Citadel Is On Top Of The World*

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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 35,00030,00025,000...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.

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