigroup Inc included the contract of energy trader Andrew Hall in submissions due Friday by seven major companies still locked in the federal government’s TARP Program…
“Whether I have jurisdiction to decide his compensation or not, we will take a look and decide over the next few weeks,” Feinberg said …
Feinberg said on Sunday that decisions he makes will be “binding,” but that the law limits his power over contracts signed before February 11, 2009.
He also said he has the authority to use a “clawback” provision to go after compensation for executives from any company that received money from the U.S. Treasury’s Troubled Asset Relief Program.
Asked if he could use that clause to target a firm like Goldman Sachs Group Inc, which paid back $10 billion in bailout money, Feinberg said: “Anything is possible under the law.”
“I can claw back, but we haven’t focused on that at all,” he said.
So notice what has happened. Citi decided to file documentation on Hall Friday. That suggests either that they want to look minimally cooperative or that they are not as certain of their position as their bluster of last week suggests.
Oh, and to you readers who claim I am in favor of breaking contracts, I suggest you familiarize yourself with basic concepts before making charges.
I said that the normal procedure was to go over the employee’s conduct with a fine tooth comb. Why? Even f Hall’s contract does not have a clause discussing termination for cause, violating written company policy is considered a contract violation. Many big producers are cavalier about company rules. I would be surprised if Hall did not fall into that camp.
For instance, Hall probably has signing authority for expenses of his unit up to a certain level, and probably approves routine staff expenses. He’d thus be responsible not just for his own activities but also those of his team.
So remind me about sanctity of contracts again? It’s OK for someone like Hall to break a contract, but it isn’t right for Citi to go looking to see if he has and if so, to use that fact to their advantage?
The other bit is parties require people to sign contracts all the time with absurd provisions that they do not intend to rely on. Most of the time, despite the silly language in most American contracts that the contract is the sum total of the deal, nothing more or less, there often are significant verbal representations made outside the written deal, and they are sometimes enforceable.
So contracts in theory and contracts in real life are two different matters. For instance, my book contract calls on me to deliver an index along with the rest of the manuscript as my official submission. That is clearly absurd, Palgrave even admits it, because you can’t prepare an index until you have page proofs made from the manuscript submission! The contract also calls for the delivery of a typewritten manuscript, which is not in fact what I was told to deliver.
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I wonder if they can force the bonus as Citi stock not to be redeemed until 2012.