Citi/Phibro: Vikram Pandit has made the right call in hiving off Phibro. The Citigroup boss could have made a case for keeping the commodities trading division. But the brouhaha of a bank propped up by US taxpayers awarding whopping bonuses, including $100 million to head trader Andrew Hall, became so overwhelming that it was not a battle worth fighting.
Pandit’s strongest argument for the bank’s continued ownership of the unit was one that ordinarily ought to carry weight with a firm’s largest shareholder: Phibro has been consistently profitable, averaging $371m a year in annual earnings over the last five years, as new owner Occidental Petroleum has revealed. That equates to a profit margin of more than 50 per cent, and has been a bright spot in the past couple of years as Citi posted billions of dollars in losses elsewhere.
Citi could also have restructured compensation for Hall and his traders, spreading their earnings over several years and inserting clawback clauses – as Occidental has done. But that probably would not have been enough to quell Washington’s disapproval – even if the bank managed to convince the US government, which owns around a third of Citi, that it had proper control over semi-autonomous Phibro’s risk-taking. A stronger chief executive at a stronger bank might have tried to make the case for keeping the unit. But Citi's government life support doesn't sit well with Hall's activities and pay. And Pandit, whose own position is far from comfortable, probably has bigger fights ahead. Though Phibro's earnings will be missed, Pandit and Citi's board will have one less headache to deal with.