You’d think that the federal government wants Citigroup (NYSE:C) to return to financial health—if for no other reason to recoup the $45 billion of taxpayer money spent to shore up the bank in the credit freeze. You’d think the government wants a real effort to boost efficiency and profits. You’d be wrong.
What the Feds chose is a political charade. The pay czar objects to the $100 million compensation due to Citi’s star energy trader. Since the trader is contractually entitled to a share of the profits from Phibro, the phenomenally profitable energy trading subsidiary, there is no legal way not to pay him. So instead Citi is pressured to sell Phibro.
The bank complies. Occidental Petroleum snaps up the business at a bargain basement price. The WSJ quotes Occidental’s president as saying, “If you’ve got to sell, why should I pay a premium? What leverage does the seller have?” The lucky buyer added that Citi would never sell Phibro if it weren’t for pressure by the government.
Citi’s balance sheet is now in worse shape. It lost one of the few businesses that made money last year and had to sell under the worst possible circumstances, created by the government. Instead of slimming down by gradually getting rid of inefficient divisions so as to become a better-run company, the bank was forced to almost give away a valuable asset. And this to make it look like the government combated excessive pay.
The traders’ compensation has merely been deferred. They’re going to receive the same amounts after Phibro becomes part of Occidental. Presumably, that does not look bad because Occidental is not a bank, did not receive government investment and is not under media spotlight.
What’s been achieved is public relations flummery. In the name of the poor masses, the Obama administration battles filthy rich financial geeks, who are in any case suspect because most people can’t understand what they do. But it’s all a pretense. The traders will be just as rich, while the masses’ investment in Citi loses value.
But who cares about that? Officials have made the politically correct gesture. Left to itself, Citi has a fair chance; overseen by Washington czars, much less so. This sorry episode demonstrates that as clear as can be.
Winston Churchill quipped that democracy is the worst form of government, except all the others that have been tried. A complementary motto would be that private enterprise is the worst type of economic player, except all government agents.
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