Citigroup Sells Phibro Unit to Occidental Petroleum (Update1)

Updated:New York, Oct 09 17:20

London, Oct 09 22:20

Tokyo, Oct 10 06:20

Citigroup Sells Phibro Unit to Occidental Petroleum (Update1)

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By Bradley Keoun

Oct. 9 (Bloomberg) -- Citigroup Inc. agreed to sell its Phibro LLC energy-trading business to Occidental Petroleum Corp., averting a clash with the Obama administration over a potential $100 million payout to the unit’s chief executive officer, Andrew J. Hall.

Occidental said it will pay $250 million for a unit that had average pretax earnings of $371 million during the past five years. Hall and other Phibro managers will defer compensation for this year and reinvest it in the trading unit, the Los Angeles-based oil producer said.

Phibro became a flashpoint for critics of excessive compensation at banks receiving federal aid because Hall, 58, was paid more than $100 million in 2008 and is set to earn about the same this year. Citigroup, the third-biggest U.S. bank by assets, received $45 billion from the federal bailout program, whose rules include curbs on pay.

The sale “is not benefiting bank shareholders, but pacifying legislators,” said Doug Ciocca, a managing director at Renaissance Financial Corp. in Leawood, Kansas, whose $1.8 billion of assets don’t include Citigroup stock. “Citigroup’s goal is to have a business model that’s far more boring than the one this group represents.”

Citigroup, led by CEO Vikram Pandit, 52, is among seven companies receiving federal aid that had to submit compensation plans for top executives in August to Kenneth Feinberg, the administration’s special master on pay. Feinberg’s determinations are due this month. He declined to comment today. Jen Psaki, a White House spokeswoman, declined to comment on the Citigroup transaction.

Phibro’s Profit

Occidental said the unit’s senior managers agreed to make “a significant investment in Phibro and receive returns dependent upon the company’s future performance.” Hall is among those managers, said Occidental spokesman Richard Kline. The sale won’t have a significant impact on Citigroup earnings, the bank said.

Pandit, who cut his own pay to $1 this year after getting a total of $10.8 million in 2008, is parting with one of his most consistently profitable businesses.

Phibro, based in Westport, Connecticut, made money in each fiscal year since 1997. Citigroup had a record $27.7 billion net loss last year, driven by mortgage-trading losses and loan write-offs.

“This is a division that has done well, so why give it away?” said Bill Smith, founder of Smith Asset Management Inc. in New York, who holds Citigroup shares. “That’s what they did, they basically gave it away.”

Volcker’s View

Paul Volcker, the former Federal Reserve chairman who now heads President Barack Obama’s Economic Recovery Advisory Board, is among those who have called for banks to shun risky behavior.

“Banks are the backbone of any financial system,” Volcker said at a conference in Gothenburg last month. “I don’t think they have any real business in doing a lot of speculative trading.”

Hall, who has a degree in chemistry from the University of Oxford, is paid under a contract that gave him a portion of the unit’s trading results. He didn’t respond to a message seeking comment. His private philanthropic foundation held 20,000 Occidental Petroleum shares as of June 30, 2008, according to regulatory filings.

Occidental stock fell 55 cents to $79.54 as of 4:07 p.m. p.m. Shares of Citigroup, down 31 percent this year after tumbling 77 percent in 2008, fell 2 cents to $4.63.

Salomon’s History

Hall was hired by Phibro from British Petroleum Co. almost three decades ago. The subsidiary, once known as Philipp Brothers, was part of the Salomon Brothers investment bank acquired by Travelers Cos. in 1997. Travelers merged with Citigroup in 1998.

Philipp Brothers’ largest businesses were originally in metals trading. With the rising volatility in the oil markets in the 1970s and 1980s, oil took over as the largest source of profit. Phibro Energy, as it became known, traded cargoes of oil as well as refined oil products, relying on data for everything from oil shipments to local prices of jet fuel, gasoline and other refined products.

Phibro acquired Salomon Brothers, then an investment- banking partnership, for $554 million in 1981. Three years later, commodities markets tumbled as the Federal Reserve battled inflation. As Phibro’s profit fell, Salomon’s rose and its traders wanted control. John Gutfreund, Salomon’s head, engineered a coup and became chief executive of the combined firm, whose name was changed to Salomon Inc. from Phibro- Salomon.

Travelers Group

Phibro Energy, still profitable, was given autonomy, and in the mid-1980s a pay agreement was worked out giving Phibro’s traders almost 30 percent of the unit’s profit, according to Gerald Rosenfeld, then Salomon’s chief financial officer and now deputy chairman of Rothschild Inc.

Salomon was acquired by Travelers Group in 1997 for $9 billion, and Citigroup merged with Travelers in 1998. Concerned about the risks of a large trading operation, Citigroup dismantled some of Salomon’s proprietary trading desks. Phibro maintained its autonomy along with the profit-sharing deal and had access to inexpensive financing provided by the parent company.

Citigroup dropped the Salomon name in 2001. Phibro kept its name and Connecticut offices.

“The fact that they’re going to be controlled by a producer may mean that they’re going to start trading more commercially, primarily to hedge production and take less risky bets,” said Gijsbert Groenewegen, a partner at New York-based hedge fund Gold Arrow Capital Management.

To contact the reporter on this story: Bradley Keoun in New York at .

Last Updated: October 9, 2009 16:30 ED