Citigroup offloads trading arm to defuse pay dispute

Citigroup Inc will sell its Phibro energy trading business to Occidental Petroleum Corp, allowing the bank to defuse a battle with regulators over a $US100 million ($110 million) pay package for the unit's star trader.

Citigroup is shedding a business that has generated profit by taking big risk, while oil and gas producer Occidental is venturing into new territory after long trading conservatively. Occidental was drawn to a bargain and potential profits, analysts said.

The price of the transaction was not disclosed, but Occidental said its net investment would be only about $US250 million and that it was paying roughly the net asset value of the business. Analysts concluded that Citi had sold Phibro for a pittance.

Andrew Hall, the unit's star trader, will invest in the business alongside other executives, and his 2009 compensation will be paid out in future years based on the unit's performance.

Hall, who famously collects contemporary art that he houses in a castle in Germany, has become a lightning rod for criticism over Wall Street compensation.

The Obama administration's "pay czar," Kenneth Feinberg, who is reviewing compensation at major bailout recipients, would have struggled to change Hall's 2009 pay package because he lacks legal authority over contracts put in place before Feb. 11, 2009, according to people familiar with the matter.

Feinberg pressed Citigroup to fix the problem and to reduce Hall's pay in future years, people familiar with the matter said, making Hall unlikely to stay.

Phibro has been profitable in recent years but has lost money in the past. In 1998, Citigroup put the unit on the auction block because of its wildly fluctuating profits, but the bank never found a buyer. Occidental looked at the company then, Occidental Chief Financial Officer Stephen Chazen told Reuters.

Government regulators have particular sway over Citigroup, which has yet to repay a $US45 billion taxpayer bailout and is roughly one-third owned by taxpayers.

Last month, Citigroup Chief Executive Vikram Pandit said publicly that $US100 million was too much for an employee to earn, given the bank's circumstances.

"When the government is an owner and Congress and regulators are looking over (CEO Pandit's) shoulder when he writes a check, then he has to be trembling if he writes a $US100 million check," said Holland & Co President Michael Holland, who worked with Hall in the 1990s.

Citigroup said the sale was not material to its earnings. Hall and his team trade out of a former dairy farm in Westport, Connecticut. The Phibro unit operates almost completely separately from the rest of Citigroup, meaning that removing it should have no impact on the bank's other businesses, including its commodities trading business for clients, people familiar with the matter said.

The sale of Phibro would be the latest in a series of divestitures by Citigroup. Earlier this year it sold a controlling stake in its Smith Barney retail brokerage to rival Morgan Stanley, as it faced pressure from regulators to raise capital and overhaul operations.

Citigroup considered many options for its Phibro business, ranging from spinning it off to opening it to outside investors, people familiar with the matter have told Reuters.

Citigroup Stock closed down 2 cents at $US4.63, while Occidental was off 55 cents, at $US79.54, both on the New York Stock Exchange.

High pay

Occidental is no stranger to high pay packages. Its CEO, Ray Irani, has long been one of the best-paid executives in the world. He took home $US60.5 million in 2008 and famously received total compensation of nearly $US450 million in 2006.

Irani is the largest individual shareholder in Occidental.

The acquisition is a departure from Occidental's traditional reluctance to make big bets on energy markets, but the company could see its investment repaid within two years, said Fadel Gheit, energy analyst with Oppenheimer & Co.

"It's really cheap," Gheit said, adding that Occidental's management is likely to put Hall and the rest of his team on a shorter leash. Phibro has earned an average of $US371 million a year before taxes over the last five years.

"They (Occidental's management) are not going to allow their hard work be put at risk to let Phibro play a high-stakes poker game. There is a new cop on the beat here," Gheit said.

Occidental Petroleum CFO Chazen said he does not view Phibro as a material source of earnings fluctuation for the company, adding that the unit has been profitable every year back to 1997.

"You probably won't even see the volatility," Chazen said.

Said David Tendler, who was co-CEO of Phibro in the 1980s, "It's a great move for Occidental Petroleum because they're getting a proven team."

Tendler said of Hall, "He's had a record of years of production. He's a hell of an asset."

Phibro history

Phibro, formerly Philipp Brothers, acquired the investment bank Salomon Brothers in 1981, though the bank would gain control of the merged entity. Travelers Group acquired Salomon in 1997 and a year later acquired Citicorp, to create Citigroup.

Hall, a British-born naturalized American citizen, has kept a low profile. He has over the years acquired an extensive contemporary art collection, including pieces from Andy Warhol and Bruce Nauman. He displays his art in his 1,000-year-old castle in Germany.

Reuters