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By DAVID ENRICH and ANN DAVISCitigroup Inc., soon to be one-third owned by the U.S.

government, is asking the Treasury for permission to pay special bonuses to many key employees, according to people familiar with the matter.The request comes as Citigroup is grappling with broad government pay restrictions that could break apart its legendary energy-trading unit.

People at that unit, Phibro, are threatening to leave because of pay caps tied to the U.S.

bailout of Citigroup.

Phibro has been the source of hundreds of millions of dollars in profits for the bank, and has paid out hefty compensation, including a roughly $100 million windfall last year for the unit's leader, Andrew Hall.Citigroup is looking for ways to free Phibro from the federal restrictions, including a spinoff of the unit, according to people familiar with the matter.

Separately, Sumitomo Mitsui Financial Group and Citigroup reached a deal in which the Japanese bank will acquire a large chunk of Citigroup's operations in Japan.

(See related article.)Andrew HallCitigroup is trying to get U.S.

approval for special bonuses for many of its employees.

In a meeting earlier this month with Treasury Secretary Timothy Geithner, Citigroup CEO Vikram Pandit made the case for the stock-based bonuses.

Executives are describing the bonuses as "retention" awards to perk up demoralized employees who the company worries are vulnerable to poaching by rival firms, people familiar with the matter said.A person familiar with Mr.

Geithner's thinking said the Treasury hadn't made a decision on whether to allow the bonuses.

It is unclear how much Citigroup would pay out in bonuses if the government approved the move.

A Citigroup spokesman declined to comment on details of the proposed compensation plans.MoreComplete coverage: Executive PayCitigroup's request comes after Congress, the public and the president blasted pay practices on Wall Street.

Bonuses at American International Group Inc.

and Merrill Lynch & Co.

ignited political infernos in Washington.Citigroup has already gotten its own share of criticism for excessive spending, thanks in part to its aborted plans earlier this year to buy a new corporate jet.

The company has received $50 billion in taxpayer aid, and the U.S.

government is protecting Citigroup against most losses on $301 billion of its assets.

The Treasury is poised next month to become Citigroup's largest shareholder, owning as much as 36% of its common stock.All this essentially gives the government veto power over the New York banking giant's employee-pay plans.

The Treasury late last year signed off on a 2008 bonus pool that was smaller than in past years and more heavily weighted toward performance-based stock awards instead of cash bonuses.Citigroup executives say they are worried that employees, who have seen much of their past bonuses wiped out by the collapse of Citigroup's share price, will jump to U.S.

and foreign financial institutions that aren't tethered by federal pay restrictions.In the Phibro situation, Mr.

Hall, who runs the energy-trading unit, has been agitating to leave Citigroup to avoid the pay curbs, people familiar with the matter said.Phibro has long been an autonomous unit within Citigroup, and its employees are paid based on how much revenue they produce.

The government pay restrictions, however, put a ceiling on that compensation.Citigroup is looking for ways to free Phibro from federal pay constraints so it can hold on to the staff of the lucrative unit, the people said.

The bank is discussing plans to either spin off Phibro into an independent hedge fund or open it to outside investors, the people said.

The unit currently only invests Citigroup's capital.Phibro has been a lean and largely hidden profit center within Citigroup's investment bank.

For 2008, Citigroup reported $667 million in pretax revenues in commodities trading, saying Phibro was the primary contributor to that figure.New federal pay limits are forcing banks that received aid to rethink their compensation structures.

One recent law requires banks to limit bonuses to no more than one-third of their overall compensation pools.Top Citigroup executives, including Mr.

Pandit and John Havens, who runs Citigroup's giant investment-banking division, have been briefing managers on the possible one-time bonuses, according to people familiar with the matter.

Citigroup hasn't settled on a specific bonus plan, with several possibilities currently on the table, the people said.Under one scenario presented to some managers, the payouts would be composed largely of stock that vests over at least three years, and the awards likely would be worth the equivalent of at least 50% of an employee's cumulative pay over the past three years, said one person briefed on that plan.Citigroup's stock price has lost about 95% of its value since peaking around $55 in May 2007.

That has taken a severe toll on the fortunes of employees, who hold a total of about 245 million stock options, warrants and rights to buy shares, with a weighted average exercise price of $41.84, according to Citigroup's latest proxy statement.

With the stock below $3 a share, most of those awards are essentially worthless.Citigroup isn't the only Wall Street firm looking for exemptions to pay restrictions.

At Morgan Stanley, which has received $10 billion in federal aid, executives are considering a plan to spin off the company's proprietary-trading business to insulate it from federal pay limits.Write to David Enrich at [email protected] and Ann Davis at [email protected] in The Wall Street Journal, page A1
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