Citi’s $100 Million Trader Exempt From Reach of Pay Czar?

The most interesting aspect of the latest stage of the tempest-in-a-teapot over now famous Phibro trader Andrew Hall’s contract. which could reap him as much as $100 million in 2009, is that Citi appears to be girding itself for a fight with the government over it. This stance suggests several possibilities, which by the way are not mutually exclusive:

Citi is going to fight every and all pay restrictions on general principle

Citi is really dependent on Hall’s earnings, which means the rest of the bank is much weaker and more badly managed than even cynics think

Citi is willing to negotiate a spin-out of Hall, but if the government intervenes, Citi’s negotiating posture will be weakened considerably.

Now of course, this list does serve to highlight the complete and utter lack of concern that the big bank has for propriety and social responsibility (although at this point, it verges on belaboring the obvious). The government should be backstopping ONLY critical banking functions, not proprietary trading, and particularly not in a the oil market. Oil has a proud history of price manipulation, as demonstrated by the fact that OPEC moved away from pricing its contracts based on spot prices, which were gamed, to a weighted average of future prices. Even the CFTC has come to the view that speculation can and has influenced oil prices.

The reason the government continues to behave in a schizophrenic fashion, getting tough on issues that are largely symbolic, is that the public has increasingly caught on that it is being had, that we all are paying tremendous subsidies to keep the financial system intact, with nary a demand made of bankers: no requirement that they renegotiate debt, no shared suffering by bank bondholders, who are supposed to be risk capital, no restrictions on risk taking. The rationale for saving the banks is that they are crucial to the economy.

With such extensive safety nets, there are ONLY two approaches that make sense. Either figure out a way to let banks fail, even very big ones, or treat them like utilities, with extensive controls over how they operate. But since a big bank failure could not be resolved overnight, and it also could not be permitted to collapse, that means the authorities would need to be willing to take it over and wind it down. But that looks like nationalization, and we don’t do that in America.

But it seems we aren’t wiling to get tough with bankers either. Geithner is able to work up a rage as far as Shiela Bair is concerned, but when he calls the banks in and chews them out over their failure to do loan moss, no one takes him all that seriously. Yes, the bankers will go back and cranks up the volumes to look like they are complying, but since they make far more off the current system, expect continued foot dragging and procedures designed to produce mods that will fail.

And from Citi’s standpoint, $100 million for Hall is a screaming bargain. After all, they paid $800 million to secure CEO Vikram Pandit’s services, and what do they have to show for that?

Oh, and to clarify my earlier remarks on Hall’s contract, 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. 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. And far more often than not, the risk-seeking big producer types push the envelope on company guidelines. Trust me, if Citi wanted Hall out. they can probably find contract violations if they looked hard (or maybe even not hard at all). They are making it abundantly clear they are not playing ball on this one.

Also notice some reporting differences between the New York Times, Reuters, and the Wall Street Journal. First, the Times:

Citigroup is planning to claim that an energy trader who is due to receive compensation of $100 million this year should be exempt from review by a federal authority given responsibility for setting pay packages at financial companies that received taxpayer bailouts, executives at the bank said Wednesday.

Such a claim would come as the Obama administration is set to begin examining the pay packages and, if accepted, could set off a new wave of criticism from the administration and from lawmakers already incensed over recent Wall Street pay packages.

Citigroup executives say the trader’s compensation is exempt because it is part of a contract signed before the law establishing the review system was passed….

In recent discussions with senior executives at Citigroup, which has received $45 billion in taxpayer assistance, Treasury officials sent signals that they would almost certainly reject Mr. Hall’s proposed pay package as excessive….

The law establishing the review, passed on Feb. 11, provides that employment contracts signed before that date are exempt from review if the Treasury secretary concludes that they are valid contracts….

The companies that are required to seek approval of pay packages have until Friday to file proposed employment contracts for their 25 top executives and highest paid employees. Mr. Feinberg then has 60 days to determine whether to accept them. While he cannot reject Mr. Hall’s contract if it was signed before Feb. 11, he has the authority to issue advisory opinions, which while not carrying legal weight could have significant political clout with Congress.

So the Times spends the two third of the article discussing Citi’s posture, and in the last 1/3 mentions the legal stipulations and indicates strongly that Feinberg has no authority to break the contract.

By contrast, Reuters goes straight to whether Citi’s stance is correct, and suggests things are not that clear cut:
Citigroup Inc’s contract with an energy trader who may be owed up to $100 million in compensation this year is exempt from

rulings by the Obama administration’s pay czar, a source close to the bank said on Wednesday.

While pay czar Kenneth Feinberg has authority over Citi’s 100 top-paid employees’ — and Hall surely ranks among those — the source said Hall’s contract will be exempt from review because it was signed before a cut-off date of February 11, 2009.

But not everyone who has examined the issue agrees that trader Andrew Hall’s contract will escape scrutiny. A separate source familiar with the matter told Reuters Feinberg will have flexibility in applying his authority on a case-by-case basis, potentially impacting future outsized payments to employees.

As the debate raged over what power the pay czar will possess, two leading U.S. lawmakers warned on Wednesday of signs that companies bailed out by taxpayers were resuming risky pay practices and urged the Obama administration to act on limiting bonuses.

The Journal says Citi and Hall are trying to structure a deal to improve its optics this year and reduce his upside next year:

Energy trader Andrew J. Hall has proposed to Citigroup Inc. that it modify his contract in a way that would avert a potential confrontation with the Obama administration’s pay czar but likely cut his cash payout next year, according to people familiar with the situation.

The discussions include converting a substantial chunk of Mr. Hall’s compensation for 2010 to equity from cash, these people said. A deal wouldn’t affect the head of Citigroup energy-trading unit Phibro LLC’s ability to collect as much as $100 million for this year, but it would expose him to the risk that his compensation suffers next year….

Mr. Feinberg can’t reject existing contracts like Mr. Hall’s, but he can prod companies to renegotiate payments he deems excessive. If that doesn’t work, he is expected to reduce future compensation to adjust for the contractual amount.

The energy trader is considering an appeal to Mr. Feinberg with a letter that would include details about the huge profits Phibro has generated for Citigroup compared with the capital it uses and the unit’s independence from parts of the financial giant that have generated massive losses since the credit crisis erupted, these people said.

Note two elements of this angle. One, if Hall is willing to accept a meaningful reduction in his deal (as opposed to cosmetic, which this may well be) it says the idea he can get as good a deal elsewhere is exaggerated. Second, the letter makes clear his business is non-core. These banks simply refuse to accept the basic concept: if Hall is at Citi, he benefits from a government backstop, and the state cannot afford to throw safety nets under high risk ventures. The state should backstop only essential financial functions.

One could say we will see soon enough, but given Team Obama’s bank friendly stance, they are unlikely to be serious about fighting this fight. Look for them to find an excuse to declare victory and decamp. I’d bet the efforts to craft a deal that allow the Feds to act like they prevailed, even if the economic substance is largely intact, will be hailed as success.

And in an amusing related story, the Financial Times reports that the FDIC has sent Citi to the woodshed and is making the bank hire a HR consultant to assess whether management is up to snuff, a non-uncommon demand for troubled institutions.

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  1. attempter

    It's clear that we are completely in the realm of politics by now. Only pro-bank scoundrels still try to claim that there's any effective "rule of law" where it comes to this level of corporatist crime, where the law has in fact been completely captured.

    Is the "rule of law" effective?

    1. It would not have been completely castrated in the first place, allowing this psychopathic parasitic financial sector to run rampant and crash the whole eocnomy.

    The rule of law, in this case strong financial regulation, would have remained intact. The repeal of Glass-Steagal and the passage of the CFMA, to give two examples, do not represent a differing, wrongheaded but otherwise "valid" viewpoint on the rule of law. They represent the abdication of the rule of law, as they were consciously undertaken against the public interest on behalf of a criminal enterprise.

    (For that matter a healthy society would never have allowed the dismantling of its real economy in the first place the way America has under globalization and financialization.)

    2. The welter of Fed and Treasury programs including the TARP have consistently been sold to the public under false pretenses (e.g."the TARP is to get banks lending again") and were negotiated under circumstances unfavorable to the investor/shareholder. E.g. why did Buffett get such better terms for his Goldman investment than Paulson did? Because Paulson criminally negotiated against his clients' interests.

    So nothing in the TARP, and other "facility", or any related laws like on "compensation" has any validity. It's all in the realm of political crime.

    3. At every particular point, the adminstration, the banks, and the media are simply making things up as they go along, with the goal of the first two always being to maximize extraction from the public, and the goal of the third usually to justify and sell this.

    In all this "law" is simply a political tool to be either used for cosmetic purposes or evaded.

    That the two news accounts cited above can have such differing views simply reflects how one propaganda purveyor is more committed than the other to pushing the corporate line, or that the administration itself, however much it celebrates Hall and this bonus in principle, is still queasy about the politics of this example and uncertain what it wants to do.

    4. Of course BofA is absolutely clear about what it wants to do. It is shameless and incorrigible, as are all the banks. "Law" as they have come to corrupt it cannot deal with this level of entrenched crime. When you allow a cancer to metastasize this fully, it's no longer possible to extract it with precision measures.

    Radical, aggressive, invasive, even disfiguring surgery is needed.

  2. RTD

    "Citi appears to be girding itself for a fight with the government over it"

    Doesn't the government own 30%+ of Citi now? Citi fighting the government? Isn't that reminiscent of Fight Club?

    Citi needs to be broken up immediately. Bailout funds being handed over to traders with the remaining funds used to pay lawyers and lobbyists to defend such theft is unacceptable

  3. Leo Kolivakis

    I heard Diane Sawyer interviewing Steve Forbes on GMA a few weeks ago. Mr. Forbes was defending the trader saying "they signed a legal contract". What people do not understand is that to make $1 billion, you go to take a lot of risk. He could have wiped out the bank if things did not go his way. Banks should compensate traders on a risk-adjusted basis but there will always be some big swinging dick that thinks otherwise.

  4. Anonymous

    Every article I read on the subject fails to put the blame of the current situation where it belongs: Obama. When Obama in a very public way indicated that "this was not the time to act in anger against the bankers" he very much gave them a blank pass for them to do whatever they want. When the SEC fines $33M (BoA) for a $3B+ offense the bankers will take that as the cost of stealing from taxpayers. Obama has failed miserably as president (it took him a few months must be a record). Bankers will not change behavior until many of them are sent to jail for fraud (and there has been fraud).

  5. Anon1

    I am sick to death of the bullshit about the "sanctity" of contracts.

    The Constitution isn't sacrosanct, the Bill of Rights isn't sacrosanct. When compared to those two documents, contracts aren't even at the level of toilet paper.

    THEY ARE JUST PIECES OF PAPER! Tear 'em up with the same fervor that the Constitution and Bill of Rights have been.

  6. Siggy


    Has it ever occured to you that the Constitution and the Bill of Rights are the contracts that makes it possible to write what you just wrote?

    As to the inequity of compensation to traders. Do those contracts need to be reviewed? Indeed they do. I say if you want to be paid unconscionable sums for taking from the market what the market will allow, then I say you should also bear joint and several liability for your trading efforts.

    What I see in the Hall/Citi/Czar discourse is political theater. The discourse suggests that the relationship between Hall and Citi is symbiotic.

    What has really gone wrong here is that we are keeping a zombie bank in business. The compensation hassle with Mr. Hall is theater. With a substantial ownership position in Citi, it is time for the Government to exercise its rights and work for the split-up of the firm.

  7. Hugh

    Our system, economic, financial, political, and social, broke and remains broken. The Hall case is emblematic of the inertia of past bad practices which continues to drive everything: the greedy trader only out for himself, the dead bank which defends him, ineffective regulators, an equivocating media, impotent politicians, a co-opted President, and an apathetic, willfully uninformed, public. If there is a cliff in our future, and I believe there is, there is nothing here to stop us going over it.

  8. Greg

    "…which means the rest of the bank is much weaker and more badly managed than even cynics think"

    I'm not a cynic. I can observe that Citi is poorly managed, if you can even call it management.

    "The reason the government continues to behave in a schizophrenic fashion, getting tough on issues that are largely symbolic, is that the public has increasingly caught on that it is being had, that we all are paying tremendous subsidies to keep the financial system intact, with nary a demand made of bankers"

    It worries me that so few people seem to have studied or remember history. Politicians are magicians with steady jobs; they're great at slight of hand. Don't people get this?

    The bailout should have been an obvious scam to anyone who bothered to notice that no meaningful legislation passed before money was handed out. And if I recall correctly, we're still waiting. Oh, the money is gone, don't get me wrong (and it's still going; we just can't track it anymore), but as far as meaningful restrictions on destructive behavior, I'm still waiting. Maybe that costs extra.

    At least economists will finally start being right about what the bailout will do now that we are on the other side of it. They really ought to stick with what they are good at: predicting the past.

    To be fair to business, and expose my capitalistic roots, the focus of industry should be on industry and not “for propriety and social responsibility.” This latter issue is the responsibility of our legislature to restrict destructive behavior. If there is fault, the fault is in government, not business. For example, I’m completely against government subsidies at all levels. At the same time I would advise individuals and business alike that if a subsidy is available, then take advantage of it.

    You can’t accuse someone of cheating if you don’t tell them the rules. And you can’t blame someone for following the rules given.

  9. emca

    "is that the public has increasingly caught on that it is being had, that we all are paying tremendous subsidies to keep the financial system intact, with nary a demand made of bankers"

    This is the crux of the problem. Society needs to hold its members responsible if they harbor the inability to do so themselves. This needs to be instituted across the spectrum of social interactions, not just bottom feeding "welfare queens".

    The argument here is not about bonuses, et. al., but whether written agreements between private parties can abrogate the welfare of the general public. The state is under no obligation to verify those contracts, when an organization originating those instruments has become indebted to the government (and more accurately taxpayers and their overriding "unwritten" contract with government). This is understood in bankruptcy actions and is the moral, ethical and practical hazard in rejecting this mediation.

    When you foul the nest you need to be liquidated, not saved.

  10. jtadetroit

    All the Govt has to say is ; if you want us to provide a financial backstop beyond the usual FDIC insurance, then we need to have a say in your risk management and related compensation policies

  11. Hugh

    "You can’t accuse someone of cheating if you don’t tell them the rules. And you can’t blame someone for following the rules given."

    Yeah, the only problem with this is that the guys who were supposed to be following the rules are the ones whose lobbyists wrote them.

  12. Greg

    Hugh, I wouldn't disagree with that. I might not count those as rules because rules tend to be something written by a third party to curb behavior rather than a first party to validate behavior.

    Proper regulation and capitalism don't conflict, in fact, capitalism requires proper regulation. Good legislation doesn't tell business what to do, it protects business from itself. This crisis should be a reminder to us all.

  13. tom a taxpayer

    A 4th possibility for Citi battling the govt to save Hall's $100 million contract is that Hall may know where Citi has a closet full of zombie skeletons and an entire executive floor of the most toxic, filthiest money laundry north of 85 Broad Street.

  14. D.B.

    Hall is an incredible trader, a legend on the street. He deserves his salary and is directly responsible for generating many times the amount in question as profit for Citi. I am sure he will end up walking and going at it on his own after C tells him to take a hike.

  15. Hugh

    Hey, DB, if Hall is such a legend how is it that he didn't move out on his own long ago? Or is some of that legend based on the cheaper cost of money he had access through Citi. And again if he was such an incredible trader how is it he never saw an $8 trillion bubble and set Citi wise to it, or did his being a legend take up all of his time?

  16. Francois

    The reason the government continues to behave in a schizophrenic fashion, getting tough on issues that are largely symbolic, is that the public has increasingly caught on that it is being had, that we all are paying tremendous subsidies to keep the financial system intact, with nary a demand made of bankers"

    And that is why the Obama administration is in such a morass right now. They acted way too friendly with the banksters for no good reason at all. Anyone wants to defend the non replacement of actual management at the big banks? They could and should have been replaced manu militari; there are more than a few good people apart from these asshats that are perfectly able to manage a big bank.

    Second, by refusing to dismantle the worst aspects of the Bush administration, everyone with interests to protect knew right then that the Obama administration was pliable, and easy to make compromises with, in spite of the Democratic Party's base.

    IS it any surprise the banksters got and still get away with everything they want, and then some?

    I don't think so.

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