We got $4 gasoline and he gets a $100 million bonus?
Fine art needs a fine German castle.
In the very, very old days, the social value of private transportation was easy to figure. A person could go no farther in a day than he could walk; if he got where he was going, it was worth it.
In the very old days, the person acquired a horse. The rider got a wider world and ease of transport. The equine transportation industry — ranchers, blacksmiths, saddlemakers, etc. — prospered.
Then in the old days came the automobile. A person could go a thousand miles a day. Automakers prospered. Oil companies prospered. Tire manufacturers prospered. Highway builders prospered. Shippers and consumers prospered. Transactions got a lot more complicated, but tangible products and services were bought and sold, creating a great deal of social value.
Today we have people like Andrew J. Hall, who is right in the middle of the national furor over compensation in the banking industry. What does this have to do with the social value of private transportation?
Excellent question.
The $100-Million Man
Andrew J. Hall is an oil trader who lives and works in Connecticut, though he also owns a 150-room castle in Germany. He runs a company called Phibro, which is owned by Citigroup, which at last count was into U.S. taxpayers for $45 billion in bailout money.
If it hadn’t been for Mr. Hall, Citigroup would be even worse off. Phibro reportedly contributed 10 percent of all of Citi’s net income in 2008. Under the terms of his contract, that makes Mr. Hall eligible for a bonus of $100 million.
He might not get it. Citi is the hook to the Treasury Department for that $45 billion, so it must get government approval before it pays executive bonuses. That decision is due Aug. 13.
Whether Mr. Hall deserves his $100 million depends on how you value capital. Mr. Hall, unlike a blacksmith or an oil field worker, produced nothing that helped anyone get from point A to point B. In fact, it may be that he made it more difficult for people to travel.
Remember last summer when gasoline was $4 a gallon? At least some of the rise in oil prices — some say as much as 60 percent — has been attributed to oil speculators. According to The Wall Street Journal, at some point in 2003, Mr. Hall began betting that worldwide demand for oil would go nowhere but up. He began investing in long-term oil futures, contracts that called for oil to be delivered three to five years in the future.
The bets began paying off in 2005, when Phibro earned $800 million for Citigroup. Mr. Hall’s haul: a $125 million bonus. Pretty soon lots of investors were buying oil futures; some of them even let tankers full of crude sit at anchor, waiting for prices to go up.
Mr. Hall got seriously rich, buying contemporary art and a castle to hold it. He made lots of money for Citi, which used it to offset the lousy investments it made on other make-believe assets. For a while, the nation flourished on the easy supply of money created by people trading in ephemera. Now we’re out a trillion dollars in various bailouts and unemployment is pushing 10 percent.
And these guys want bonuses?
We’re all for savvy investors and market liquidity. But executives who don’t create real value for their shareholders and society should be gone, along with the horse they rode in on.
So let me get this straight … somebody who accurately analyzes demand for oil, and earns billions of dollars for his company, isn’t creating “real value for … shareholders.” Yet I could name the CEO of another company whose stock went from $11.86 a share on 1/4/08 to just 39 cents on 12/26/08, who received more than $2.5 million in total compensation. Of that, only $850,000 was salary.
I’m guessing this Ed. Board has appointed itself as the group who determine value for Citi investors? You can look to the current Administration in the Whitehouse for the Trillion dollar bailout and nowhere else. If someone came to the Post Dispatch owners and said ‘If I make you 800 Million in legal investments will you pay me 100 Million?’. We are to believe the answer would be know? We’ve all read this before here. You all hate the rich… unless they’re are a Dem. or a supporter of Dems. It’s been a few days, isn’t it about time for another rip piece on Palin?
Wow.. can’t believe I did that. should be ‘No’ not ‘Know’. I did try to lernt somtin in scool.
Bravo! The Prez might get better results if he put a bounty on Hall and any other wealthy tumor that takes a bonus while their financial ship is sinking. Any bailout should require beforehand resignations of all CEO’s sans remuneration or else no bailout. All the current bailouts are doing is propping up the incompetent jerks that caused the failures. Of course the entire GOP and many of the Democrats in Congress would hate losing all those wealthy supporters…
This editorial shows a complete misunderstanding of the very basic principals of the commodity and futures markets, so much so, it is irresponsible to write this. The author is correct in pointing out that the bonus does not accurately value capital. It is also correct in showing the importance of the money made by Hall to Citi’s bottom line. However, it ignores the most important aspect of the futures market: IT IS A ZERO SUM GAME.
That means, for every person or group like Citi that buying oil on the promise that it is going to go up, there is an equal number of investors betting it will go down. So, Citi is happy with their $800 MM, but Goldman Sachs, Bank of America or Exxon Mobile may have lost an equally enormous amount in their bet of oil going down. Those that anchored oil off shore may have been forced to hold the oil until the market came back higher or sell it at an enormous loss.
Anyone who has the foresight and machismo in order to have success should be rewarded accordingly. Think of it like this: If someone were able to correctly predict, through study of wind patterns and the throwers tendencies, the results of a coin flip 35 times in a row, should they not receive their just compensation?
Another irresponsible conclusion by the author is the conclusion that the efforts of Hall somehow lead to high gasoline prices. The very nature of the market, with the same number of winners and losers, proves the efficiency of the market. In most market cycles, this will make the price of gasoline as low as possible, not the opposite as the author tries to conclude. Oil is the most efficient market.
A substance is removed from 6000 feet below the surface of the earth, transported on billion dollar vessels 6000 miles and boiled to 6000 degrees. Then it is taxed higher than any product, save tobacco, and you pay multiple times less for this than you do for your bottled water that comes from down the street.
The only accurate point that the author touches on, is that Hall does not have to pay back Citi for any losses on years in which he guesses wrong. He would just have been fired and chased from the industry. However, until he shows those major losses, someone will be willing to pay him to continue to beat the zero sum game so successfully. That is exactly what will happen if the government and Citi do not live up to their contractual obligation and Hall will be making money for another company. Citi and the US taxpayers will be worse off for it.
If we’re talking about people who get paid but produce nothing of value, that would put all 535 members of Congress out on the street!
Seriously, this will be the first big test for the Obama Administration’s “Pay Czar” (one of something like 34 Czars). Regardless of the Post’s invective, Mr Hall has a contract that specifies his bonus payout.
So, what’s a Czar to do? Cancel his contract? (Is that legal?) Pay him part of his bonus? Hire him to do tax returns for Obama Cabinet members?
Ahhh…the joys of unintended consequences when government hands out corporate welfare checks.
Couldn’t agree more with SoCoBoy above. Here’s my question and I’ve asked it before to no avail with the POST. You provide salary information on county workers - yesterday - for all to look up. You print out yearly what all of the higher executives earn at major companies around town. You provided pay info on police, firemen, and other services industries. My question is (again): When are you going to print in the paper what the various people at the POST earn per year. If you choose a profession and make $12,00 per year, that is YOUR choose. If on the other hand, someone becomes a brain surgeon and earns $750,000 per year, that is also an individual choose in work and compensation. Now if your in the investment business, why would you care what anyone earned or lost for that matter? It is still a free country to become what ever you desire to be, and thus, earn what ever monies that come with the position. Writing editorials is an easy job, I’m sure most bloggers could do as well if not better than what is printed here……Rick M.
Americans aren’t smart enough to realize when they’ve been cheated. If this blog was closer to the top of the site, there would be numerous comments claiming people were “just being jealous of his success”. This attitude Americans have is part of the reason that the USA and its Empire are destined for the dustbin of history not destined for great things.
Editorial Board,
Remember, more than 50% of that bonus will go right back to the govt so they can give it to gin drinkers. You rail on the “rich” and those who take a chance and receive a huge reward, but forget how much gubment takes back.
The Robin Hood game is getting old. Got another topic?
Assuming his $100 bonus is directly tied by formula to the amount of money he made for Citi, I don’t see a problem with this. Therefore, his compensation is directly tied to performance and likely Citi is keeping a large percentage of the earnings.
I would have a problem with this if his comp wasn’t tied to performance and the earnings he generated. This is the case with many CEOs who still make millions when their companies perform poorly.
The other consideration for Citi is if they don’t pay him for the earnings he generates, he will go to another firm where they will pay him. It’s very similar to free agents in baseball.