A few weeks after Citigroup (NYSE:C) said it would rid itself of one of its only consistently profitable assets, it's shedding its highly lucrative Phibro commodities trading unit.
No surprises here. Phibro houses commodities trader Andrew Hall, to whom Citi owes roughly $100 million in pay for 2009. Being more than 30% owned by taxpayers and all, there's no way Citi could pay Hall the GDP of a small nation. Remember what happened when taxpayer-owned AIG (NYSE:AIG) tried to pay a few hundred mil to its derivatives traders? As Stephen Colbert put it: "Our founding fathers knew that when the rights of the people get trampled, we must become a torch-and-pitchfork-wielding mob, empty of all thoughts; an injured, vengeful animal, lashing out blindly at shapes and colors ... Let's go get AIG!"
So Citi's avoiding a spanking from regulators by selling Phibro to Occidental Petroleum (NYSE:OXY). Nothing wrong there.
What's odd is the price. Occidental is paying $250 million. Assuming it also has to pay Andrew Hall his entitled $100 million, we'll say the real price was maybe $350 million.
Yet Phibro's average pre-tax earnings were $371 million per year from 2003 to 2008. In other words, Citi sold the unit for what looks like maybe one times earnings. If you think that seems like a pittance, you're right.
Granted, the past five years' earnings could have been an anomaly. Given the volatility in commodity markets, they probably were. But were they such an anomaly that Citigroup thought the unit was only worth what it earned, on average, over the past 12 months? That seems implausible, if not ludicrous. These people are bankers. If there's one thing they're good at, it's selling absurd financial products at even more absurd prices by trumpeting short-term results.
Bank analyst Dick Bove succinctly explained how he feels about this oddity: "This decision has nothing to do with creating value for shareholders and it has a lot to do with the government's perception of how a bank should run, and proprietary trading is not one of the things the government wants banks to be doing."
Well, yeah. Commercial banks shouldn't be doing proprietary trading. But they shouldn't be liquidating their assets at insanely low prices, either.
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