Why Pandit Must Sell Phibro

Maria Woehr has a rather confusing column on Andrew Hall and his $100 million bonus. It’s worth reading, however, for two reasons: firstly, she’s aggregated a lot of good links, and secondly, she serves as a good guide to what the received opinion on such matters is on Wall Street.

Woehr believes that “the figure that the government would like to see Hall accept is something like $0″ — which I suspect is only true if, like Hall, you round to the nearest $50 million. There’s no reason to ask Hall to work for $1 or forego his bonus entirely, as the bank’s executives did, because he (unlike they) is not responsible in any way for the billions of dollars that Citigroup (C) has managed to lose over the past couple of years.

But I think this is entirely wrong:

What’s sad is if Citigroup loses Hall and Phibro due to the bonus issue, it could pose more embarrassment for Citigroup’s CEO Vikram Pandit. The bank will be losing one of its most profitable unit and most likely suffer losses because of it.

It’s not at all embarrassing for Pandit to sell off an in-house hedge fund for a large sum of money. Citi isn’t and shouldn’t be in the business of running hedge funds, and the great thing about Phibro (compare and contrast Old Lane) is that the bank will have not only made billions of dollars in total profits to date but will also make a large gain on selling the business as well. How Woehr can spin that as Citigroup suffering losses I have no idea. All it will have done is remove a big risk factor from its list of businesses: Like most highly-profitable hedge funds, Phibro has a lot of tail risk. If it can make billions, it can lose billions too. And since that tail risk can’t be hedged, it’s time for Citi to sell Phibro.

Dan Gross is much more succinct and correct: “When a company fails, it has to sell valuable assets,” he tweets. The good news for Citi is that not only is Phibro a valuable asset but it’s also an asset which Pandit should be looking to sell in any case. This latest flap over Hall’s pay just makes that decision easier.

Comments

[al s:]

Stop with the Philbro praise, enough. Hall & company are a bunch of excellent oil futures/contract traders. Tell me what value they add to the energy space?
They don't explore , find, produce, refine, transport, etc. they do nada. But give the devel its due. They have in no small way "helped" push up the price of oil on their speculation trades.
Gee, I guess the American consumer owes Mr. Hall a big round of thanks for all of his efforts on our behalf.
Now, as far as $100 Mil. Philbro generates approx. $800 Mil. and Hall and his boys want a collective $200 Mil.? Tell me any company that pays out at a 25% comp rate.The truth is the management at Citi, Pandit & Parsons are clueless and exhibit zero leadership.
Do you honestly think these results are due to Mr. Hall. No, it is about a smart lawyer he retained to write a FAT contract. Get any good energy trader in there under the same circumstances and profits will be nearly identical. PS, pay the new guy $10 Mil or so and he'll wax your car every week end !!!!!!

Aug 05 12:36 PM

[XRTrader:]

The above poster "al s" shows a complete lack of understanding about the Phibro business. A Hall has been doing an outstanding job for YEARS, and has amassed a formidable trading/profit record going back to the 1980s. I doubt very much "any good energy trader" could produce "nearly identical" profits. Or else, the business would be much less lucrative.

Aug 05 12:56 PM

[helplessobs...:]

I often wondered what happened to Phibro as back in the '80s oil and commodities bubble they made money hand over fist, so much that they took over a big Wall Street bond and brokerage house. Later the bond house took over Phibro. Englehard stripped Bunker Hunt of his oil leases, Kentucky Horse Farm and even the Rolex on his wrist as they crushed his long silver contracts by changing the trading rules which allowed no new long contracts to be traded. Silver opened each day limit down from $47 an ounce to less than $5 before it was over. Never underestimate the power of those people who make the trading rules.

Aug 05 10:35 PM

[Mark Bern:]

Good article! I agree that even though the Phibro unit is profitable it also brings to Citi a lot of risk exposure that I, for one, would rather not be maintained by a bank holding company that is being bailed out with my tax dollars. Sell the unit, take the gain, and either build capital reserves or pay back some of the TARP money. Then Citi should get back to the core business of a bank: lending to businesses to help fuel a recovery.

Well, that was wishful thinking!

Aug 06 02:27 PM