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Citadel under siege, page 4

Last Updated: December 9, 2008: 3:54 PM ET

If anyone could use three fingers of Wild Turkey, it's Griffin. Just the day before, on Thursday, Nov. 13, he was scrutinized by the nation as he and hedge fund compadres such as George Soros and James Simons were grilled on Capitol Hill by a congressional panel on issues such as why hedge fund managers make gobs and gobs of money; whether hedge funds are toxic to the market; and why they are so darn secretive.

During the panel, Congressman Edolphus Towns said, "All of you have successfully navigated the recent problems in the economy, which appear to have blind-sided the people on Wall Street and, of course, the people here in Washington. I don't think we can pass up this opportunity to explore what it is that you knew that allowed you to get so far ahead of everyone else when it came to predicting what would happen in the markets."

Unlike John Paulsen, seated to Griffin's right, who had profited hugely from shorting subprime and was able to explain his strategy, Griffin had to tell Congress, America, the world, that his firm had screwed up. He said, "Sir, the last eight weeks have been a challenging eight weeks for Citadel."

Back at the bar, Griffin seems somewhat humbled. Citadel's survival isn't a 100% done deal. According to investors, the flagship fund was down 47% year-to-date as of Dec. 4.

But odds are that Citadel isn't going away, for several reasons. First, its cash position continues to be strong. Second, 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.

Also, 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.

Citadel is also creating new low-price funds that will pursue specific trading strategies, unlike his flagship funds, which are multistrategy. It's possible some of the smaller funds will be long only, eschewing hedging. And Griffin is expanding his capital markets division, which consists of market making, trading platforms, and back-office services - all fee-driven businesses.

In case you're wondering, Griffin's personal holdings aren't suffering. He's worth an estimated $3 billion, of which a large portion is tied up in Citadel, and he will remain a major benefactor on the Chicago art scene. Last year he and his wife pledged $19 million to the Art Institute of Chicago to build the Kenneth C. and Anne Griffin Court, set to open in about a year.

But what will Citadel look like at that time? It will be a leaner shop, possibly with fewer assets under management. It will obviously hold on to cash cows such as its options and stock-trading platforms.

Griffin says the firm will engage in far fewer complex trading strategies - that long-short equities will be its core: "I think we're looking at a period of time going forward where the market will value simplicity." As he said on the conference call heard round the world, "We need to face the fact that we need to evolve. We will embrace the changes that are part of that evolution, and we will prosper in the new era of finance."

Right now, there are plenty of opportunities Citadel would love to pounce on: loads of cheap stocks, undervalued deals - the kind of thing Griffin obsessively seeks out. He says, in fact, he plans to start a convertible-arbitrage fund again as soon as he can.

When asked whether he would have done anything differently in the past months, he responds not much, other than perhaps reducing some of the firm's more complex investments.

Then, after thinking a moment, Griffin says with a sly smile: "With hindsight, of course, I would have been all in cash!" And thus he demonstrates another skill that he mastered during the credit crisis - gallows humor.  To top of page

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