Star trader threatens to leave Citi

[Uncle Max]

Pay issue could squeeze Citigroup
​

CHICAGO (MarketWatch) -- Citigroup Inc. could find itself between a rock and a hard spot as it determines how to handle a hefty pay package that is likely to draw the ire of the government, investors and the public, according to a media report Sunday.

A star trader and his team have threatened to quit the financial giant's Phibro LLC energy-trading unit if their 2009 contracts, which could earn them as much as $100 million, are not met, The Wall Street Journal reported in its online edition.

But Citigroup, which has received some $45 billion in bailout money from the U.S. government, could put itself in the center of a controversy if it honors the contract, much like American International Group Inc. did earlier this year when it paid out $165 million in bonuses.

Andrew Hall heads up a small group of traders that has made hundreds of millions of dollars in profit to Citigroup for many years, the Journal reported. This year's and future profits are key to Citigroup's recovery.

If the company refuses to pay Hall and the others, that could prompt the group to leave en masse and sue Citigroup.

However, if Citigroup hands out such handsome profits, it could be in trouble with Kenneth Feinberg, the Treasury Department czar whose job it is to set pay for top executives and highly paid employees at the seven firms that have received big bailouts.

"Companies will need to convince Mr. Feinberg that they have struck the right balance to discourage excessive risk-taking and reward performance for their top executives," a spokesman told the Journal.

For its part, Citigroup said in a statement that "Retaining and attracting the best talent is very important to the success of Citi and all its stakeholders. Citi continues to examine ways to ensure its employee-compensation practices are competitive in this very challenging market environment."

Among the options Citigroup is considering in this case is a spinoff of Phibro, which would enable Citi to continue to siphon off some of the unit's profits without having the responsibility of the pay packages, the Journal said.

Pay issue could squeeze Citigroup

 

[Uncle Max]

Here is the guy:

Andrew Hall, Citigroup's quarter-billion-dollar oil trader

The Wall Street Journal presents a fascinating study of Andrew J. Hall, a Citigroup Inc. trader who made $250 million in 2007 due to a successful bet beginning in 2003 that anticipated a change in the way the world valued oil. And his money and attitude have put him in some street fights with his Connecticut neighbors over his $100 million art collection.

What was Hall's trading insight? In 2003 he concluded that long-term and short-term energy prices would soon abandon their historical relationship with one another. For more than a decade, oil had ranged from $10 to $30 a barrel. But he concluded that demand growth -- driven by China and India -- would outstrip supply.

He bet on this trend by investing in the extremely long-term market in which traders buy and sell oil to be delivered years in the future. Back in 2003, oil for future delivery was as much as 20% cheaper than oil in the current -- or "spot" -- market. Hall told traders to bet that this relationship would reverse itself. He bet on this by buying all the oil futures he could for delivery three to five years out along with "call" options that gave him the right, but not the obligation, to buy oil at lower prices in the future. .

Around 2005, the discount for far-forward oil vanished and it began commanding a premium. That year, his tiny Phibro unit contributed $800 million in pretax revenue to Citigroup. Hall's pay totaled $125 million, around five times that of then CEO Charles Prince.

All this money has given Hall a chance to indulge in his passion for art collecting. In an effort to display a sculpture on his lawn in Southport, CT, he lost a four-year-battle with his neighbors. The battle was over "Etroits sont les Vaisseaux," or "Narrow Are the Vessels," an 80-foot-long concrete sculpture, on the lawn of his Greek Revival home. No problem. Hall replaced it with two, brightly painted, cartoon-like sculptures of cars by the artist Julian Opie.

Unfortunately for Citigroup shareholders, Phibro is too small a piece of the total pie to offset its problems. Hall should bolt and start his own fund. I hope he doesn't, though.

Source

 

[GusTsahas]

Whether Mr. Hall gets the full package, settles, or leaves and starts up his own fund he has what I call a "happy headache" but based on the governments past history I would be looking for office space for my group if I was in his shoes. I do believe his next call for the long term price direction of oil will be much harder to make then his 2003 call but that's why he charges big bucks.

 

[Uncle Max]

Is it possible that his 2003 call was just a luck? And now he charges a lot of money to make another "bet" not risking his own money.

 

[doug reich]

Is it possible that his 2003 call was just a luck? And now he charges a lot of money to make another "bet" not risking his own money.

Isn't Wall Street great?

His initial bet would have been much smaller if he wasn't very confident in it. And if it was wrong it would have been cut sooner as well, I think.

 

[Uncle Max]

His initial bet would have been much smaller if he wasn't very confident in it.

If he bets not with his own money, there's no confidence issue. Contrary, he is interested to bet us much as possible, because upside is unlimited, while downside is that he will get zero bonus.

 

[Andy Nguyen]

More insight from the NYT $100 Million Payday Poses Problem for Pay Czar - NYTimes.com

Mr. Hall, raised in Britain and known for titanium nerves and a collection of pricey art, is the standout performer at an operation that has netted Citigroup about $2 billion over the last five years. If Citigroup will not pay him the huge sums he has long made, someone else probably will.

The added wrinkle is that Mr. Hall works in a corner of the trading world that appears headed for its own infamy. Regulators are pushing to curb the role of traders like Mr. Hall, whose speculation in the energy markets may have played a major role in the recent gyrations of oil prices.

That suggests that last summer, drivers paid more at the pump, at least in part, because of people like Andrew J. Hall. How do you hand $100 million to a guy who may have profited because gas hit $4 a gallon?

 

[woody]

They shouldn't need this guy and his team to see that oil prices will be higher in the future (although they should honor contracts). Look for the next big leg up to be spurred on by population growth in OPEC countries.

 

[Subramaniam]

Citi to give up control of Phibro energy trading business
http://www.bloomberg.com/apps/news?pid=20601087&sid=agLSWvFVqk6A

 

[Keblovszky]

They shouldn't need this guy and his team to see that oil prices will be higher in the future (although they should honor contracts). Look for the next big leg up to be spurred on by population growth in OPEC countries.

I agree that oil is an easy call, but I definitely disagree with your assessment that it's going to go up due to population growth. In the free-market, most goods get cheaper over time.

Anyway, I think the main thing that's going to drive oil, in the long-term, is inflation. Although, at the current moment, Bernanke isn't printing any money. The last time he went this long without printing was in the summer of '08, right before the crash. So, we could see a second downturn in the market very soon.

BTW, on a completely different topic, what the hell do you quant guys actually do? I mean, outside of arbitrage and some other stuff, your formulas are pretty much useless.

 

[Eugene Krel]

Considering oil is becoming a scarce resource it is doubtful that it will get cheaper as demand increases.

 

[alain]

...your formulas are pretty much useless.

because...?

 

[woody]

To equate oil with a good that gets cheaper over time because the free market will cause producers to make more, like iPods, demonstrates a lack of knowledge of the oil industry.

And the equations are useful because they keep us employed!

 

[Uncle Max]

outside of arbitrage and some other stuff, your formulas are pretty much useless.

Our formulas are the best! At least mine are pretty good

 

[Andy Nguyen]

Considering oil is becoming a scarce resource it is doubtful that it will get cheaper as demand increases.

Speaking of scarce oil, did anyone read this piece from NYT yesterday
Exxon to Invest Millions to Make Fuel From Algae - NYTimes.com

 

[woody]

Thx for the article Andy. Algae has been an interesting topic for a while. There are many questions about cost and *opportunity* cost associated with algae and other biofuels. Many scientists (not so much politicians) are focusing on Energy Return on Energy Invested (EROEI), or 'Net Energy' analysis. For example, free-flowing oil in Ghawar comes out of the ground cheaply; it might take 1 unit of energy to get 100 units out of the ground (I'm making up numbers here). Whereas one unit of energy may yield 2 units of corn-based ethanol energy. (Some believe all things considered, ethanol is actually a net energy loser.) We don't know what this will look like for algae after a lot of R&D $$ is spent on improving it.

One thing is certain, there is no single replacement for oil, not in the short- or medium-term. US oil peaked in the 1970's and I'm pretty sure that oil companies are investing in multiple replacement strategies.

One more thing, I assume by saying inflation will cause oil prices to rise, you mean that a weak dollar will cause oil prices to rise. Because saying inflation causes prices to rise makes my brain hurt.

 

[alain]

(Some believe all things considered, ethanol is actually a net energy loser.)

This applies to US and ethanol made out of corn, right?

 

[woody]

Alain, yes. Sugar-based ethanol made in Brazil is much better. The US has tariffs and subsidies in place to ensure we don't get that more-efficient ethanol from Brazil.

 

[Keblovszky]

To equate oil with a good that gets cheaper over time because the free market will cause producers to make more, like iPods, demonstrates a lack of knowledge of the oil industry.

And the equations are useful because they keep us employed!

Well, just because we're dealing with a depletable good (some theories say it isn't depletable) doesn't mean its price can't drop due to improving efficiency of its use. As an example, if you saw the average mile per gallon go from 20 to 100, that's going to have an effect on the price of oil. And then you have questions of alternative goods and all that stuff.

Anyway, I do think countries like China will continue to add to the demand for oil, and thus push the price up. I was thrown off by population growth. When I think of population growth, I think of growth in the population of countries that are already major users of oil. In that case, it would be pop growth vs. efficiency improvement.

I was just teasing you guys on the equations, but it seems that using historical data to spot correlations is dangerous. This is a forward looking game. For example, treating the historical variable default rate as a constant, which worked so well for many banks. But as far as arbitrage and related stuff, you guys are gold!

Check this out:

Data Mining Isn't Good Bet for Investors - WSJ.com




---------- Post added at 10:15 AM ---------- Previous post was at 10:13 AM ----------

One more thing, I assume by saying inflation will cause oil prices to rise, you mean that a weak dollar will cause oil prices to rise. Because saying inflation causes prices to rise makes my brain hurt.

Monetary inflation being the cause of price inflation, in most cases ;-)

 

[woody]

The population growth I referred to is in OPEC countries. Take Saudi Arabia for example. Their growth rate is pushing 3%, with a very young population. Here's a decent blog post with some graphs and data.

GraphOilogy: Saudi Arabia's Ability to Export Oil

Saudi Arabia gets energy from oil and gas. It should be expected that they will use their own locally produced energy to do things like power their homes, desalinate water, and fuel their cars. This leaves less for the rest of the world.

And yes, oil is depletable. There is no evidence to say otherwise. Talk of aboitic oil is not only a waste of good minds, but moot. (Please don't cite a 1950's Soviet theorist.)