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.
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