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 Citigroup Inc.'s (NYSE:C) CEO Vikram Pandit has asked the U.S. Treasury to pay out retention bonuses to employees in its energy trading unit Phibro as the bank seeks ways to free the profitable unit from Troubled Asset Relief Program restrictions. Can you see the hairs on
Timothy Geithner's neck standing up? The bonus request comes shortly after the controversy concerning the $165 million in retention bonuses American International Group Inc. (NYSE:AIG) paid to employees in its financial product unit and the controversial Merrill bonuses, which now have Bank of America Corp. (NYSE:BAC) CEO Ken Lewis under fire. However, the circumstances are very different. For starters, AIG paid out bonuses to its Financial Products unit, which basically was responsible for the firm's collapse. On the other hand, Citi's Phibro unit has nothing to do with the bank's troubles, and through it all it has remained profitable. Because the unit churns out millions of dollars for Citi, staff were "paid out hefty compensation, including a roughly $100 million windfall last year for the unit's leader, Andrew Hall," according to The Wall Street Journal. Now, Citi must play a balancing act as employees in the unit have been threatening to leave because of pay caps. So in order to pay out retention bonuses, Citi and the government are apparently considering paying stock-based bonuses to employees or spinning off Phibro into an independent hedge fund or bringing in outside investors. Both options could be a win-win for Citi and the government because the government would likely prefer to see Citi shrink, so as to limit its systemic risk to the economy. As Clusterstock points out, Geithner is stuck between a rock and a hard place: "And then pity poor Tim Geithner. If he says 'no' to this request, Phibro will walk from Citi, taking its revenue with it. If he says 'yes,' he'll get his face ripped off by the public and media again. Such is the lunacy of the US government owning major stakes in massive financial institutions but pretending it hasn't nationalized them. If the government had just seized Citigroup six months ago, as it was supposed to, we wouldn't be in this position. The company would have been chopped up and units like Phibro would already have been sold off. Bondholders would have absorbed some of the costs (as they should). And we wouldn't be in the absurd position we find ourselves in now." However, if Geithner lets Citi give employees bonuses, he also would be setting a precedent that would likely carry over into creating loopholes for institutions to award employees bonuses despite TARP regulations, which all of the recipient banks have been desperately seeking. That's why several institutions such as Goldman Sachs Group Inc. (NYSE:GS) that originally accepted TARP want to give it back as soon as possible. - Maria Woehr Also see: Looking for bonus loopholes Is Goldman's rush to repay TARP premature?
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