Citigroup had little choice but to sell Andrew Hall's Phibro

Citigroup (C) superstar trader Andrew Hall is now Occidental Petroleum's (OXY) headache.

Occidental today agreed to buy Phibro, the commodities trading operation that Hall headed, which has become an albatross around Citigroup's neck because of Hall's $100 million pay package. Neither company addressed the pay issue in their press releases, and officials could not be immediately be reached. Los Angeles-based Occidental plans to invest about $250 million in Phibro.

For Citibank, retaining Hall and his colleagues would be too high of a price to pay for the gigantic public relations headaches that they would cause. People can argue that a contract is a contract, but an angry member of Congress is a pretty scary sight, particularly when you're Citigroup and you need all of the friends in Washington you can get.

Phibro is a well-known player in the commodities market, averaging about $200 million a year in pretax earnings from 1997 to the second quarter of 2009. It has been profitable in each fiscal year since 1997. Even so, Citigroup, which is under pressure from FDIC Chair Shelia Bair to shake up its management team, had little choice but to sell Phibro, which operates in a converted farm house in Connecticut. Shares of Citigroup and Occidental both declined on Friday, by 2 cents (0.43 percent) and 55 cents (0.69 percent), respectively.

Investor reaction was muted because many other companies have either scaled back or quit trading all together to avoid the risks of losing substantial amounts of money, and the sale of Phibro also was telegraphed well in advance through carefully orchestrated leaks.

In an interview, University of Delaware corporate governance expert Charles Elson told DailyFinance that the sale highlights the dangers of government intervention in private companies, particularly if the deal was done to avoid a fight over Hall's pay. Unlike shareholders, government's goals are entirely political, he said.

"The issue is what is he worth," Elson said, adding he had no idea if Hall was overpaid or not. "The unit [he headed] produced significant profits." Indeed, Hall is considered a top trader who is able to correctly bet on the direction of the market years in advance. That explains why Occidental is eager to keep him.

Hall and Phibro's management team have agreed to remain after the deal closes, which is expected by year-end. Exactly how long they may stick around wasn't discussed in the Occidental press release. "Significant portions of current and future bonuses will be deferred and retained by Phibro and paid out in future years," the company said. "These future payouts will be adjusted to reflect Phibro's results during that period."

Also left unsaid was whether this deal will be acceptable to Kenneth Feinberg, the so-called pay czar, who is investigating the compensation practices at Citigroup and other banks that the federal government bailed out to prevent the economic crisis from worsening. Feinberg likely still has Hall on his radar because the pay czar will have a say on what Citigroup pays out to Oxy to pay Hall.

Hall seems to want to avoid becoming a poster boy for out-of-control compensation at financial services firms dependent on government largess to stay solvent. At one point, he tried to defer his bonus and get a "quiet divorce" from Phibro.

That, of course, never happened.

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