A perplexing question is troubling Citigroup and
regulators in the United States. Citigroup trader Andrew Hall, who
specializes in energy and commodities, earned a lot of money for his
employer over the past year. No one disputes that according to his
contract, he deserves one hundred million dollars. But there is some
resistance to paying out the money.
root of the problem is that Hall's employer received emergency bailout
funds in the fall of 2008. One of the conditions of the bailout was
that the US government, which obtained an ownership interest in the
rescued firms, would have oversight of pay packages for employees.
For this purpose the Treasury appointed a "salary czar,"
Kenneth Feinberg. Feinberg does not have the authority to abrogate
written contracts, but he can put pressure on employers to renegotiate
what he considers excessive payouts. If he is dissatisfied he can
impose various sanctions on the employer and on the employee, including
modifying future pay agreements.
Feinberg has at once an ethical and a practical dilemma.
Ethically, it is obviously problematic for an employer to say: "Yes, we
negotiated a pay package and you fulfilled your part, but we don't
really want to fulfill our obligations."
Certainly it is a bad example and precedent for the
government to be encouraging companies to act this way. In some cases
this could be justified in the case of a "windfall" profit; imagine a
person who gets a million or two dollars in bonuses year after year,
and one year lucks into many times that. It might be reasonable to say,
neither side really conditioned its acceptance on a sum ten times the
But this argument doesn't really hold water for Hall. According
to news reports, he has been hauling in nine-figure sums year after
year. Furthermore, his profits have been accumulating over the course
of the year; if Citigroup perceived a problem they could have
renegotiated in the middle of the year.
Yet the American taxpayer, now part-owner of
Citigroup, is understandably asking: Why should I be tightening my belt
in the middle of a recession to pay a hundred million dollars to a
single guy who works a few hours a day guessing where markets are
going? There is a good chance the bailed-out firms would have ended up
bankrupt if not for the bailout, and where would Hall's payday have
It's true that Hall, a renowned star, would likely have found
work somewhere else, but they wouldn't necessarily have extended him
the same sums and his payday would likely have been less. And what if
the bail-out saved the entire financial system? Hall could certainly
not have thrived in the midst of a general melt-down.
There is also a practical dilemma. Now that Hall is de facto
working for Uncle Sam, the Treasury has a good reason to keep him
happy, if he is as astute as Citigroup thinks he is. Hall's bonus is a
percentage of the approximately one half billion dollars his trading
group earned during his contract period.
If word gets around that traders aren't getting what they
bargained for, bailed-out firms could have difficulty finding
On the other hand, maybe that is a good thing.
Many people thing that the bonus structure encouraged excessive
risk-taking, which in turn led to the crash. Traders typically get
twenty percent of the upside but zero percent of the downside, which
obviously encourages taking big risks. Maybe it's good for America if
Feinberg makes it difficult for bailed-out firms to run old-fashioned
This all points to an additional problem. The US authorities
are now stuck in a potential conflict of interest. Suppose high-flying
trading is good for the shareholders but bad for the economy. As
regulator, the authorities should try and discourage the practice (as a
bill now before the US Congress is designed to to). As owner, they may
want to encourage it.
I think the ethical and practical issues all boil down to one
question: Was Hall skillful or lucky? If Hall guessed one way and made
millions, while some equally talented anti-Hall at another desk guessed
opposite and went home in anonymous ignominy, then he didn't really do
anything special to earn the money, and little will be lost to the
market, the country or the world if he misses out on part of his
If, on the other hand, regulators have reason to believe that
Hall really has more insight into the workings of the economy than
other traders, then he is truly creating value for his employer and for
the economy as a whole, and it's both fair and good to keep him happy.