Citigroup Inc is removing one of the irritants in its relationship with the government, its Phibro commodities trading division that is paying one trader an estimated US$100 million this year.
The deal announced on Friday carries a tradeoff for Citigroup: While the US$250 million sale to Occidental Petroleum Corp means a bit less government scrutiny, it also means the bank is losing hundreds of millions of dollars in annual income that could help repay US$49 billion in bailout money.
Phibro, which makes most of its money through oil and natural gas trades, earned an average US$371 million annually during the past five years. Citigroup sold it for about US$250 million, which means Los Angeles-based Occidental, the fourth-largest US oil and gas company, could recoup its investment in less than a year.
A Citigroup official with knowledge of the deal said the bank wanted to dispose of Phibro by the end of the year.
The official, who spoke on condition of anonymity because she wasn’t authorized to discuss the deal publicly, said Citigroup considered Phibro a “political hot potato” that would hurt the company despite its financial success.
Occidental Petroleum spokesman Richard Kline said Citigroup approached Occidental about a month ago, seeking a buyer for Phibro.
“There obviously was some pressure from the government to do this,” Kline said.
While Citigroup sold Phibro for a relatively small amount, he said: “If they had liquidated the business, they would get about what we’re paying.”
Officials at the US Department of Treasury declined to comment directly when asked whether the government had pressured Citigroup to dump Phibro, its huge pay packages and the volatility that goes along with trades in the energy market.
The government now has a 34 percent stake in Citigroup, putting the bank under close watch by federal officials. The company came under further scrutiny this year after it agreed to pay Phibro trader Andrew Hall an estimated US$100 million.
Hall’s pay will now be Occidental’s responsibility. It’s not known whether the US administration’s pay czar, Kenneth Feinberg, will continue to review Hall’s pay package following the sale to Occidental.
Treasury spokeswoman Meg Reilly said in a statement: “We are not going to provide a running commentary on that process, but it’s clear that Mr Feinberg has broad authority to make sure that compensation at those firms strikes an appropriate balance.”
While the government has questioned banks’ pay practices since the financial crisis that erupted a year ago, it has also taken issue with the companies’ trading units. Many banks drove their profits higher by dealing in risky securities and commodities, and they turned to the government for help when they piled up billions of dollars in losses.
The sale of Phibro could be the first in a series of actions taken by banks to satisfy the government.
“What you should expect to see is other banks — whether it’s Bank of America or JPMorgan or Wells Fargo — will also be forced to sell divisions like this,” said Richard Bove, a banking analyst with Rochdale Securities.
“You should expect to see pressure on Morgan Stanley and Goldman Sachs to reshape their business so they do less proprietary trading,” he said.
Proprietary trading includes transactions such as stock, commodities and bond purchases and sales that banks do for themselves in hopes of increasing their profits.
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