The New York Times
October 27, 2008
Breakingviews.com
Citadel Projects Calm; Call to Merge the Regulators
Projecting Calm Amid the Chaos
Citadel, the hedge fund in Chicago run by the wunderkind Kenneth C. Griffin, has found just how hard it is to calm investors during these troubled times.
Attacks that claim problems concerning forced sales, liquidity troubles and regulatory crackdowns make it hard to do business. But responding to such charges is also risky.
Mr. Griffinâs decision to hold a surprise conference call late Friday afternoon when the markets were in a free fall was a big gamble. The announcement itself set off a slight panic, and the call had to be delayed as Wall Streetâs global hordes swamped the lines as they tried to dial in.
But the real risk is that, after the failed attempts by Bear Stearns and Lehman Brothers to tamp down rumors about them, lenders and counterparties might not have bought Mr. Griffinâs story.
Whether they have is hard to tell. Citadel isnât a public company and has only a sliver of bonds that rarely change hands. Itâs also hard to find credit-default swap prices on Citadel that are a reliable gauge of its health.
Thatâs a great advantage to the firm â counterparties that may be nervous about the firmâs performance wonât be scared off by a sinking stock price or a drop in the value of credit-default swaps.
Mr. Griffin and the firmâs chief operating officer, Gerald Beeson, delivered a strong case for calm. Its flagship Kensington fund is down 35 percent because the cash markets crashed harder than their hedges rose in the weeks after Lehmanâs demise.
But they said that Citadel had more than 30 percent of its investment capital in cash or similar investments, $8 billion of undrawn credit capacity and no losses from counterparty exposures, which, they went to lengths to explain, were broadly diversified. Also, they expect just some investors to withdraw only a âfew percentâ of the fundâs investment capital at year end.
All this sounds fine. But in these fraught times, the medium can be more important than the message.
Investors and counterparties have been subjected to blatantly false sugar talk from bank boss after bank boss, and have paid the price with steep losses. Mr. Griffin may be the exception to that sorry rule, and Citadel may be as rock-solid as its name implies. But by sticking his head over the parapet in such an unexpected way, he risked having it lopped off by disgruntled investors and counterparties.
