Citi and Occidental Petroleum: Strange Bedfellows?

Includes: C, OXY
by: Jim Delaney

Politics, it is said, makes for strange bedfellows. This has been proven over and over again as we have watched Uncle Sam take aim at straw dog after straw dog attempting to shoot the perpetrator of the debacle caused by his own greatest efforts to de-Americanize renters and make heroes of homeowners since the days of FDR (no partisanship whatsoever). In this latest round, he was aided and abetted by a Fed that began sipping at the same punchbowl it was supposed to be pulling from the party.

Two things that are never in the same bed and rarely if ever even under the same roof are logic and emotion and rightly so as facilities needed by the latter are clouded when the former is present.

The current cure-all of limiting executive compensation ratcheted the collar around capitalism’s throat another click tighter yesterday as Kenneth Feinberg decided that all this talk of record bonuses was politically unpalatable when unemployment is still on the rise and Main Street’s ire is still firmly focused on Wall St.

This says nothing of the fact that on average every job in the financial services industry creates three others or that in order for the Administration’s plan of taxing the top two percent, to even bother working the top 2% had better make some pretty hefty moolah.

Further evidence of the disaster that trying to summon logic while clouded by emotion can create comes from the recent compensation crisis at Citigroup (NYSE:C). Andrew Hall was slated to be paid $100MM as head of that firm’s commodity arm, Phibro. This was seen as completely unacceptable at an institution that was in hock to the taxpayers for $45BN or so. Emotions flared and the unit was sold to Occidental Petroleum (NYSE:OXY) for $250MM.

Now I’m not saying that $100MM is not a lot of money but the way Wall St. works is that you only get paid a portion of what you make so if Andrew Hall was getting rich that means Phibro was getting even richer and a richer Phibro was exactly what Citi (antonym for profit) needed as their last earnings release revealed it will be a long time before anyone is paid off at the rate Pandit & Co. are turning the ship around.

Occidental made out well on the deal as the $250MM purchase price was pretty much the value of the open positions at the time of the transaction; paying Citi nothing for the unit as a “going business entity” or its future earnings potential.

Steve Chazen, OXY’s president, who is no stranger to high pay packages (his is $50MM) or hard bargaining said of his bid: “If you’ve got to sell, why should I pay a premium? What leverage does the seller have?” With regard to Mr. Hall’s compensation Mr. Chazen said, “ I hope they make a lot of money, because we’ll make even more.”

Like Mr. Chazen, OXY’s former CEO, Armand Hammer, seems to have had his way with Uncle Sam a few times as the latter’s fortune was initially made in the import-export business between the U.S. and what was then the newly formed Soviet Union and bragged later in life that he had been the only man in history friendly with both Vladimir Lenin and Ronald Reagan.

Emotional satisfaction if fine if you can afford it but the real responsibility of Congress is the safe return of all of the money the U.S. taxpayers have entrusted to them. If they keep cutting deals like they did with Citi, shouldn’t we be able to watch at least one episode of Congressional hearings where the Capitalists are on the dais asking the free spending politicians what they think they are doing?

Citi’s CDS closed at 188bps last night which was exactly 166bps more than the sovereign CDS on the U.S.A. If buying Citi paper is not credit arbitrage, then it doesn’t exist as selling a profitable entity for half of what it’s worth is a lot different than trying to explain to your constituency why you just blew $45BN by letting Citi go down the drain.

C’s stock closed at $4.42 last night off near term highs of $5.00 on 10/14 and $5.23 on 8/28 but still a bit away from the $7.46 seen on 1/6.

OXY’s CDS closed at 45bps last night, up from 38bps on 8/7 but well off the high of 135bps seen on 1/22. The stock has pretty much followed the price of oil this year moving higher with the increased perception of a turn around in global demand for fossil fuels. A near term high of $83.14 was reached on 10/15.