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.
I wonder if they can force the bonus as Citi stock not to be redeemed until 2012.
I like how you assume that Hall has broken some provision of his contract without having any proof of this. Making up facts as we go along?
Anon of 2:14 AM,
I suggest you read what I said, and further Google "psychological projection." Your accusation is "making up facts," No where do I say, or have I ever said, that Hall has broken a provision of his contract. I said under most applicable law, an employment contract, either explicitly or under state law (I have no idea what state was chosen to provide the governing law here) requires the employee to comply with company policy. An employment contract does not have to say, for instance, "We can fire you if you rape your secretary" for that to be grounds for contract termination.
Given how inattentive most big producers are to formal policies, and give the unusual amount of rope afforded Hall, the odds are high that he in in breech of some policies. Now they might be trivial, but I have been amazed at the violations I have seen investigations turn up of middle and senior level employees.
I will go further here. Every company I have worked with or had as a client (save one that was fairly small) in both consulting and investment banking showed very high levels of expense account abuse even at junior levels. And this was years ago when firms were privately held and would have more reason to be tough-minded about it. From what I have seen in recent years (less intense involvement but broader sample) nothing has changed. So my suspicion is hardly as radical as you make it out to be. And I did make it clear that this was a personal guess.
Saying "odds are high" is not at all the same as "he has/must have broken some provision of his contract." And if Citi wanted to see if there were grounds for terminating the agreement, an investigation, which is what I have suggested every time this topic came up, would be the step required to determine where the facts lie.
The same people that usually scream about auto workers getting what was in their contract are the first to hoist it up 'the sanctity contracts' when talking about pay of over 200k.
Which is it? Most of the time there is a lot more case law in favor of the unions. The bankers/ceo's/execs and most other non union workers are "at will" workers, they can be fired at any time for almost any reason, even if they are "under contract". Whatever that means.
The whole apparatus of a 'human resources' department was usually developed to come up with, and document termination insurance. Aka, make sure you don't fire them for being a Hindu, fire them for being 5 minutes late for work on 3 days out of the last five years.
I am familiar with Andy Hall's pay scale. If he is line for a $100 million bonuse, then he earned something like $500-550 million for the bank. Citi is netting $400 to $450 million from Andy alone.
Why is the issue solely with Andy Hall? Why isn't anyone insisting that the taxpayer get a 30-40% cut for financing this whole crap shoot?
Citi is possibly the worst run financial institution in the world. (Madoff's business was a criminal enterprise but exceedingly well run.)
Agree with anonymous at #4; when one person bargains for a high salary it's great. When two people do it together, it is evil.
Also, this whole sanctity of contracts is just so much nonsense. Anyone who espouses it hasn't run a business (or dealt with a big one). Contracts get broken all the time. Run a small business for a month and you'll see it in no time.
Response from Anon at 2.14am:
Yves, I think you're over reacting. I don't take issue with the fact that contracts in life and on paper are not necessarily the same.
What I tried to raise was the assumption that he'd already violated his contract and therefore deserves to have his pay held. If Citi conducted such an investigation and found that he screwed up somewhere, then they can take what action they deem appropriate. If not, then we should not be in a position to judge based on the assumption that, "well if everyone else has done it, then Hall must have too."
I wish to clarify that I'm hardly a cheerleader for banks paying bonuses after taking government assistance. But that failure lies in the government (via Geithner and Summers) not holding the banks to account.
Instead guys like Hall become a public effigy that everyone wants to burn to vent their frustration.
Is privity of contract an issue in the bonus controversy, as regards companies supported with taxpayer money?
we the taxpayers did not agree to pay these ridiculous bonuses when we bailed these companies out. Why do we have to honor contracts to which we are not a party?
I suspect that there is a high probability that Mr Hall's contract could be altered or terminated for some otherwise trivial reason.
Citi chooses to want to execute the contract. Or, Citi appears to want to execute the contract in the hope that the pay czar will execute a novation and Mr Hall will go walking. But then it seems that no one is courting Mr Hall. Or is he too hot to employ?
I'm having a very hard time with all of this. Just Who is the Mad Hatter and Who is the Red Queen?
If Citi doesn't get the bail out, Mr Hall and entourage go somewhere else, why not B of A, they vacumned up a lot of trash and seem to be making it work for them. Another alternative is that Mr Hall and entourage set up their own little niche shop. Who will give them cheap funds?
Apart from the Fed and Treasury, who has cheap funds for rent?
This is all grand theater but IMO merely a fly on the elephants ass!
Yves, your clarification of your position on contracts satisfies me. I see that you are far more reasonable than I had earlier presumed. But then, all reason fails in presumption, does it not?
scott m said…"this whole sanctity of contracts is just so much nonsense."
I couldn't agree more. Heaven knows where the sanctity-of-contract crowd comes up with its smug and highly dogmatic formulations, much less the oppreesive idea that the long arm of the law ought to reach out and smack down any and all contract breakers. I suppose it just makes this stuff up out of whole cloth, for none of it has any basis in Western thought, much less American tradition.
From Western thought comes the idea of the "society of consent":
The citizen's moral obligation to obey the laws has traditionally been derived from the assumption that he either consented to them or actually was his own legislator; that under the rule of law men are not subject to an alien will but obey only themselves–with the result, of course, that every person is at the same time his own master and his own slave, and that what is seen as the original conflict between the citizen, concerned with the public good, and the self, pursuing his private happiness, is internalized. This is in essence the Rousseauan-Kantian solution to the problem of obligation…
Hannah Arendt, Crises of the Republic
Arendt goes on to explain that the theory of "social contract" evolved during the 17th century to mediate between public good vs. private self-interest. Three altogether different kinds of aboriginal agreements were formulated under the rubric of "social contract". Two of these–the Biblical covenant and the Hobbesian variety–were rejected by our founding fathers. Instead the revolutionaries opted for Locke's version, which, according to Arendt, "brought about not government but society–the word being understood in the sense of the Latin societas, an 'alliance' between all individual members." "[T]he American republic," Arendt adds, "rests on the power of the people–the old Roman potestas in populo–and power granted to the authorities is delegated power, which can be revoked."
All contracts, covenants, and agreements rest on mutuality, and the great advantage of the horizontal version of the social contract is that this mutuality binds each member to his fellow citizens. This is the only form of government in which people are bound together not through historical memories or ethnic homogeneity, as in the nation-state, and not through Hobbes' Leviathan, which "overawes them all" and thus unites them, but through the strength of mutual promises.
But Arendt is careful to point out that these promises are not sacrosanct:
Promises are the uniquely human way of ordering the future, making it predictable and reliable to the extent that this is humanly possible. And since the predictability of the future can never be absolute, promises are qualified by two essential limitations. We are bound to keep our promises provided that no unexpected circumstances arise, and provided that the mutuality inherent in all promises is not broken. There exist a great number of circumstances that may cause a promise to be broken, the most important one in our context being the general circumstance of change. And violation of the inherent mutuality of promises can also be caused by many factors, the ony relevant one in our context being the failure of the established authorities to keep to the original conditions. Example of such failures have become only too numerous; there is the case of an "illegal and immoral war," the case of an increasingly impatient claim to power by the executive branch of government, the case of chronic deception, coupled with deliberate attacks on the freedoms guaranteed under the First Amendment, whose chief political function has always been to make chronic deception impossible…
Arendt concludes that the Supreme Court is "unable to enforce decisions that would hurt decisively the interests" of the republic and knows that its "authority depends on prudence, that is, on not raising issues or making decisions that cannot be enforced."
All this of course is lost on the sanctity-of-contracts crowd.
In an excellent post related to this one Yves Smith said a few weeks ago: "Sanctity of contract" means there are costs of modifying or exiting the deal (www.nakedcapitalism.com/2009/07/on-sanctity-of-wall-street-pay.html). This is absolutely true, but not likely to be comprehended by those who fundamentally misunderstand the phrase.
Sanctity of contract is confused with inviolability of contract. It is easy to see where this confusion arises, because ‘contract’ is very often used as a noun.
However, the word ‘contract’ in ‘sanctity of contract’ is not a noun; it is an intransitive verb meaning “to make a contract.” The phrase itself refers to the bilateral right to make any contract the parties wish. The right to enter any (legal) contract may be sacrosanct under our jurisprudence, but no contract is sacrosanct.
Enforcement is a completely separate matter. Anyone using the phrase with contract as a noun probably wants it to mean ‘sanctity of contract enforceability.’ But that sanctity is obviously non-existent, which makes plain the grammatical and logical error. Thankfully we do not live in a frozen world of sacrosanct contracts.
Anonymous at 9:14 AM said…"we the taxpayers did not agree to pay these ridiculous bonuses when we bailed these companies out. Why do we have to honor contracts to which we are not a party?"
Excellent point, which goes to highlight how extreme the sanctity-of-contracts crowd has become. Here they're not just advocating that the government enforce a contract between two private parties, one which cannot perform, but that the government step in and perform for the party that cannot perform. All of this is justified in the name of the sanctity of contracts.
I wonder what socially redeeming function they believe this would accomplish. Pray tell, how would this enhance the public good?
Contracts are just pieces of paper. They are NOT sacrosanct, they are NOT holy writ. They are pieces of paper based entirely upon a legal fiction.
Since the Constitution itself is officially "just a piece of paper" (quote from fmr Prez Bush Jr), then there is NO WAY a mere contract is holier than that.
Screw contracts. Screw the wealthy robber barons. Claw back every penny and seize the rest of their stolen and unearned wealth. Time to forestall revolution by taking from the rich and leveling the field to something sustainable.
Remember the big brouhaha that resulted when Goldman commanded Hartman to command Geithner to command Dodd to insert the bonus payment clause in the bailout legislation?
I supect that is because it was known that the sovereign could not be made legally responsible to pay these ridiculous bonuses.
I think the czar may have picked the wrong poster boy here. Trading crude oil futures are real profits booked and realised at the time they expire. They are not multi-year mortgage backed securities or deals that can ultimately turn out to be garbage but for which bonuses have already been paid.
Do czars get bonuses? What is their base salary? Are they at-will employees? Who said we even need politically appointed czars as another layer of bureaucracy other than payback for large campaign contributions.
Say I hire a contractor for a 2 week home repair project. By your logic I can stiff him for the entire bill because he showed up 3 minutes late the 1st day.
That's not how it works, not should it. Even if the contractor padded the bill by an hour you are still obliged to pay (minus the hour).
Seems the only difference is the $100M.
Only Citi would be so stupid as to assume that Hall's past performance is indicative of his future. They paid Vikram Pandit $600 million to buy his hedge fund, which was worthless just a couple of years later. Hall is no different than all those other guys who were supposedly geniuses until they lost 70 or 80% of their clients' money. He is probably taking lots of risk that won't be apparent until it implodes. So far it has worked for him, but one of these days it will probably blow up spectacularly and everyone will say how stupid it was to have believed he could be a money machine. How many times did this story play out last year with big name hedge fund guys?
Without knowing what Citigroup's cost of capital charge to Hall was, we have no idea if he made any money at all. I suspect he has never made Citi any money on a risk-adjusted basis.
I do not know of Arendt. The quotation you provide suggests to me that you may be reading into it that which you wish rather than that which is said.
I believe that a contract should be honored. I do not believe that they can be broken willy nilly. I also accept that there can be circumstances that demand that a contract be abrogated. In the spirit of Arendt, I believe that the abrogation of the contract at hand should be mutually entered into in the same manner as the contract itself.
I am curious, in the quote, is the phrase 'social contract' meant to include commercial contracts; or, is the 'social contract' a political one such as the one put forth in the Constitution.
In the specific, as to Mr Hall/Citi: I believe that a cash bonus $100 million is excessive and quite probably unnecessary. In light of the fact that the US has a substantial equity position in the enterprise, I believe that the US is entitled to demand renegotiation of the contract. I hold that belief less for the fact that the $100 million appears unconscionable than for the fact that I suspect that Citi cannot really afford the payment.
Now if it is revealed that Mr. Hall, as trader of oil & gas, was/is a causitive force in the recent volatility of energy prices, then; I say lets bring him to dock and find out just what his role was in what appears to have been the mother of all manipulations!
Does Feinberg have real claws? If so, he needs to sink his claws into Goldman Sachs, Citigroup, and every company that received money from the U.S. Treasury's Troubled Asset Relief Program. The Reuters report quotes Feinberg as saying he has "clawback" power and may use it. The potential for Feinberg to claw his way through one TARP company after another is far more significant than the crusade against one man (Hall), whatever its merits.
"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."
As a taxpayer, I fervently hope that Feinberg will "focus" and claw back all the ill-gotten and fraudulent gains from Wall Street. Please, Mr. Feinberg, claw back and recover the outrageous taxpayer funding of exorbitant compensation to the reckless gamblers and fraudsters that raped and pillaged the mortgage industry, ruined the housing market, destroyed the credit system, endangered municipal financing, pension funds, and the banking system, sent the economy into a downward spiral, endangered the world financial system, and now extort the U.S. and the world to pay them billions in ransom or face the destruction of the world financial system and economy.
The real scandal here isn't the pay, but the institution. The very idea that the banks of the world are running corners on oil and other commodities using government guarantees and engaging in another round of systematic risk is literally unforgivable. I have followed the economics of the oil markets for 30 years and the idea that the supply of oil could be up another 100 million barrels over last year and prices be at normal highs don't wash. I thought for years that the talk of speculators keeping oil prices up was nonsense. I think I was right. Instead it was banks using free money and government guarantees. Care to speculate where Goldman got their $9 billion profit last quarter? ($3 billion plus the $6 billion they are paying their employees in bonuses). If this activity isn't illegal it should be in the context of the government backstop of banking. The idea of deposit guarantees are the backbone of this moral hazard, as a depositor with a brain otherwise wouldn't put a dime in a bank involved in a commodities corner. When this corner breaks, it is going to bankrupt entities around the world, quite likely OPEC itself.