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Citi’s Phibro Giveaway: Politics Trumps Business Sense

In these tough economic times, companies often face difficult decisions. But Citigroup’s recent decision to sell its Phibro LLC energy-trading business to Occidental Petroleum Corp. had nothing to do with economics.

Phibro was one of the few Citigroup divisions to continue to turn a profit last year when the company as a whole suffered a record $27.7 billion net loss. Occidental will pay only $250 million for the unit, which has averaged $371 million in annual pretax earnings over the past five years.

Bill Smith, founder of Smith Asset Management Inc. in New York, who holds Citigroup shares, said of the sale, “This is a division that has done well, so why give it away? That’s what they did, they basically gave it away.”

The answer to Smith’s question is all too familiar: It’s politics.

Citigroup paid Phibro’s chief executive, Andrew Hall, a portion of the unit’s earnings. Hall made more than $100 million last year from that arrangement, and he is likely to be entitled to a similar sum this year.

With government regulators peering into Citigroup’s finances to see what it’s doing with the $45 billion bailout it got from taxpayers, C.E.O. Vikram Pandit now says $100 million is too much for a single employee to earn. Pandit has cut his own pay from $10.8 million last year to $1 this year.

Citigroup was one of seven companies receiving federal aid that had to submit compensation plans for top executives in August to Kenneth Feinberg, the Obama administration’s “pay czar.” While the Phibro sale was made before Feinberg issued his conclusions this month, it already was clear that he would not look kindly on a $100 million payout, even if it was in Citi’s best interest to pay it.

So Pandit cast off Phibro like a hot potato. If he doesn’t own the unit, he does not have to pay Hall and can avoid the resulting friction with his none-too-silent partners in Washington.

Occidental, an oil company, is under less government pressure. According to Occidental spokesman Richard Kline, Phibro’s senior managers, including Hall, have agreed to make “a significant investment in Phibro and receive returns dependent upon the company’s future performance.”

The real winner in all this is Occidental, and the losers are Citigroup and its shareholders, including the American people. While $100 million may be too much to pay a single person, Hall still made more for Citigroup than he took. And without him, Citigroup will be poorer.

So the Phibro deal was bad business for Citi, but it was good politics. If anyone needed an example of what can go wrong when politicians run companies, this is it.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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