Crimes in the Citi

Citi group is going down and like a drowning swimmer they don’t care who they take into the deep with them.

The losses by the two hedge funds at issue, called Falcon and ASTA/MAT, are the latest examples of the credit crunch hammering retail, or individual, investors who believed they were holding low-risk securities.

Earlier this year, Citigroup had to inject capital into another hedge fund, hobbled by its purchase of a big book of corporate loans. The company’s flagship Old Lane fund, co-founded by Mr. Pandit, has been struggling with weak returns and investor redemptions, prompting Citigroup this month to write down the fund’s value by $202 million.

Citigroup with its huge client base had no difficulty finding investors for a pair of hedge funds it launched last year. According to the Wall Street Journal brokers pitched the funds as a safe place to stash money.

Brokers at the firm’s Smith Barney unit drummed up hundreds of millions of dollars from retail clients, including some who were told the fixed-income funds were a safe place to stash money.

Citigroup brokers and fund managers assured prospective investors that the new hedge funds were low-risk, with Falcon likely to post losses of no more than 5% a year in the worst-case scenario, according to people familiar with the situation.

“That’s why they bought it,” says a Smith Barney broker whose clients, many of them wealthy retirees, invested in the Falcon fund. “These kinds of clients weren’t looking for a home run.”

Robert Zeff, a retired lawyer in Boca Raton, Fla., invested $500,000 in Falcon at the advice of his Smith Barney broker. “He was a very conservative investor whose main issue was capital preservation,” says Joe Osborne, who is representing Mr. Zeff in a lawsuit accusing Citigroup of fraud in its marketing of Falcon.

But as the hedge funds bleed out more than 75% of their value and an investor with $500,000 invested into one of the hedge funds filed a federal lawsuit against against the bank, Citigroup is offering to cover some of the losses.
How then did “a likely to post losses of no more than 5% a year in the worst-case scenario”, trun into an undeniable 75%? In out view not by accident. In the fund world it’s an old game. Sell the fund, collect the fees. So long as you don’t get greedy and load the dice or tilt the table you can make a lucrative life long living by screwing investors not too badly. But withCitigroup insolvent as we all know (Mish) We wonder aloud: did the Citi put this game into warp speed to grab all the fees and profits in the short life span foreseeable to bank insiders. Or did they just go fast and lose with the cash in a shot gun go for broke trade, win and Citi takes the loins take, lose and youv’e got the tax write off? Or maybe we over think it and the 5% bleed to 75% just by natural market forces alone. We might actually be willing to go for the least likely explanation once in a while, but not in this case and here is one reason why.

At Citigroup’s annual shareholder meeting in New York last week, Paul R. Koch, a Smith Barney broker from Wayzata, Minn., complained to Chief Executive Vikram Pandit that the bank seems to be compensating clients “just enough so they don’t sue us.”

Oh, coincidental the lawyers will say, but we say make that first line above read,

Citi group is going down and like a wilde animal determined to take everything else with them.