Published August 17, 2009

US officials in a pickle over pay of Citi traders

Bank says US$130m exempt from government review

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(WASHINGTON) Senior Obama administration officials were wrestling on Friday with how to handle an explosive executive pay issue involving compensation packages for two traders, totalling more than US$130 million, that Citigroup says are exempt from government review.
Phenomenally successful: The home of Andrew Hall, whose compensation package comes to US$98 million, in Southport, Connecticut

Citigroup's decision leaves top White House and Treasury Department officials unable to do much about some of the highest- paid employees at the troubled bank just two months after the administration announced, with great fanfare, the appointment of an official to crack down on lucrative payouts at companies that have become wards of the state.

On Friday, Citigroup, which is facing a government deadline, submitted the pay packages for its 25 senior executives and highest-paid employees. People involved in that process said Citi advised the Treasury that an energy trader named Andrew Hall, due US$98 million, was exempt from federal review, and so was a second unidentified trader who received more than US$30 million.

Mr Hall and the other trader were paid under an employment contract signed in October, said a person briefed on the contract who was granted anonymity because of not being authorised to disclose the information. That was before a law went into effect instructing Treasury Secretary Timothy Geithner to examine the pay packages of top executives at companies that received exceptional bailout assistance from the government.

In recent weeks, Treasury officials had warned Citigroup executives that the administration would reject the contract, hoping to persuade the bank to rewrite it. Now the bank's decision presents the administration with an awkward political choice between doing little or doing nothing about the contract.

Treasury officials could issue a non-binding advisory opinion critical of the pay package that would carry no legal weight but could ameliorate some of the expected political fallout. Or they could do nothing and face the wrath of the public and Congress, which will consider legislation to limit executive pay after its August recess.

The government's special compensation czar, Kenneth Feinberg, has two months to decide how to proceed. On the touchiest contracts, he is expected to take his cue from top Treasury and White House officials when they decide whether to criticise those deals.

Mr Geithner and two top aides to the president - Rahm Emanuel, the president's chief of staff, and David Axelrod, a senior political adviser - were calculating the political options.

The oil trader at the centre of the pay issue clings to a low profile, quietly making trades from a former dairy farm in Connecticut and emerging occasionally to satisfy his passion for art.

Mr Hall, 58, a British-born naturalised American, has been phenomenally successful with the Citigroup unit Phibro, earning an estimated US$100 million this year while the parent company reported a net loss of US$18.7 billion in 2008 and took US$45 billion in taxpayer bailouts.

In the previous five years, Mr Hall earned more than US$250 million, according to a Wall Street Journal analysis of securities filings and Mr Hall's compensation structure.

That has allowed him to acquire a fabulous art collection, including his favourites among the German neo-expressionists and the American Andy Warhol, and he displays his art in his 1,000-year-old castle in Germany.

'Andy Hall has had a genius for seeing where the market will be a year or two years out and booking bets that have been inexpensive to put on and hugely profitable,' said George Stein, managing director of Commodity Talent LLC. 'He's done this several times in his career and has attracted a following among oil traders and investors.'

Back in 2003, when crude prices hovered around US$30 per barrel, Mr 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 US$100 per barrel in 2008.

Through it all, he exercised the clout and independence that come with success, convincing Citi to increase its risk threshold to go longer on oil and fighting off Citi plans to integrate Phibro into its asset-management arm, the Journal reported. -- NYT, Reuters