Editor's note: Porter's out of the office today, so Goldsmith is on The Digest.
Is any employee worth $100 million a year? That's the question Citigroup is currently struggling with... The bank is in a compensation debate with one of its star traders, Andrew J. Hall – head of its energy-trading unit, Phibro. Hall made $100 million last year, and his 2009 pay package will likely top $100 million. But Citi is hesitant to hand over such a huge amount for fear of political and investor backlash... The bank is currently operating with $45 billion of government funds – and the government will soon own 34% of the company – so, needless to say, a $100 million payday for one individual would look bad.
Regardless, Hall's contract entitles him to a large percentage of Phibro's profits – his small group takes home around 30% – and Phibro is responsible for a disproportionately large chunk of Citi's profits every year... Refusing to pay Hall could spur him to leave, and Citi is much more likely to pay back its government loan with the super-profitable Phibro unit operating as normal.
We've seen how much credence the government gives existing compensation contracts at financial institutions – witness the AIG fiasco. In this case, the Andrew Hall compensation issue will fall upon Obama's newly appointed "pay czar" Kenneth Feinberg... Feinberg has the power to regulate pay for the 100-highest compensated employees at every firm operating with government funds.
Seven companies that received large government loans must submit proposals for their 2009 compensation packages by August 13 – Citigroup, Bank of America, AIG, GM, Chrysler, Chrysler Financial, and GMAC Financial Services. Feinberg has been working with the firms to find a compensation level that makes the government happy, but also allows the firms to lure and maintain top talent.
Feinberg's biggest challenge will be dealing with compensation contracts – which firms are legally allowed to enter and are legally obligated to uphold. According to the Wall Street Journal, Feinberg won't "rip up" legal contracts. But he will likely renegotiate contracts he deems too high. If the two parties can't reach an agreement, Feinberg is expected to dock an employee's future pay by the amount of the contested contract. For instance, if you were promised and granted a big salary for 2009 despite a government request to lower your pay by, say, $1 million, expect your 2010 salary and bonus to be reduced by $1 million.
The lack of accountability exemplified by the U.S. government bailing out dozens of reckless financial institutions is trickling down to the individual... People known as "ruthless defaulters" have simply stopped paying their credit-card bills. The borrowers are angry with the credit-card companies for lending them so much money, and they don't feel they should have to continue paying exorbitant credit-card fees to an unyielding bank while that bank is operating on taxpayer dollars.
Most banks refuse to lower interest rates for underwater borrowers who are current on payments, so these "ruthless defaulters" just stop making payments...
"They've done the math on their account and they're very angry," said Corey Calabrese, a Fordham law student who is an administrator of the school's walk-in clinic for debtors at Manhattan Civil Court. "For the first time, Americans are no longer blaming the borrower but are looking at the credit-card companies."
Adam Levin, another industry expert, said borrowers are embracing "the darkness of default."
Eventually, corporations and individuals must learn taking on more debt than you can afford leads to bankruptcy... And it's no one's fault but your own. Of course, with the government waiting to backstop everyone and everything in financial ruin, this lesson will take a long time to sink in.
Last September, Warren Buffett bought $5 billion of Goldman's preferred shares paying 10% annually and received warrants for an additional $5 billion of Goldman stock. Last week, the Oracle reiterated his bullish stance on the bank, saying he doesn't plan on exercising those warrants any time soon...
"Every instinct in my body tells me that we will want to hold those warrants until they're very close to their expiration date," Buffett told Fox Business News. "The preferred pays us the dividend and the warrants are going to make us the money."
Mind you, the preferreds pay Buffett $500 million a year in dividends. And the warrants, which allow Berkshire Hathaway to buy Goldman common shares at $115 each at any time before October 1, 2013, are already up $2 billion with Goldman stock trading above $160.
New highs: AmeriGas Partners (APU), Crucell (CRXL).
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Regards,
Sean Goldsmith
Baltimore, Maryland
July 27, 2009