Citigroup dumps Phibro, avoids showdown with US

[October 10, 2009]  NEW YORK (AP) -- Citigroup Inc. is removing one of the irritants in its relationship with the government, its Phibro commodities trading division that is paying one trader an estimated $100 million this year.

The deal announced Friday carries a tradeoff for Citigroup: While the $250 million sale to Occidental Petroleum Corp. means a bit less government scrutiny, it also means the bank is losing hundreds of millions of dollars in annual income that could help repay $49 billion in bailout money.

Phibro, which makes most of its money through oil and natural gas trades, earned an average $371 million annually during the past five years. Citigroup sold it for about $250 million, which means Occidental could recoup its investment in less than a year.

A Citigroup official with knowledge of the deal said the bank wanted to dispose of Phibro by the end of the year.

The official, who spoke on condition of anonymity because she wasn't authorized to discuss the deal publicly, said Citigroup considered Phibro a "political hot potato" that would hurt the company despite its financial success.

Occidental Petroleum spokesman Richard S. Kline said Citigroup approached Occidental about a month ago, seeking a buyer for Phibro.

"There obviously was some pressure from the government to do this," Kline said. Noting that Citigroup sold Phibro for a relatively small amount, he said, "if they had liquidated the business, they would get about what we're paying."

The income lost to the Phibro sale will have little effect on Citigroup's earnings because the company has bigger problems with losses from failed loans, said Gerard Cassidy, a banking analyst with RBC Capital Markets.

"They're going to miss those earnings," Cassidy said. "But the credit losses are much larger and will have a much bigger impact."

Officials at the Treasury Department declined to comment directly when asked whether the government had pressured Citigroup to dump Phibro, its huge pay packages and the volatility that goes along with trades in the energy market.

The government now has a 34 percent stake in Citigroup, putting the bank under close watch by federal officials. The company came under further scrutiny this year after it agreed to pay Phibro trader Andrew J. Hall an estimated $100 million.

Hall's pay will now be Occidental's responsibility. It's not known whether the Obama administration's pay czar, Kenneth Feinberg, will continue to review Hall's pay package following the sale to Occidental.

Treasury spokeswoman Meg Reilly said in a statement, "We are not going to provide a running commentary on that process, but it's clear that Mr. Feinberg has broad authority to make sure that compensation at those firms strikes an appropriate balance."

While the government has questioned banks' pay practices since the financial crisis that erupted a year ago, it has also taken issue with the companies' trading units. Many banks drove their profits higher by dealing in risky securities and commodities, and they turned to the government for help when they piled up billions of dollars in losses.

The sale of Phibro could be the first in a series of actions taken by banks to satisfy the government.

"What you should expect to see is other banks -- whether it's Bank of America or J.P. Morgan or Wells Fargo -- will also be forced to sell divisions like this," said Richard Bove, a banking analyst with Rochdale Securities. "You should expect to see pressure on Morgan Stanley and Goldman Sachs to reshape their business so they do less proprietary trading."

Proprietary trading includes transactions such as stock, commodities and bond purchases and sales that banks do for themselves in hopes of increasing their profits.

Los Angeles-based Occidental, the fourth-largest U.S. oil and gas company, said Phibro's management team including Hall will stay with the company. Phibro executives agreed to make a significant investment in the trading firm, with returns on those investments tied to company performance. The company said current and future bonuses for the management team will be retained by Phibro, and paid out later.

Kline said Phibro would continue to make speculative trades in energy commodities as it did with Citigroup, but it will also help Occidental find buyers for the oil and natural gas it produces.

Phibro, based in Westport, Conn., trades energy, metal and agricultural commodities. Its predecessor company acquired privately held Salomon Brothers in 1981 in a $550 million deal, with Salomon managing partner John Gutfreund heading the combined company that retained the Salomon name. That deal came amid a series of big Wall Street takeovers.

It was during the Phibro-Salomon combination that a Salomon partner, Michael Bloomberg, lost his job. Bloomberg went on to found financial news conglomerate Bloomberg Inc. and is now running for a third term as New York City mayor.

Salomon was later bought by Sanford Weill's Travelers Group Inc. conglomerate, which in 1998 acquired Citicorp and renamed itself Citigroup Inc. Salomon was subsumed into the Smith Barney brokerage, which is now part of a joint venture between Citigroup and Morgan Stanley. The commodities operation, still named Phibro, will now be part of Occidental.

Phibro has been profitable each fiscal year since 1997, making about $200 million per year in pretax earnings from 1997 to 2009, Occidental said.

The latest deal for Phibro consists of cash, marketable securities and commodities positions. The acquisition is expected to close by the end of the year.

Shares of both companies dropped in afternoon trading. Citigroup stock fell 2 cents to $4.63 a share and Occidental fell 55 cents $79.54.

Jim Byrne, an analyst with BMO Capital Markets-Canada, said the transaction isn't mean guaranteed success for Occidental. Though Phibro has made money in the past decade, oil and natural gas trading isn't a sure bet. Both commodities have fluctuated wildly on the New York Mercantile Exchange during the past year.

"I would hate to see a bad bet impact the rest of Occidental's business," Byrne said.

[Associated Press; By CHRIS KAHN]

AP Economics Writer Martin Crutsinger contributed to this story from Washington D.C.

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