By Bradley Keoun March 16 (Bloomberg) — Citigroup Inc. , the bank 27 percent owned by the U.S., is bolstering a unit that trades stocks with the lender’s own money after a proposed government ban of proprietary trading helped spur eight of its 22 employees to defect, people with direct knowledge of the matter said. Kevin Russell , head of Americas stock trading, told employees and securities firms supporting the unit last week that Citigroup may increase the group’s trading limits and capital, according to the people. The New York-based bank will replace some or all of the six portfolio managers and analysts who left since their leader, Matt Carpenter , quit in February, according to two of the people, who declined to be identified because the unit’s operations are confidential. Citigroup is trying to preserve the unit, which produces about $100 million of annual revenue , as banks face a proposed ban on proprietary trading dubbed by President Barack Obama as the Volcker rule. Chief Executive Officer Vikram Pandit fed concern among the unit’s remaining employees that Citigroup’s commitment might wither under U.S. pressure when he told a bailout oversight panel this month that banks shouldn’t use their own money to speculate, the people said. “Vikram the academic can put on his academic hat and conclude that the Volcker rule makes sense,” said Brad Hintz , an analyst for Sanford C. Bernstein & Co. who follows the securities industry. “On the other hand, the Volcker rule hasn’t been passed, nobody knows what the capital rules are going to be, so why on earth not take advantage of it?” Moore Capital Carpenter departed as head of the so-called long-short equity unit along with deputy Matt Newton for hedge fund Moore Capital Management LP, according to the people. The long-short unit oversees more than $1 billion of assets, and tries to hedge against economic and market risks by matching bullish stock bets with bearish holdings in the same or related industries, said a person familiar with its operations. Although Carpenter had begun interviewing with several hedge funds last year, he told Citigroup executives his decision to leave was partly influenced by Obama’s announcement of the Volcker rule, people briefed on the discussions said. The rule is named after former Federal Reserve Chairman Paul Volcker , now an Obama adviser who has said banks supported by federal deposit insurance shouldn’t be allowed to engage in proprietary trading or own hedge funds or private-equity firms. Russell called the other securities firms to make sure they didn’t scale back the amount of stock analysis or other attention they give the long-short group, or take advantage of the knowledge of its trading positions, the people said. He indicated that the bank was in the business to stay , they said. Pandit Speaks “Proprietary trading represents an extremely small fraction of our revenue and an even smaller commitment of capital,” spokesman Stephen Cohen said. Any increase in the unit’s capital will be matched by reductions in other areas, so the overall allocation to proprietary trading in Citigroup’s stock-trading division will remain flat or down slightly, a person familiar with the bank’s operations said. Citigroup is the third-largest bank in the U.S. by assets, behind Bank of America Corp., based in Charlotte, North Carolina, and New York-based JPMorgan Chase & Co. At the Congressional Oversight Panel hearing in Washington on March 4, Pandit, 53, defined a proprietary trading unit as one that doesn’t interact with clients and gets stock analysis and other research from outside securities firms. That’s the model of the long-short equity group, which is isolated from the rest of Citigroup’s operations on its trading floor in downtown Manhattan. Dodd’s Legislation “Proprietary trading is not a big part of our business at all,” Pandit said. “You’re using the company’s capital, and I don’t believe you should use, banks should use capital to speculate that way.” Senator Christopher Dodd , the Connecticut Democrat who runs the Senate Banking Committee, unveiled legislation yesterday to overhaul the financial industry that potentially empowers regulators to break up large financial firms, supervise hedge funds and ban proprietary trading at banks. The long-short unit is one of at least five proprietary trading teams in the bank’s stock-trading division, the person said. Other methods include using computers and formulas to analyze trading data, betting on the probability of corporate events and trying to exploit irregular gaps between a company’s security classes, the person said. Trading Units Across the company, proprietary trading units produced about 2 percent of Citigroup’s 2009 revenue, or about $1.6 billion, a person close to the bank said. They accounted for about $10 billion of the bank’s total assets, or 0.5 percent of the $1.86 trillion balance sheet , said the person. The data don’t include Phibro LLC, a proprietary energy- trading business that the bank sold last year rather than face government scrutiny of head trader Andrew Hall’s $100 million pay package. “We have exited or moved to Citi Holdings the vast majority of proprietary trading businesses, reduced the capital committed to these activities and have no plans to increase the total capital committed to them,” Cohen said. Citi Holdings is a $547 billion group of “non-core” businesses that Pandit has tagged for eventual disposal. “In many cases, we use learning from our proprietary trading activity to create and test new strategies for clients,” Cohen said. Staff Status Three of the long-short group’s 10 portfolio managers have left since Carpenter departed, the people said: J.P. Gravitt, who specializes in technology companies; Hunter Horgan , who focuses on energy; and Jay Kim , a health-care specialist. Gravitt and Horgan are going to Moore, the people said. Energy analyst Sam White quit yesterday to join Moore, the people said. Kim, who left last week, hasn’t disclosed his new job, the people said. Kim’s analyst, Susan Lee , left with him, and Gordon Malin , a financial-company analyst, left to join another hedge fund, SAC Capital Advisors LP, the people said. Horgan and White said they couldn’t comment. Gravitt, Kim, Malin and Lee couldn’t be reached. A spokesman for Moore, Shawn Pattison , declined to comment. Jonathan Gasthalter , a spokesman for SAC Capital, declined to comment. Carpenter isn’t being replaced, and the proprietary trading unit now is overseen jointly by Russell and Sutesh Sharma , who oversees Citigroup’s proprietary stock trading businesses from London, people close to the company said. Incentives to Leave The employees who quit were offered the potential for higher compensation and written contracts from hedge funds instead of Citigroup’s oral assurances, according to the people. Citigroup, which got a $45 billion bailout in 2008 and repaid $20 billion last year, remains subject to government pay curbs because the Treasury Department owns 7.7 billion of its shares . The bank also won’t provide permanent capital commitments to individual traders because of the potential for changing market conditions, the person familiar with the bank’s operations said. The long-short group’s remaining portfolio managers already have seen their individual trading limits climb, in some cases by more than 50 percent, people briefed on the matter said. Since the bank is hiring to replace the portfolio managers who left, total capital allocated to the unit would ultimately be higher than before Carpenter left, people close to the bank said. To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net .
