A perplexing question is troubling Citigroup andregulators in the United States. Citigroup trader Andrew Hall, whospecializes in energy and commodities, earned a lot of money for hisemployer over the past year. No one disputes that according to hiscontract, he deserves one hundred million dollars. But there is someresistance to paying out the money.
Theroot of the problem is that Hall's employer received emergency bailoutfunds in the fall of 2008. One of the conditions of the bailout wasthat the US government, which obtained an ownership interest in therescued 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 abrogatewritten contracts, but he can put pressure on employers to renegotiatewhat he considers excessive payouts. If he is dissatisfied he canimpose various sanctions on the employer and on the employee, includingmodifying future pay agreements.
Feinberg has at once an ethical and a practical dilemma.Ethically, it is obviously problematic for an employer to say: "Yes, wenegotiated a pay package and you fulfilled your part, but we don'treally want to fulfill our obligations."
Certainly it is a bad example and precedent for thegovernment to be encouraging companies to act this way. In some casesthis could be justified in the case of a "windfall" profit; imagine aperson 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 theusual amount.
But this argument doesn't really hold water for Hall. Accordingto news reports, he has been hauling in nine-figure sums year afteryear. Furthermore, his profits have been accumulating over the courseof the year; if Citigroup perceived a problem they could haverenegotiated in the middle of the year.
Yet the American taxpayer, now part-owner ofCitigroup, is understandably asking: Why should I be tightening my beltin the middle of a recession to pay a hundred million dollars to asingle guy who works a few hours a day guessing where markets aregoing? There is a good chance the bailed-out firms would have ended upbankrupt if not for the bailout, and where would Hall's payday havebeen then? It's true that Hall, a renowned star, would likely have foundwork somewhere else, but they wouldn't necessarily have extended himthe same sums and his payday would likely have been less. And what ifthe bail-out saved the entire financial system? Hall could certainlynot have thrived in the midst of a general melt-down. There is also a practical dilemma. Now that Hall is de factoworking for Uncle Sam, the Treasury has a good reason to keep himhappy, if he is as astute as Citigroup thinks he is. Hall's bonus is apercentage of the approximately one half billion dollars his tradinggroup earned during his contract period. If word gets around that traders aren't getting what theybargained for, bailed-out firms could have difficulty findingemployees. On the other hand, maybe that is a good thing. Many people thing that the bonus structure encouraged excessiverisk-taking, which in turn led to the crash. Traders typically gettwenty percent of the upside but zero percent of the downside, whichobviously encourages taking big risks. Maybe it's good for America ifFeinberg makes it difficult for bailed-out firms to run old-fashionedtrading desks. This all points to an additional problem. The US authoritiesare now stuck in a potential conflict of interest. Suppose high-flyingtrading is good for the shareholders but bad for the economy. Asregulator, the authorities should try and discourage the practice (as abill now before the US Congress is designed to to). As owner, they maywant to encourage it. I think the ethical and practical issues all boil down to onequestion: Was Hall skillful or lucky? If Hall guessed one way and mademillions, while some equally talented anti-Hall at another desk guessedopposite and went home in anonymous ignominy, then he didn't really doanything special to earn the money, and little will be lost to themarket, the country or the world if he misses out on part of hisnine-figure payday. If, on the other hand, regulators have reason to believe thatHall really has more insight into the workings of the economy thanother traders, then he is truly creating value for his employer and forthe economy as a whole, and it's both fair and good to keep him happy.
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