Published: Friday, 7 Aug 2009 | 8:10 AM ET

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Will Citigroup turn loose its $100 million man, Andrew J. Hall?

After putting out feelers to sell its Phibro commodities business, including a brief talk with the billionaire investor Warren E. Buffett, Citigroup

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[C  Loading...      ()   ] is considering a variety of options. Among them is a deal that would give control of the unit to Mr. Hall, the energy trader who runs Phibro, two people close to the negotiations said.

Mr. Hall’s nine-figure payday — and his insistence that his contract be honored — has become a political hot potato for Citigroup, whose compensation practices are about to be reviewed by the Treasury Department’s pay czar.

The talks over Phibro’s fate are continuing and several options are under discussion, but there is no obvious path.

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After the talks with Mr. Buffett went nowhere — they were characterized as casual, with no firm discussion of a price — Citigroup executives are considering what to do next. One option would be to transform Phibro into a partnership headed by Mr. Hall. Under that plan, Citigroup would become a limited partner, reducing its share of Phibro’s profits, but the bank would have to find outside investors for Phibro.

It is unclear how much Phibro might be worth if it were sold or how much outside investors might put into the company.

Other options include asking Mr. Hall and other Phibro traders to work without contracts that guarantee them a percentage of the profits, bringing in new leadership or closing the company.

“We are evaluating the best way forward for stakeholders,” a Citigroup spokeswoman, Danielle Romero-Apsilos, said.

Mr. Buffett, considered by many to be one of the greatest investors of all time, has a long history with Phibro. In the early 1990s, he sat on the board of Salomon Brothers, the Wall Street bank that owned Phibro at the time. Salomon and Phibro later became part of Citigroup.

Mr. Buffett has become something of a go-to investor during the financial crisis. Berkshire Hathaway

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[BRK'A  Loading...      ()   ], the conglomerate he runs, invested in Goldman Sachs

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[GS  Loading...      ()   ]last autumn on highly favorable terms. Berkshire is expected to report robust quarterly profits on Friday. Mr. Buffett could not be reached Thursday for comment.

Phibro is enormously profitable for Citigroup, which is struggling to turn around many of its other units. The trading operation generated about $2 billion for the bank over the last five years.

But whatever the economics, bailout politics are straining the relationship. Mr. Hall is the star of Phibro, in Westport, Conn. There is little doubt he is owed the money under his contract. But Citigroup was saved with roughly $45 billion in taxpayer aid, so its pay practices have come under public scrutiny.

While Mr. Hall is making headlines for demanding that the bank honor his $100 million contract, lesser lights at Citigroup and beyond expect to pull down at least seven figures this year, too.

The prospect of big paydays raises thorny questions for the government pay czar, Kenneth Feinberg, as he prepares to start reviewing compensation structures next week at companies that received bailouts. While Mr. Hall’s contract with Citigroup is not in doubt, the prospect of paying large sums, even to the head of a unit raking in profits for Citigroup, could be untenable.

But Mr. Hall has plenty of options. Much of Phibro’s value is thought to flow from his expertise and track record. If he leaves, he could start another firm and take colleagues with him.

Generally, Phibro takes advantage of unusual spreads between the spot price of oil and the price of an oil futures contract.

The company, for example, often wagers that the price of oil will rise so fast during a particular period, say six months, that it can make money by storing oil in supertankers and floating it until the price goes up.

Other deals are more complex. Right before the first gulf war, Phibro placed an elaborate bet that the price of oil would spike and then go down faster than others were anticipating. The company earned more than $300 million from the gamble.

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