The U.S. government's pay czar played a critical role in Citigroup's decision to sell off its lucrative commodities trading business, Phibro, a source familiar with the matter said Friday.
The sale of the unit to Occidental Petroleum Corp relieves beleaguered Citigroup of a massive political headache-- what to do with Phibro trader Andrew Hall and his paycheck of up to $100 million.
Hall has become the poster child of Wall Street's top earners; and while pay czar Kenneth Feinberg would have limited power over his pay this year, he would undoubtedly have dramatically restructured Hall's pay in future years.
Feinberg made it clear to Citigroup that Hall would not be able to keep earning his eye-popping paychecks, leaving Citigroup with the decision of selling off Phibro and parting with Hall or keeping Phibro but losing the unit's moneymaker, according to the source.
The source spoke anonymously because the negotiations between Citigroup and the pay czar have not been made public.
Citigroup's decision to offload both Phibro, and so Hall, demonstrates the extent of Feinberg's power over the seven firms that have received exceptional assistance from the government.
The other firms are Bank of America Corp , American International Group Inc , Chrysler Group LLC, General Motors Co , Chrysler Financial and GMAC.
Alan Johnson, a Wall Street compensation consultant, said the deal helped Citigroup unload what was becoming an embarrassment.
Occidental did not disclose the terms of the deal but said that its net investment would be about $250 million and that it was paying roughly the net asset value of the business.
Citigroup has received multiple bailouts from the government, including $45 billion from the U.S. Treasury's Troubled Asset Relief Program.
Feinberg is in the thick of a 60-day intensive review of the pay contracts for the top 25 earners at the seven firms, in which he has the power to approve or renegotiate their compensation packages.
Citigroup's announcement that it is shedding Phibro comes just three weeks before Feinberg's rulings are due.
Feinberg did not have explicit authority to approve or reject Hall's pay for this year because the contract was signed before a cut-off date of February 11, 2009.
But in a demonstration of the reach of Feinberg's powers, he would still have a say over Hall's future pay. He would have likely forced much more of it to be in equity that vested over a longer time horizon, crimping Hall's ability to take home cash.
Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, said it is not clear that influencing Citigroup to shed a profitable unit is in the shareholders' best interests.
Wall Street firms and the government should be concerned not with high pay, but with undeserved pay -- and by all accounts Hall had earned what was coming to him, Elson said.
That demonstrates, in my view, the absurdity of this whole exercise, Elson said.
But even Citigroup Chief Executive Vikram Pandit has admitted that nine-figure paychecks are hard to justify, saying publicly last month that $100 million was too much for an employee to earn, given the bank's circumstances.
(Reporting by Steve Eder in New York and Karey Wutkowski in Washington, with additional reporting by Dan Wilchins)