An Open Letter to Kenneth Feinberg (and American Taxpayers)

Dear Mr. Feinberg,

I am an investor in Citigroup (C), both through direct ownership of thousands of shares of common stock, as well as indirectly through a partnership that has recently acquired 34% of the company. As such, I am highly motivated to ensure that my investment grows in value and that our investment partnership is able to sell its shares in the future for a substantial profit.

Considering we have already invested in Citigroup (whether we wanted to or not), it is an incontrovertible fact that this decision has already been made and the money has already been spent. Therefore, it is very important that we as shareholders do all we can to ensure the success of the company we have purchased. It is for this reason that I am writing to you today.

You will soon be evaluating Citigroup's compensation structure, including that of Andrew J. Hall, the leader of Citigroup's energy trading unit Phibro. Mr. Hall's unit has earned Citigroup hundreds of millions of dollars in profit annually for several years. The company has a contract with Mr. Hall and his small team which rewards them handsomely when the team earns a profit. This year, it has been reported that Mr. Hall and his team may be due approximately $100 million under the terms of his contract.

I would like you to carefully consider Mr. Hall's compensation package and ensure that it has the right structure to compensate Mr. Hall appropriately for earning huge profits for Citigroup, but that it also ensures he gets no reward should he or his team's trades cause losses for the company in the future.

Beyond this simple analysis above, I beg you not to request Citigroup to break the contract the company has with Mr. Hall and refuse to pay him what is contractually due to him. While you will undoubtedly hear from "outraged" fellow taxpayers that "no one is worth that much," please look at the matter from the viewpoint of an investor, not from the view of someone who does not understand that if we want our investment to grow, we must keep the people who make the money!

Mr. Feinberg, you will surely also read articles and hear from numerous people that it is okay to break the contract because without government support, Citigroup would have gone bankrupt and Mr. Hall would not have gotten paid anyway (see one such article written by my fellow taxpayer Felix Salmon -- "Revamping Traders' Pay").

However, please also ignore this inane drivel. Again as I noted at the beginning of this letter, for better or for worse our decision to invest in Citigroup has already been made and we have already purchased the shares. If we wanted to punish the employees of the company, we should have done that last year by refusing to invest in the company. However, we apparently realized that not all the employees of the company were bad and in fact many parts of the company can make a lot of money.

So as prudent investors, we instead decided to invest in the company and hope for a healthy return on our investment. Therefore, also as prudent investors, we definitely want to retain the best talent, those managers who are helping the company to return to sustained profitability. If we alienate those managers by breaking our contracts with them, they will almost certainly leave the company and Citigroup will have lost some very talented individuals that have been consistently earning significant profits for many years.

Having said all of the above, I still expect that you will be under severe political and public pressure to void the $100 million payment due to Mr. Hall and his team.

However, I trust that you actually understand your fiduciary duty to the taxpayer. Thus recognizing that Mr. Hall and his team earn profits for Citigroup that are five to ten times their annual compensation, I am certain you will agree that it would be the most intelligent decision to pay them as agreed, so that they will continue to perform well and help our investment grow in value.

Yours truly,
Angry Banker

Disclosure: Long XLF and Long C (as we all are)

Comments

[dbf:]

As if there are not a host of talented, experienced, and well educated professionals that could do the same thing. What are a person's responsibilities? Are they merely to make as much money as possible (which mindset caused a near collapse of the world economy) or should all professionals also consider their responsibilities to mankind. Let us hope that financial managers begin to show some sense of social responsibility and not merely flow where they can suck up the most money.

Jul 27 01:48 PM

[Angry Banker:]

Well, legally speaking of course, the responsibility of a company is to maximize shareholder wealth. So if these guys are doing that, then they are doing their job. Citigroup is not paying them to work for the Peace Corp. And if its so easy for other people to do the job they are doing, then why aren't more people doing it? Don't tell me it's because everyone else is too focused on their responsibilities to mankind.


On Jul 27 01:48 PM dbf wrote:

> As if there are not a host of talented, experienced, and well educated
> professionals that could do the same thing. What are a person's responsibilities?
> Are they merely to make as much money as possible (which mindset
> caused a near collapse of the world economy) or should all professionals
> also consider their responsibilities to mankind. Let us hope that
> financial managers begin to show some sense of social responsibility
> and not merely flow where they can suck up the most money.

Jul 27 04:00 PM

[whisperonth...:]

Angry Banker, I agree. Why aren't more people doing it? And I think the answer is that many people are jealous of those big salaries, and instead of pitting their energy toward doing the best job they can for the whole company (whatever company it may be) they are taking time out to whine and moan about how everyone else is making all this money and the poor peons aren't making their share too.

As one of the (hopefully temporary) casualties of the automotive crisis, it would be too easy for me to sit back and whine about how much I don't have. Instead, at the first sign of the economic crunch, I used a chunk of my savings to pay off a couple loans early. I saved the interest payments and now have that much more money each month that I don't have to pay out.

When I work, I do my job and spend every extra minute trying to come up with new and different ways to do that job faster and more efficiently so that when new responsibilities are doled out, I can be one of the volunteers. The more I do, and the better I do it, the more valuable I am. I am willing to wait awhile for compensation to prove my worth but when I've proven it, I expect that compensation to show up. Without it, my worth is devalued and I look elsewhere.

We need to honor the contracts of those who are doing their jobs, in hope that they continue to do those jobs and earn more money, for us, and for themselves.

It's time everyone stopped whining and started doing their own jobs.

Jul 28 05:22 PM

[Wildhawk:]

Please tell me why the argument that Mr. Hall deserves to get nothing because without government intervention C would have gone bankrupt, effectively invalidating the contract, is "inane drivel"? That's is absolutely what would have happened had the government not stepped in with bailout funds. The simply fact that Mr. Hall has his current job at all is due to government funds.

I'm as much (maybe more) a proponent of ensuring the sanctity of contract law as the next guy, but the argument of paying him in order to uphold contract law rings hollow when he shouldn't have an enforcable and contractual right to a job at all right now, much less a $100 million bonus. If we are so concerned about upholding contract law, we never should have stepped in with the bailouts to begin with.

And speaking as a compensation consultant, the fact that Mr. Hall has a contract that even allows for such outlandish upside potential is mind-numbingly anti-social and creates incentives to do nothing other than take spectacular risk for personal gain with all the downside taken on by shareholders if he fails (or in this case, taxpayers). If I were a shareholder, I'd be livid at this kind of compensation arrangement, only because there appear to be no safeguards in place to protect the very existence of the company if he fails (remember, there is no shortage of high profile banks going out of existence in the recent past because of "rogue traders", e.g. Barrings). I don't begrudge someone making huge profits if they deliver shareholder value, but without clawbacks or offsets in the contract for losses/failure, Mr. Hall's natural incentive is to take as much risk as possible in order to reap the greatest personal reward possible, with little or no downside if he fails.

Unfortunately, this type of compensation structure is largely the norm on Wall Street, and the biggest reason why so many banks blew up and needed taxpayer funding to begin with.

Jul 30 01:50 PM

[Angry Banker:]

If you will notice in my article, I did in fact say they should ensure that his contract addresses failure to perform as well. I agree that there must be appropriate controls to ensure he doesn't kill the company.

But as for the would-have-been-bankru... issue, the truth is no one knows what would have happened had the company not received bailouts funds. Bankruptcy is one of the paths it could have taken, but it could have also been acquired very cheaply by another cash-rich company. That company may have decided to keep and continuing rewarding Citi's highest performers. See, that's the point, if the company had been ACTUALLY allowed to go bankrupt, then they can go ahead and break the contracts. But it did NOT go bankrupt, so they should continue to honor their obligations (remember an employee is also a creditor when the company owes them money).


On Jul 30 01:50 PM Wildhawk wrote:

> Please tell me why the argument that Mr. Hall deserves to get nothing
> because without government intervention C would have gone bankrupt,
> effectively invalidating the contract, is "inane drivel"? That's
> is absolutely what would have happened had the government not stepped
> in with bailout funds. The simply fact that Mr. Hall has his current
> job at all is due to government funds.
>
> I'm as much (maybe more) a proponent of ensuring the sanctity of
> contract law as the next guy, but the argument of paying him in order
> to uphold contract law rings hollow when he shouldn't have an enforcable
> and contractual right to a job at all right now, much less a $100
> million bonus. If we are so concerned about upholding contract law,
> we never should have stepped in with the bailouts to begin with.
>
>
> And speaking as a compensation consultant, the fact that Mr. Hall
> has a contract that even allows for such outlandish upside potential
> is mind-numbingly anti-social and creates incentives to do nothing
> other than take spectacular risk for personal gain with all the downside
> taken on by shareholders if he fails (or in this case, taxpayers).
> If I were a shareholder, I'd be livid at this kind of compensation
> arrangement, only because there appear to be no safeguards in place
> to protect the very existence of the company if he fails (remember,
> there is no shortage of high profile banks going out of existence
> in the recent past because of "rogue traders", e.g. Barrings). I
> don't begrudge someone making huge profits if they deliver shareholder
> value, but without clawbacks or offsets in the contract for losses/failure,
> Mr. Hall's natural incentive is to take as much risk as possible
> in order to reap the greatest personal reward possible, with little
> or no downside if he fails.
>
> Unfortunately, this type of compensation structure is largely the
> norm on Wall Street, and the biggest reason why so many banks blew
> up and needed taxpayer funding to begin with.

Jul 30 04:53 PM

[dcb:]

Here is another goldman managing director who clearly doesn't knw what hey are talking about. minless blogger drivel of course. Areason they should not eth the bonuses!!!

From A Former Goldman Managing Director: How You Finance Goldman Sachs’ Profits
Submitted by Tyler Durden on 07/30/2009 17:10 -0500

Alan Grayson Bank of America Bankruptcy Banks Ben Bernanke Bonuses Cash CEO Commercial Paper Compensation Comptroller of the Currency Credit Debt Derivatives Earnings FDIC FED Federal Deposit Insurance Corporation Federal Reserve Federal Reserve System Goldman Sachs Jamie Dimon Lehman Brothers Liquidity Merrill Lynch Money Morgan Stanley New York Times Office of the Comptroller of the Currency SEC Speculation TARP Toxic assets Trade VaR


By Nomi Prins, via Mother Jones

July 28, 2009 -- This is perhaps the most important thing I learned over my years working on Wall Street, including as a managing director at Goldman Sachs: Numbers lie. In a normal time, the fact that the numbers generated by the nation's biggest banks can't be trusted might not matter very much to the rest of us. But since the record bank profits we're now hearing about are essentially created by massive federal funding, perhaps it behooves us to dig beneath their data. On July 27, 10 congressmen, led by Rep. Alan Grayson (D-Fla.), did just that, writing a letter to Federal Reserve Chairman Ben Bernanke questioning the Fed's role in Goldman's rapid return to the top of Wall Street.

To understand this particular giveaway, look back to September 21, 2008. It was a frenzied night for Goldman Sachs and the only other remaining major investment bank, Morgan Stanley. Their three main competitors were gone. Bear Stearns had been taken over by JPMorgan Chase in March, 2008, Lehman Brothers had just declared bankruptcy due to lack of capital, and Bank of America had been pushed to acquire Merrill Lynch because the firm didn't have enough cash to survive on its own. Anxious to avoid a similar fate, hat in hand, they came to the Fed for access to desperately needed capital. All they had to do was become bank holding companies to get it. So, without so much as clearing the standard five-day antitrust waiting period for such a change, the Fed granted their wish.

Bank holding companies (which all the biggest financial firms now are) come under the regulatory purview of the Fed, the Office of the Comptroller of the Currency, and the FDIC. The capital they keep in reserve in case of emergency (like, say, toxic assets hemorrhaging on their books, or credit derivatives trades not being paid) is supposed to be greater than investment banks'. That's the trade-off. You get access to federal assistance, you pony up more capital, and you take less risk.

Goldman didn't like the last part. It makes most of its money speculating, or trading. So it asked the Fed to be exempt from what's called the Market Risk Rules that bank holding companies adhere to when computing their risk.

Keep in mind that by virtue of becoming a bank holding company, Goldman received a total of $63.6 billion in federal subsidies (that we know about—probably more if the Fed were ever forced to disclose its $7.6 trillion of borrower details). There was the $10 billion it got from TARP (which it repaid), the $12.9 billion it grabbed from AIG's spoils—even though Goldman had stated beforehand that it was protected from losses incurred by AIG's free fall, and if that were the case, would not have needed that money, let alone deserved it. Then, there's the $29.7 billion it's used so far out of the $35 billion it has available, backed by the FDIC's Temporary Liquidity Guarantee Program, and finally, there's the $11 billion available under the Fed's Commercial Paper Funding Facility.

Tactically, after bagging this bounty, Goldman asked the Fed, its new regulator, if it could use its old risk model to determine capital reserves. It wanted to use the model that its old investment bank regulator, the SEC, was fine with, called VaR, or value at risk. VaR pretty much allows banks to plug in their own parameters, and based on these, calculate how much risk they have, and thus how much capital they need to hold against it. VaR was the same lax SEC-approved risk model that investment banks such as Bear Stearns and Lehman Brothers used, with the aforementioned results.

On February 5, 2009, the Fed granted Goldman's request. This meant that not only was Goldman getting big federal subsidies, but also that it could keep betting big without saving aside as much capital as the other banks. Using VaR gave Goldman more leeway to, well, accentuate the positive. Yes, Goldman is a more risk-prone firm now than it was before it got to play with our money.

Which brings us back to these recent quarterly earnings. Goldman posted record profits of $3.4 billion on revenues of $13.76 billion. More than 78 precent of those revenues came from its most risky division, the one that requires the most capital to operate, Trading and Principal Investments. Of those, the Fixed Income, Currency and Commodities (FICC) area within that division brought in a record $6.8 billion in revenues. That's the division, by the way, that I worked in and that Lloyd Blankfein managed on his way up the Goldman totem pole. (It's also the division that would stand to gain the most if Waxman's cap-and-trade bill passes.)

Since Goldman is trading big with our money, why not also use it to pay big bonuses? It's not like there are any strings attached. For the first half of 2009, Goldman set aside $11.4 billion for compensation—34 percent more than for the first half of 2008, keeping them on target for a record bonus year—even though they still owe the federal government $53.6 billion, a sum more than four times that bonus amount.

But capital is still key. Capital is the lifeblood that pumps through a financial organization. You can't trade without it. As of June 26, 2009, Goldman's total capital was $254 billion, but that included $191 billion in unsecured long-term borrowing (meaning money it had borrowed without putting up any collateral for it). On November 28, 2008 (4Q 2008), it had only $168 billion in unsecured long-term borrowing. Thus, its long-term unsecured debt jumped 14 percent. Though Goldman doesn't disclose exactly where all this debt comes from, given the $23 billion jump, we can only wonder whether some of it has come from government subsidies or the Fed's secret facilities.

Not only that, by virtue of how it's set up, most of Goldman's unsecured funding comes in through its parent company, Group Inc. (Think the top point of an umbrella with each spoke being a subsidiary.) This parent parcels that money out to Goldman's subsidiaries, some of which are regulated, some of which aren't. This means that even though Goldman is supposed to be regulated by the Fed and other agencies, it has unregulated elements receiving unsecured funding—just like before the crisis, but with more of our money involved.

As for JPMorgan Chase, its profit of $2.7 billion was up 36 percent for the second quarter of 2009 vs. the same quarter last year, but a lot of that also came from trading revenues, meaning its speculative endeavors are driving its profits. Over on the consumer side, the firm had to set aside nearly $30 billion in reserve for credit-related losses. Riding on its trading laurels, when its consumer business is still in deterioration mode, is not a recipe for stability, no matter how much cheering JPMorgan Chase's results got from Wall Street. Betting is betting.

Let's pause for some reflection: The bank "stars" made most of their money on speculation, got nearly $124 billion in government guarantees and subsidies between them over the past year and a half, yet saw continued losses in the credit products most affected by consumer credit problems. Both are setting aside top-dollar bonuses. JPMorgan Chase CEO Jamie Dimon mentioned that he's concerned about attracting talent, a translation for wanting to pay investment bankers big bucks—because, after all, they suffered so terribly last year, and he needs to stay competitive with his friends at Goldman. This doesn't add up to a really healthy scenario. It's more like bad déjà vu.

As a recent New York Times article (and many other publications in different words) said, "For the most part, the worst of the financial crisis seems to be over." Sure, the crisis may appear to be over because the major banks of Wall Street are speculating well with government subsidies. But that's a dangerous conclusion. It doesn't mean that finance firms could thrive without the artificial, public-funded assistance. And it certainly doesn't mean that consumers are any better off than they were before the crisis emerged. It's just that they didn't get the same generous subsidies.

Additional research by Clark Merrefield.

Article From Mother Jones, h/t amsterdamtrader

Jul 30 08:39 PM