Phibro: Beneficiary of Citi’s Benign Neglect

Sticking with Citi, Ann Davis has a fantastic front-pager in today’s WSJ on Andrew Hill, who runs commodity-trading subsidiary Phibro. Go read it, it’s full of wonderful details, like Hill’s thousand-year-old castle in Germany, which recently housed a massive Schnabel exhibition.

But the most interesting part of the story is Phibro’s relationship with its parent – something which Hall describes as "benign neglect". Phibro clearly is very successful, but the problem seems to be that Citi’s new CEO, Vikram Pandit, wants to fold it into his asset-management arm.

Mr. Pandit and his team see Phibro as an "underleveraged" brand, which, while still a profit center, has fallen off the financial world’s radar, one executive says. Some top executives at Citigroup hope to establish Phibro as a prestigious investment fund for Citigroup clients. That would move Phibro beyond its current role as a commodities shop trading solely on the bank’s behalf, as Phibro has functioned for years.

Late last year, Citigroup told Phibro executives that it was interested in broadening the unit’s scope by merging it into Citigroup’s asset-management arm. That would effectively turn Phibro into a hedge fund, managing money for clients but much less of Citigroup’s own capital.

The 57-year-old trader balked. Mr. Hall called the idea "a complete nonstarter," according to a person familiar with the exchange.

Phibro is the one bit of Citi which is working really well and making lots of money – and it’s where Pandit wants to start meddling? Has Pandit never heard of the law of unintended consequences, or what happened to the goose that laid golden eggs?

As for Hall’s compensation, yes, he’s made a lot of money, but that’s because he’s been running an enormously-successful commodity trading operation during a massive commodities boom. He’d’ve made just as much, probably, if Phibro had been independent. (Incidentally, "trading" is maybe the wrong word for what Hall is good at: he made most of his money by placing very large long-term bets and then sitting back over the course of a few years and watching them cash in.)

Hall would very clearly be happiest if Pandit would just leave him alone. Since Hall’s so valuable to Citigroup – he accounted for 10% of the bank’s total net income last year – I don’t see why Pandit doesn’t do just that.

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