Citigroup Inc agreed to sell its Phibro energy trading business to Occidental Petroleum Corp for a pittance, allowing the bank to calm regulators who were outraged over a $100 million pay package the unit was obliged to pay a star trader.
Citigroup is shedding a unit that has generated big profit by taking big risk, while oil and gas producer Occidental Petroleum is venturing into new territory. Occidental has historically been conservative in its trading.
Phibro has been profitable in recent years but has lost money in the past. In 1998, the bank put Phibro on the auction block because of its wildly fluctuating profits, but it never found a buyer.
Occidental did not disclose the terms of the deal but said its net investment would be about $250 million and that it was paying roughly the net asset value of the business. Andrew Hall, the unit's star trader, will invest in the business, as will other executives.
Hall became a lightning rod for criticism over Wall Street compensation. Pay czar Kenneth Feinberg, appointed by U.S. President Barack Obama to review executive compensation at banks that received the biggest government bailouts, would have struggled to change Hall's pay package because he does not have the legal authority to tinker with a long-standing contract, according to people familiar with the matter.
If that outsized contract had been unchanged, Feinberg would have appeared toothless. Feinberg pressed Citigroup to fix the problem, although he didn't propose a specific solution, people familiar with the matter said.
Last month Citigroup Chief Executive Vikram Pandit said publicly that $100 million was too much for an employee to earn, given the bank's circumstances.
Government regulators have particular sway over Citigroup, which has not yet repaid a $45 billion taxpayer bailout and is roughly one-third owned by taxpayers.
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 $100 million check, said Holland & Co President Michael Holland, who worked with Hall in the 1990s.
Citigroup said the sale of Phibro was not material to its earnings. Hall makes trades out of a former dairy farm in Connecticut, and 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, people familiar with the matter said.
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 $60.5 million in 2008 and famously received total compensation of nearly $450 million in 2006.
Irani is the largest individual shareholder in Occidental,
Phibro, primarily a trader in oil and gas, will become part of Occidental's midstream segment, which includes natural gas liquids, power, pipeline and trading businesses.
It's a great move for Occidental Petroleum because they're getting a proven team, said David Tendler, who was co-CEO of Phibro when Hall was hired. This is not a fly-by-night trading group.
Tendler said of Hall, He's had a record of years of production. He's a hell of an asset.
Phibro's management team, headed by Hall, and its employees will remain with the unit after the sale closes, expected by year-end.
Citigroup said certain Phibro executives had agreed their 2009 compensation would be deferred and reinvested in Phibro, and paid out in future years.
Occidental said Phibro's senior management team had agreed to make a significant investment in the business and receive returns dependent on the company's future performance.
It said significant portions of current and future bonuses would be deferred and retained by Phibro and paid out in future years. The payouts will be adjusted to reflect Phibro's results.
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.
Phibro, formerly Phillips 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, quietly making trades in Connecticut and emerging occasionally to satisfy his passion for art.
His success has allowed him to acquire a fabulous art collection, including his favorites among the German neoexpressionists and the American Andy Warhol. He displays his art in his 1,000-year-old castle in Germany.
In 2003, when crude oil prices hovered around $30 per barrel, Hall foresaw demand from China and went long on oil, betting heavily on long-term futures and options that paid off when oil soared past $100 per barrel in 2008.
Citigroup shares were down 4 cents, or 0.9 percent, at $4.61 in midday trade, while Occidental was off 97 cents, or 1.2 percent, at $79.12, both on the New York Stock Exchange.