Archive for October, 2009

Taxpayers Saved from Morally Corrosive Profits As Citi Sells Phibro

Tuesday, October 20th, 2009

Citigroup’s decision to sell its Phibro energy trading unit to Occidental Petroleum for about $250 million saves the partly government-owned bank from paying trading chief Andrew Hall a reported $100 million compensation. The idea of taxpayers footing so princely a bill had raised the ire of the Administration, Congress and the media, who’ve tried to use Hall’s prospective payday to rally public outrage at what they regard as morally repugnant Wall Street profits. Hence Washington’s intense pressure on Citi to unload Phibro.

Well, thanks to the Phibro sale, the taxpayer-shareholders of Citigroup no longer need worry that they might be sullied by such unseemly earnings. You see, in addition to selling Phibro at what some analysts regard as a cheap price, we the reluctant partial owners of Citi will forgo the average $400 million per year Phibro contributed to Citi’s bottom line.

To be sure, some will argue that firms bailed out with public funds should not be taking the risks inherent in trading operations like Phibro, and certainly Citi’s track record on risk management is, shall we say, rather less than completely reassuring. But measures of risk for a firm like Citi must take into account how the bank’s positions are “correlated,” essentially how they tend to move in relation to one another. Two risky but negatively correlated assets or revenue streams tend to have their values move in opposite directions and thus may hedge or cancel some of each other’s risk. In the case of Citi, while lending and other trading activities went south last year it was Phibro’s outsized gains that prevented overall losses (and the subsequent bailout) from being hundreds of millions larger.

So it’s not at all clear Citi is a safer bank for shedding Phibro, let alone a more valuable holding for the taxpayer. But we all have the consolation of knowing it will be Oxy’s shareholders who’ll be paying those big bonuses, even if after meeting that payroll Phibro’s new owners still end up with a truckload of earnings. This sacrifice means we can all feel morally superior to Wall Street, knowing our leaders made sure we dumped a once and perhaps future golden goose before it send any of those shiny eggs our way. No price to high for rectitude, right?

The problem here isn’t that the government sold out of Phibro but rather that it hasn’t gotten out of Citi itself. Continuing to hold a public stake in any bank means strategic decisions driven by a need to appease or otherwise manipulate public opinion. While this may make good short-term political sense, it tends to lead to biting off one’s potentially profitable nose to spite one’s supposedly overpaid face, with results that, for taxpayers, tend to be far from financially beautiful.


Blame It On Rio

Thursday, October 8th, 2009

In the wake of the International Olympic Committee’s decision to award the 2016 Summer Games to Rio de Janeiro there has been no shortage of hand wringing over how Chicago and the United States lost. My personal favorite: Brad Flora’s very amusing “Chicago Loses, Nerds Win” in Slate, in which the city’s bid is hamstrung by “good government” types opposing public funding of stadiums. You know the country’s taken a turn toward state enterprise when a derisive moniker once reserved for bespectacled bookish types is now hurled at anyone against getting taxed to fund a government-sponsored sports complex. Flora’s point that local opposition didn’t help is well taken, but the hard truth is the current political economy made Brazil’s Olympic victory a virtual sure thing.

At a time when the BRIC (Brazil, Russia, India and China) nations are credited as new dynamos of global economic growth and the financial authority of the G7 is discarded in favor of the G20, the zeitgeist favored one of the rising players (I’ll set aside the question of whether Russia’s experiment in secret policing of markets really belongs in this group). Brazil, a nation of whom it was once joked was “the land of the future, and always will be” is now the tenth largest economy in the world and is lending money to the IMF its President often scorned. Its 2008 growth rate was an estimated 5.1% and, despite the global economic slump, managed to expand at a 1.6% annual rate in the second quarter. Though still heavy in agriculture and natural resources, Brazil’s development has been accomplished with impressive diversification of economic activity, as anyone who’s flown in an Embraer jet can attest.

The Rio games will be the first in South America and in the Southern Hemisphere outside of Australia, emblematic of formerly Third World nations asserting themselves in the international arena.  With that new-found self-confidence, and in the wake of America’s image problems in the last few years, I suspect there’s a certain satisfaction on the part of much of the international community in seeing a diminished United States. Obama’s election has surely helped in the public relations department, but when you’re leader is praised by those who are after all not only allies but rivals, some caution is in order. Knocking Chicago out of the running at the start of the Copenhagen round and rebuffing the American President (he was flying home when he got the news) is just part of a process of humble pie consumption. It’s worth noting that Luiz Inacio Lula da Silva, a man not shy in his critiques of the U.S. and a sometime supporter of Chavez and Ahmadinejad, is now provided with a capstone achievement for his own presidency. Take that, Yankee.

It’s likely the White House figured the odds and never thought there was much chance the United States would prevail in Denmark, hence the early reluctance to send Obama to plead the Windy City’s case. But a second calculation obtained, rather along the lines of “Dammed if you do, more damned if you don’t” With Japan, Spain, and Brazil sending their heads of state, had Obama not gone he would have inevitably been accused of depriving the American cause of its strongest possible advocate, and by his hometown supporters to boot. Better to go and take you lumps than be seen as having failed to back your backers.

So no need for a urine test: Brazil won fair and square, a victory that can be credited to economic achievement and a realigned world order (well, in that sense maybe the judges could be said to have been in the bag). That country’s challenge remains translating recent growth into broad prosperity, security against crime and political stability. To this end, it remains to be seen if the Rio games will mean more displacement than development for the teeming poor of the city’s favelas. As for America, conciliation can sooth friends but also encourage adversaries, and Joe Biden predicted Obama would be tested early in his Presidency. Would it not be wonderful if the challenge in Copenhagen represents the zenith of frustrated international ambitions for the new President? Unfortunately, I’m not sure we’ll all be that lucky.

Meanwhile, the nerds had a hard enough time in gym class; let’s stop blaming them for losing the Olympics.