Why is Andrew J. Hall working for Citigroup?

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Andrew J. Hall, Citigroup’s $100 million man, is considering a compromise to please pay czar Kenneth Feinberg. Reports the WSJ:

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.

It’s kind of staggering to me that, after all we’ve learned over the past couple of years, anybody at a big bank is still getting giant bonuses paid largely in cash. But clearly Hall is a special case. Which raises the question: What are he and Phibro doing at a place like Citigroup?

I know the basic answer: Commodities-trading house Phibro (formerly Philipp Brothers) bought Salomon Brothers in 1981. Then commodity prices collapsed and the Salomon guys took control of the firm, but kept Phibro’s energy-trading business as an autonomous unit whose traders took home almost 30% of profits. Then Travelers bought Salomon in 1997, and in 1998 Travelers and Citicorp merged into the wonderfulness that is Citigroup. Hall joined Phibro from British Petroleum in 1982, so he’s been through almost all of this.

But what I wonder is, what does Citi get out of Phibro, and what does Phibro get out of Citi? Obviously Citi has gotten a lot of profit out of Phibro. But it’s not the sort of steady, reliable profit that shareholders want. Part of the idea behind Citigroup was that by combining lots of lumpy but uncorrelated profit streams you’d get steady profits, but that hasn’t worked out so well. As for Phibro, if it owes its profits in any significant way to Citi’s capital and Citi’s credit ratings and Citi’s financial contacts, then Hall is wildly overpaid. If not, then he should stop trying to negotiate a pay contract with Feinberg and concentrate on negotiating a separation of Phibro from Citigroup (he’s been doing some work on this front, but it doesn’t seem to have gotten very far).

This seems to be the obvious answer here (and it’s definitely not original to me): A high-flying energy trading operation and a government-owned bank do not belong together.

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