And Now It Begins!

In our book, The Great Recession Conspiracy, we warned that politics would interfere with sound business judgment by managers in companies that the U.S. Government now owns.

Well, it didn't take long and every taxpayer just lost money because of it. Here is the story;

The U.S. Government owns a 34% stake in Citigroup and can use that stake to demand management actions of which the Treasury Department approves. Now Citi owned a subsidiary named Philbro that was dedicated to trading comodities. Philbro was hugely profitable for Citi and it was run by a man named Andrew Hall. Hall had a contract with Citi that rewarded him handsomely for achieving big results. And last year, Andrew Hall performed brilliantly! In fact, he did so well that Citi owed him a $100 million bonus.

And therein lies the rub. The government could not let Citi pay Andrew Hall a bonus of $100 million because it would look bad. But on the other hand, if they didn't pay him, he would go to court and win his case because he had really tight contract.

So how did the Treasury Department solve this problem? They forced Citi to sell Philbro so somebody else would have to pay the bonus. Well, Occidental Petroleum stepped up as the only buyer and took over Philbro with a payment of $450 million. Well and good, except for one thing. $450 million was just about the level of profits that Philbro generated for Citi every year.

Basically, Citi got ONE years profits for Philbro and absolutely nothing else. Any private sector manager who made such a bad deal would be fired on the spot. However, the Secretary of the Treasury does not work in the private sector so he can get away with it.

Just wait until the government weighs in with similar decision making at GM, Chrysler, et al.