Fortune has a fairly rare interview today with Citadel founder Ken Griffin, by Roddy Boyd. The topic is how the Chicago hedge fund “flirted with disaster this fall” and ultimately “survived.” Now, the cynical assholes among us might wonder if, perhaps, considering the fact that Citadel’s flagship fund is down 47 percent year to date as of December 4, this isn’t like gloriously recounting how a plane, perhaps one of KG’s Gulfstreams, avoided crashing into the ground while the pilot comes over the loudspeaker to say, “Ladies and Gentlemen, hello from the cockpit… our altitude is 35,000 30,000 25,000…And we’re on the ground! Hello? Any survivors?,” or doing victory lap for surviving when you’re down 47 percent and the only reason all the money’s not gone is because it’s locked up, but let us silence those cynical A’s and gather round for the tale. While this particular story might not timely enough for, say, John Devaney, or, I don’t know, Jeff Gendell, it should probably be required reading for those of you dipping your toe in insolvent waters. Pick and choose the pearls of wisdom as you see fit.
1. Be receptive to people who tell you it’d be a good idea to address the rumors you’re experiencing a case of anal prolapse.
On the morning of Friday, Oct. 24, James Forese, Citigroup’s head of capital markets, picked up the phone and called Kenneth C. Griffin, the founder and chief executive officer of Citadel Investment Group, a Chicago-based hedge fund that manages $15 billion and has 1,300 employees worldwide.
“Ken, you guys are getting killed in the rumor mill,” Forese said. “Most of these things are just blatantly false. If you get out there and say you’re fine, it will mean a lot to the market right now.”
Griffin, 40, took the advice to heart and staged a conference call in which he addressed the firm’s cash position and performance.
2. Loosen up a bit. If you can’t find the instructions manual, call the manufacturer and asking them to reprogram you with a ‘quip’ function. Computerized monotone: “hahahahaha. That was a funny.”
Once thought of as humorless and stiff, he now comes across as more personable and even makes the occasional quip.
3. But not too loose! While you’re yukking it up, you maybe be getting screwed by (a) Dick!
Sure, his two main funds, Kensington and Wellington, were experiencing general market losses, but they were still doing better than their benchmarks. In fact, the downdraft didn’t start until Monday, Sept. 15, when Lehman Brothers filed for bankruptcy. Griffin’s response was to get on the phone with Fed board members.
“We were very focused on the collateral damage from Lehman to the overall system. What I was worried about was the money market funds breaking the buck,” he says. The Fed board members assured Griffin that the markets would remain orderly as Lehman unwound its positions.
But he says in retrospect that he experienced a false sense of security. He describes the feeling on that particular Monday as akin to watching a giant wave go underneath a boat you’re sailing on, and nothing happens. As devastating as Lehman’s failure was, it appeared to Griffin at the time to be a manageable event.
4. Financial apocolypses are not good for business.
The tsunami that threatened to capsize Citadel was the massive global credit freeze. Like other hedge funds, the firm found it nearly impossible to borrow money to finance its positions – particularly in convertible-bond arbitrage, a market Citadel had stormed into during the summer when convertible-bond prices were dirt cheap.
An added headache for Citadel created by Lehman’s throwing in the keys was that as Lehman’s positions were sold into the market, the selloff brought down prices on all stripes of securities. It didn’t matter whether Citadel was long equities or short equities; the assets the firm had to fund with banks suddenly were repriced to the point where Citadel struggled to fund them.
5. Aptly named pricks will fuck you.
According to sources, Griffin phoned Christopher Cox, the SEC’s chairman. Griffin pleaded with Cox, telling him the ban could mean certain death to many hedge funds – including Citadel. Cox, according to these sources, was unmoved and merely responded with the party line about how the country was going through a national financial crisis and the SEC needed to do what it had to.
There was nothing Griffin could do or say to sway him, and on Friday, Sept. 19, the ban was made official.
6. Leverage is a total biatch.
Credit default swaps on Citadel’s debt and its leverage ratio became the next problems for the firm. They were now being quoted at distressed levels, meaning confidence in the firm’s ability to back its bonds was at an all-time low. (Citadel has roughly $300 million in bonds outstanding after buying back about $200 million worth, and the bonds are rarely traded. Still, in mid-October, Standard & Poor’s downgraded Citadel’s bonds from stable to negative. On Nov. 18, S&P downgraded Citadel’s bonds again, citing the firm’s market losses.)
7. And blogs! God damn blogs!
During October, Citadel also had to crush a rumor that appeared on a blog about its leverage hitting a ratio as high as 13 to one. According to the firm, the ratio was actually four to one (that means for every $1 of assets under management, Citadel had borrowed another $4).
Nevertheless, by that time smart fund managers had already drastically reduced leverage to almost zilch. The reason? They didn’t want to fall prey to margin calls, forcing them to dump stock to repay the loans.
Citadel was getting some margin calls from lenders.
8. Sending fruit baskets to colleagues in the financial space go a long way to ingratiate you to them. Dropping off bags of fecal matter on their porches and lighting them on fire? Not so much.
Griffin…believes there were traders trying to take his firm down. His persona as a Chicago-based maverick who had little time for the Wall Street Boys Club did not help matters.
“Ken has created a number of enemies on Wall Street,” says a rival hedge fund manager.
9. People who choose not to take part in the Street’s game of ookie cookie are forced to eat the frosted pastry.
Griffin set out to be generally independent of Wall Street. His business model was to create a diversified financial firm that did not rely on investment or commercial banks for trading or capital, which left Citadel with few friends in a world that requires fraternization through trading with one another, sharing information, dealmaking, and fee splitting.
“That very notion has pissed off a lot of people along the way,” says the manager. (Recently, for example, Jamie Dimon, J.P. Morgan’s (JPM, Fortune 500) CEO, temporarily refused to trade with Citadel after Griffin poached several top bankers.)
10. Again with the blogs!
Regardless of its source, the gossip reached a tipping point during the week of Oct. 20, when the potentially lethal Fed bailout rumor surfaced. There were also reports that the Fed had been questioning Citadel’s trading partners, asking them how much exposure they had to the firm.
Griffin acknowledges that the Fed did indeed question Citadel’s trading partners, but he is quick to point out that the Fed was questioning all counterparties that traded with large hedge funds, not just his firm’s, and that it was standard practice. But it was the Fed bailout rumor coupled with Forese’s phone call that coaxed Griffin into the spotlight.
11. Take a page from Alan Schwartz’s playa book
Forese had told Griffin that there were two things he needed to convey on the call: “First, just get the facts out about your solid liquidity position. Second, you need to stem rumors about your survival.”
The actual call was short – just 12 minutes. Griffin and Gerald Beeson assured the public it wasn’t going under, telling them it had 30% of its investment capital in cash and an $8 billion credit line it could tap, among other things.
Says Beeson: “That next Monday when we came in, things were noticeably quieter. The conference call did stop the [press calls] and allow us to get back to work.”
12. Scare the shit out of people
True to his nature, he maintains a Zen-like calm, his cool blue eyes rarely blink.
13. LOCK. IT. UP.
But odds are that Citadel isn’t going away…investor redemptions are not a huge concern right now. After Long-Term Capital cratered in 1998, Griffin astutely put in two-year lockups. For investors who pull money out early – and they are allowed to take out only a portion – there are steep fees, as high as 16%. Citadel expects year-end redemptions to be around 10%, comparatively low for the industry.
14. Avoid stuff that doesn’t make you money, like employees.
Griffin is already taking action to streamline his business. Citadel let 20 people go in its trading division recently, and people close to the firm say more cuts are in the offing. He is shuttering a $1 billion fund-of-funds business. The firm is getting out of reinsurance, which hasn’t been lucrative.
15. The double decker deep fryer wasn’t the only piece of advice from the Big Guy you shouldn’t have passed up.
Then, after thinking a moment, Griffin says with a sly smile: “With hindsight, of course, I would have been all in cash!”
*Pre-iceberg.
First
When are two years up? Reminds me of when D.B. Zwirn said it had locked up money and everything would be fine … and as soon as the money was free, it fled.
Both Citadel and AQR need to learn to shut-up. I thought hedge funds were suppose to be private.
Imagine being his secretary, running after him with a bottle of visine to keep those zen-like aryan eyes “fluid.” Fuck that.
Andy Tim 4eva
@4 Ken is no aryan. The only successful aryan hedge fund is Porsche AG.
Wow. That caption above and Citadel’s current situation. Can you define irony any more perfect?
which one goes under first citadel or aqr?
haha – He said Cox..
Boyd has a history: http://tinyurl.com/5atyke
Merry Christmas!
Griffin is such a fucking tool. This asshole strikes me as someone who would pose as a CalSTERS attorney in an attempt to get a loan.
@11, didn’t you hear? Morgan Stanley cancelled Christmas. Get with the program, there shall be no joy this year.
According to the firm, the ratio was actually four to one (that means for every $1 of assets under management, Citadel had borrowed another $4).
No. 4x leveraged means you have borrowed $3 for every $1 of assets. n00bs
14 you might want to rethink that
@14 Oooooh Pwned
http://www.john-warren.co.uk/partridge/images/bouncingback.jpg
15, 16, dipshits…14 is right. ratio is assets to equity.
18, maybe that’s some type of other accounting ratio, but if you’re talking about leverage ratio, i believe, 4:1 means 4 times levered. no?
Griffin is getting what he deserves. The guy’s a jerk.
Griffen = Aspie.
definately two ways to define leverage but most of the time when you are talking about how much debt is leveraged, its assets/equity, so put up 25mm and borrowed 75mm on 100mm of assets = 4x leverage. guess that makes 14 technically right but its just semantic really.
too long, didn’t read
wow they must really be fucked in the tush to be doing interviews
c’mon people, everyone knows an anus can’t prolapse. rectums prolapse. i thought this was a first rate journalism outfit.
25,
You made today okay.
I got laid off from CIG last month. Gotta say I havent felt happier ever. Its like you got paid to get out of jail. Seems like i’m going to get tonnes of company soon … not that chicago isnt already full of ex citadel types drinking off their non competes.
dec will be horrible for these pricks, YTD -60+%
27: you’re front office? what kind of package did you get?
I notice that the Fortune article has a double byline and that Mr. Boyd’s name does not appear first. Perhaps Fortune now gives second billing to the journalist who played a more integral role.
Vickers…Marcia Vickers…contributing Fortune ed, former Fortune senior writer. She’s the g*d damned author of this ENTIRE f******* Citadel article. News flash/ Update: FORTUNE was not going to even give Boyd (who worked for the website, not mag) a writer cred on this story until he allegedly threatened mgmt just at the very the time he was being “laid off” (aka “fired” in his particular case, no matter what hr records might show) so for mgmt, it became(paraphrasing) “a sensitive, potentially legal” byline issue. In the end the mag caved and gave him a number two billing. Yet Dealbreaker “amazingly” gives him full credit.
Let’s get at the truth: Dealbreaker had been a substantive Boyd receptacle.
He gave Dealbreaker info often. Dealbreaker used his info, no matter how credible or, often, incredulous. He fed your fodder. In return, you bolstered him. (Now he’s been forced out of journalism because he was basically seen as a potential walking libel suit).
Too bad for your own credibility or rather,lack thereof.
BTW, the angle, reporting and prognostications of this article, several months old now, have proven correct. No thanks to Boyd who originally was adamant about burying Citadel–his amazing “street sources” told him the firm was essentially on the verge of a vulture’s delight. Fortunately cooler heads were brought in and prevailed. Idiot, screwed up world we live in, isn’t it?
Vickers…Marcia Vickers…contributing Fortune ed, former Fortune senior writer. She’s the author of this Citadel article. News flash/ Update: FORTUNE was not going to give Boyd (who worked for the website, not mag) a writer cred on Citadel story until he allegedly threatened mgmt just at the very the time he was being “laid off” (hot tip: check out that particular hr nomenclature). Yet “amazingly” Dealbreaker gave Boyd full credit.
Let’s get at the truth: Dealbreaker had been a substantive Boyd receptacle.
He gave Dealbreaker info often. Dealbreaker used his info, no matter how credible or, often, incredulous. He fed your fodder. In return, you bolstered him. (Now he’s been forced out of journalism because he was basically seen as a potential walking libel suit).
Too bad for your own credibility or rather,lack thereof.
BTW, the angle, reporting and prognostications of this article, several months old now, have proven correct. No thanks to Boyd who originally was adamant about burying Citadel–his amazing “street sources” told him the firm was essentially on the verge of a vulture’s delight. Fortunately cooler heads were brought in and prevailed.
Who cares about any of this? Probably no one–esp now. Yet, it reveals a much bigger story: it shows how blogs/purported news orgs like DB tend to work. You take what you’re fed. Thrilled to get anything free. No questions. Info is mere currency, correct or incorrect. The more sensationalistic, the better. In return, “reporter-types” who feed the beast get fed–all kinds of “shout outs”, etc.
Idiot, screwed up world we live in, isn’t it?
Vickers…Marcia Vickers…contributing Fortune ed, former Fortune senior writer. She’s the author of this Citadel article. News flash/ Update: FORTUNE was not going to give Boyd (who worked for the website, not mag) even a mere writer cred on Citadel story until he allegedly threatened or at very least dogged mgmt just at the very the time he was being “laid off”. Yet “amazingly” Dealbreaker (not Fortune) gave Boyd full credit for the story.
Let’s get at the truth: Dealbreaker had been a substantive Boyd receptacle.
He gave Dealbreaker info often. Dealbreaker used his info often, no matter how credible or, often, incredulous. He fed your fodder. In return, you bolstered him. (Why did he leave journalism? A popular saying in various corridors was that he was allegedly a “potential walking libel suit”.)
Too bad for Dealbreaker’s credibility or lack thereof.
BTW, the angle, reporting and prognostications of the Citadel article, several months old now, have proven correct. No thanks to Boyd who originally was drooling over the prospect of burying Citadel–his amazing “street sources” told him the firm was essentially at death’s door. Fortunately cooler heads were brought in and prevailed.
Who cares about any of this? Probably no one–esp now. Yet, it reveals a much bigger, troubling story: it shows how blogs/purported “news” orgs like Dealbreaker tend to work. You take what you’re fed. Thrilled to get anything …it’s free, afterall and saves shoestring outfits or blogs or whatever real legwork. Few questions are posed to to the “blog whisperer” (info provider) if any. In particular, the key one: whether their info is correct or incorrect. Indeed, the more sensationalist the “info”, the better. In return, “reporter-types” who feed the beast (i.e. Dealbreaker) get fed by the beast–all kinds of “shout outs”, etc.
Idiot, screwed up world we live in these days, isn’t it?
RE COMMENTS 31 and 32, the technological functions at this website posted them without posters consent. They were “previews” only and therefore are/were not vetted, approved posts. The poster requests these be taken down.
Post 33 holds.
UciHDL Looking forward to reading more. Great blog.Thanks Again. Keep writing.