Citi May Spin Off Phibro As Hedge Fund

Apr 30 2009 | 9:38am ET

Another Wall Street giant may have to spin off a profitable trading desk into a hedge fund to skirt executive pay restrictions imposed on firms accepting government bailout money.

Citigroup is considering either spinning off its Phibro commodity-trading unit as an independent hedge fund or opening it to outside investors. The team, just a few dozen strong, has threatened to leave Citi as a result of the pay restrictions—Phibro’s head, Andrew Hall, reportedly earned about $100 million last year.

Citi is reportedly in talks with the Treasury Dept. about allowing special bonuses for many employees, possibly including the Phibro team. The firm is desperate to hold onto Phibro, which as recently as two years ago accounted for some 10% of Citi’s net income.

According to The Wall Street Journal, Treasury Sec. Timothy Geithner has not decided whether to grant Citi’s request.

Citi’s contract with Phibro, which it acquired along with Smith Barney in 1998, requires the firm to return a certain percentage of Phibro’s revenue in the form of compensation, an arrangement that could run afoul with the Treasury. Citi has accepted hundreds of billions in government assistance as it struggles to weather the economic crisis.

The firm is not alone is fretting over what to do with a highly-profitable, but highly-compensated, trading unit. Morgan Stanley is considering similar moves for its quantitative process-driven trading group as a way to get around the federal pay restrictions.

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