1. Money

Citigroup, Risk and Wall Street Pay

By August 13, 2009

There’s an article in today’s New York Times about the Citigroup oil trader who is due to make about $100 million in compensation this year, after earning a similar amount last year, and how that fits in with the whole debate about compensation on Wall Street. It’s a story I blogged about recently after a report on National Public Radio.

The trader’s name is Andrew Hall and he heads up Phibro, a commodities trading firm owned by Citigroup, which is one of the big banks that received federal bailout money last year. Because it received those taxpayer dollars, Citigroup is subject to a review of compensation by Kenneth Feinberg, the Treasury Department’s new “pay czar.” The question is what will Feinberg do about Hall’s $100 million?

Citigroup says Hall’s pay package should be exempt from government review, because his contract was signed before that review process was created. The Obama administration and Congress view bonuses and Wall Street pay like raw meat and Hall’s $100 million package is an easy handle to grab when debating the entire compensation issue.

Does anyone really need to be paid $100 million – and two years in a row for that matter? Perhaps if they’ve got annual bills totaling $99,999,000 or so. Otherwise they could probably get by with a little less. But that’s really beside the point, as much as social investors might see that sort of a payout as an enormous red flag in terms of corporate governance. It may seem excessive, ridiculous and even obscene to some, but to Citigroup it made sense. According to the Times, Hall is the top performer at Phibro, which has provided about $2 billion in revenues for Citigroup during the past five years. They had a deal: Hall would get a certain percentage of what he earned for the company. Earn a lot, get paid a lot. That’s capitalism.

The issue is risk. While Hall apparently took big chances and they paid off, others in the financial services industry were not so skilled. The consensus is that the financial crisis that has hit the U.S. was caused by encouraging excessive risk for enormous potential rewards, but not installing enough safety if plans flop. Traders such as Hall have much to gain, but the burden of failure falls on the company, the financial system and – in the extreme – the taxpayers. The question is how can that change?

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