06/13/2009 05:12 am ET Updated May 25, 2011

Boot TARP-O-Line Bonuses

Phibro is Citigroup's energy-trading subsidiary. The bank wants to pay special bonuses to key Phibro employees in order to retain them. The rationale is simple. Last year the bank earned $667 million dollars. And Phibro was the primary contributor.

As the bank rolls toward one-third ownership by the US government, it needs Federal approval to pay the bonuses. My take on the matter:

Forget it. Figure out another solution. Or let executives walk.

Banks are no longer integrated teams. They're sprawling collections of disparate profit centers--complicated, unwieldy, and hard to manage. Internal silos strive to maximize their own profits. And as we learned from the quant-mare of 2007, they sometimes make massive bets that can wipe out the consolidated profits of organizations.

Why not spin out the silos?

Morgan Stanley faces a similar problem. The names are different, but it's essentially the same story. Morgan wants to pay bonuses to traders and can't without government approval. As a consequence, Morgan may spin out its proprietary trading business--eliminating the government's control.

Why not?

Reducing the size of banks, it seems to me, would be a win for everyone. With less complexity, the organizations would be easier to manage. And we would avoid these bonus brouhahas, the debates about TARP and compensation.

In the case of Citigroup, I can't help but wonder whether the CEO is top-ticking the market. From 2000 until last year, energy was on a huge run. Oil prices peaked on July 11, 2008, however, and have tumbled since. The world is in a recession, with uncertain prospects for future growth and the success of commodity traders.

Will Phibro remain the driver behind Citigroup's earnings?

Nobody knows how the unit will perform going forward. Citigroup argues that bonuses will retain demoralized employees, who saw their stock drop 95 percent over the last twelve months. Retention bonuses, however, are a temporary fix. For there's one thing we all know about Wall Street.

Money buys loyalty until it doesn't.

The head of Phibro earned a $100 million "windfall" in 2008. That's not enough to keep him at the company for a while? I presume many of the people working for him earned "windfalls," too.

Personally, I like the Morgan Stanley solution. It seems more enduring: spin out a silo and get paid through the capital markets. Hopefully, Morgan will reorganize so the remaining divisions contribute to each other's success.

The other alternative is to borrow the shareholder strategy from Fortis. At the annual meeting this year, shareholders threw shoes at the CEO to indicate their displeasure. Forbes labeled the incident, "Shoe-Jitsu."

Talk about acrimoney.