commodities trading

While I am riled up about bankers: I came across a couple of stories to pass on to you that illustrate just how far we have to go before we can declare ourselves back in control of our banking system. Right now the inmates are very definitely running the asylum.

1. Here’s a fun little story from the Wall Street Journal you may have ignored. It concerns Citibank’s efforts to get permission from the government to create an exception to those onerous pay level caps that came along with our bailout money. Now I am not opposed to bonuses. In fact I think they’re jolly good. Especially when they help shape behavior to the benefit of the shareholders who are paying them. In Citibank’s case that would include you and me now that the taxpayers own about 30% of the place. But these bonuses can spin out of control. Which they seem to have done all over Wall Street. This Citibank case illustrates my point. They want to free up a small part of their investment bank called Phibro, which is an energy speculator: it trades energy related contracts and so on. The WSJ refers to it as ‘legendary’ which is Wall Street machismo talk for very profitable, at least recently. Presumably Citi’s shareholders are reaping the benefits of owning and funding this legend. I read that Phibro contributed heavily to Citi’s reported 2008 pre-tax revenues in commodities trading of $667 million. So Phibro must have earned less than that since it was just one of Citi’s commodities trading businesses. Yet a certain Mr. Andrew Hall, who leads the legendary band – he is even more legendary – is reported to have earned a ‘windfall’ of ‘roughly’ $100 million. Now I may be really dim, but $100 million seems like a rather large chunk of that $667 million pre-tax revenues. In fact its 15%. Roughly. I understand that I am not in ‘the know’ when it comes to pay and bonuses down on Wall Street, but when one person can rake in 15% of the pre-tax it seems more like pillage than bonus. No matter how legendary he is. I assume his merry band also received their share of the loot. Which leaves me to wonder how much the shareholders got. Any? This kind of looting at least clears up why Citi is going bankrupt. Some of its employees are robbing it blind. And now back to the story: Apparently the poor folks at Phibro are chaffing under the bonus restrictions that the government has placed on Citi. I feel sorry for them. The grown ups have arrived and are ruining the party. What a shame. These people are truly insane. No wonder poor old Citi is on the rocks: the kids trashed it.
2. The second fun bonus story was buried in today’s Financial Times. It concerns the hissy fit that two of AIG’s super star bankers threw as a result of the acrimony surrounding those bonuses we all heard about a few weeks ago. You will be pleased to know that a certain Mr. James Shephard has decided to rejoin the fold in order to continue winding down part of the infamous derivatives business that AIG is desperately trying to eliminate before it eliminates them. Mr. Shephard and his French based colleague Mr. Mario Gabriele quit in a huge snit at the end of March because of the pressure that the ‘politically motivated criticism’ of their bonuses put them under. These guys must have sensitivities I didn’t realize traders had. I always suffered under the misguided view that traders were a pretty tough crowd. Apparently not. Anyway the real fun part of this story is that the French government in its ever fast bureaucratic way decided to install a replacement for Mr. Gabriele, who must have been in the same legendary class as Phibro’s Mr. Hall because the replacement of the two sensitive folks by a simple bureaucrat was considered enough of a crisis to trigger default clauses in AIG’s contracts. This would have cost a paltry $234 billion. Or at least that’s the amount of contracts going into default because Messrs. Shephard and Gabriele left. This default would have cataclysmic ripple effects on European banking with banks like Royal Bank of Scotland, Banco Santander, and Societe Generale all standing to lose a pot load of cash. Oops. So AIG had to scurry to get one of the sensitive duo to return. Mt. Shephard reluctantly set aside his hurt feelings and rode back to save civilization.

That these two stories can be reported with a straight face stuns me.

Was AIG so totally dependent on just two people that it stood to lose $234 billion because its derivative contracts depended upon their presence? They are that essential? Two people? I shudder to think what they’re paid.

And do those traders at Phibro really think they’re that important? can you imagine what the ego’s of these people are like?

The sad thing is that these stories were told with a straight face. The WSJ truly does think that those Phibro traders are hard done by, and are right to chafe at having bonuses capped.

Who are these people?

More to the point: who do they think they are?