The Four Horsemen of this financial Apocalypse

Guambat reckons that it took four ferocious and independent minded horsemen to bring about this financial apocalypse, but the context of a fearless new Millenium (notwithstanding FY2K and 9-11), and the pandering old political system were essential ingredients giving these horsemen added potency:

1. A "clubby" and feckless US Central Bank that refused to understand and keep rein on the commonly accepted human nature propensity to take risk to the limit if it can be off-loaded on anyone else, especially the unknowing and unsuspecting;

2. An over-achieving dogmatism that understood that government is ill-suited to undertake the price, product and production discovery that is necessary to achieve a dynamically efficient economy that produces the greatest wealth for the greatest number, but failed to even consider that unfettered private enterprise is equally ill-suited;

3. A referee, in the character of the ratings agencies, that was too easy prey to the payola that has destroyed "professional" sports since time immemorial; and,

4. An elite group of highly educated technocrats who understood too well the inner workings of the institutions set up to police the financial playgrounds of big money to the end that they were able to easily and diligently and with malice aforethought work their ways around the existing structural frameworks, cow the institutions with authority, and create their own fantasy land of eternal wealth.

In the fourth category, Guambat would relegate Citadel, and most other hedge funds. Citadel was one of the first to ring the alarm bells that all was not right with their immaculately conjured world.

Citadel was entangled in one of the first major hedge fund blow-ups, Amaranth. Remember Amaranth? To refresh your memory, have a quick look of this.

Amaranth was, in turns out, not an aberration but more of a blue-print of how these things work. Or, rather, how they don't work when the guys who dream this stuff up wake up to find out that they don't always work to plan, which they fail to plan for.

Anyway, Citadel had a deep and meaningful relationship with Amaranth and its fall-out.

But Citadel was no light weight character to be pushed around by the amateurs at Amaranth. It was big enough that it's trading influence extended to being as much as five percent (5%) of US equity trading.

Now, Guambat reckons that anyone who has the capacity to affect 5% of the US equity market is no longer a "player" or "participant". Such a power is a market maker, not a market taker. Any such concentration of power ought, in Guambat's construct of a more perfect union, to have a full time cop on the beat. And, to digress to a subject that has struck Guambat as possibly significant, Guambat has noted that areas of law, such as "securities regulation" and "anti-trust", which were high on Guambat's list of preferred coursework over a quarter of a century ago, seem to hardly rate a discussion group in today's blawgs and Supreme Court agenda.

In an attempt to try to gain perspective, Guambat once postulated that "the view from a citadel is somewhat different than the view of a citadel, and that the difference in perceptions would make for somewhat differing assessments of the world at large."

In that post, which was way back in February 2006, Guambat recounted that Citadel was intending "to issue $500m (€385m) in bonds, which will make his $13bn hedge fund less reliant on Wall Street for financing". Such a financing deal would put Citadel beyond the realms, bailiwicks and coppers of banking and any other regulatory reach, let alone transparency to the rest of the world.

In the article recounted, Guambat plagiarized,

Citadel is one of the most self-sufficient hedge funds in the world. It has secured its capital by locking investors into its funds for three years, while its focus on investment automation has helped free it from dependence on investment staff. It conducts marketmaking in options and last week tried to buy a licence to a hedge fund database to give it insight into rivals’ trading strategies.

The $500m in bonds Citadel plans to issue will cut its reliance on banks for financing and reduce margin call risk, which brought down Amaranth Advisors in September and Long-Term Capital Management in 1998.

So, how has that worked out so far?

Citadel Seeks to Reassure Debt Holders

Rumors continued to circle about losses at hedge funds, which collectively control some $2 trillion in assets world-wide.

The rumors were so acute for Citadel that its chief Kenneth Griffin held a conference call Friday afternoon for holders of $500 million in Citadel debt.

Mr. Griffin and chief financial officer Gerald Beeson reminded bondholders that more than 30% of Citadel's capital is in cash and Treasurys and it has another $8 billion in unused financing lines.

"I've never seen a market as full of panic as we've seen in the last seven or eight weeks," Mr. Griffin said on the call.

Citadel in recent days has repurchased as much as 20% of its debt held by outside investors, according to a person familiar with the transaction.

The 40-year-old Mr. Griffin oversees some $16 billion in assets, and is having the worst year of his career. As of a week ago, his main funds were down 35% during 2008.

Citadel said its bets on convertible bonds, bank loans and investment-grade bonds were hedged with credit-default swaps, or insurance-like contracts that allow investors to bet on the prospects of companies' debt.

The historical relationship between securities held by Citadel and the value of derivatives tied to those securities has seen a "tremendous dislocation" that rendered those hedges ineffective and "rewriting the world of finance in less than eight weeks," Mr. Beeson said.

Hedge Fund Withdrawals Stress Market; Citadel Reassures Clients

Hedge funds are aggravating the worst market selloff in 50 years as they dump assets to meet investor redemptions and keep lenders at bay.

U.S. hedge-fund managers may lose 15 percent of assets to withdrawals by year-end while their European rivals shed as much as 25 percent, Huw van Steenis, a Morgan Stanley analyst in London, wrote yesterday in a report to clients. Combined with investment losses, industry assets may shrink to $1.3 trillion, a 32 percent drop from the peak in June.

"I have never seen a market as full of panic as I've seen in the last seven or eight weeks," Kenneth Griffin, founder of Citadel Investment Group LLC, a Chicago-based hedge-fund firm, said yesterday.

Citadel, addressing investor concerns that its funds may be forced to liquidate, said yesterday it has $8 billion in untapped bank credit, 30 percent of its assets in cash and "modest" client redemptions.

The firm had no material losses from trading partners as its main Wellington and Kensington funds fell about 35 percent this year through Oct. 17, Chief Operating Officer Gerald Beeson said on a conference call with bondholders. Year-end redemptions will be a "few percent" of assets.

Griffin, 40, who started Citadel in 1990, has posted the biggest losses of his career in 2008 after increasing wagers on loans and bonds before the markets plunged.

Most of the funds' declines occurred in the four weeks after Lehman Brothers Holdings Inc. went bankrupt, Beeson, 36, said.

Citadel was betting that the gap between the default swaps and the bonds would narrow. Instead, they widened as lenders left the market and investors bet that more companies would default.

Guambat reckons that the more of these horsemen are made headless, the better. Guambat would, however, caution that the horses not be harmed in the making of that movie.

If these horsemen operated in an accountable, risk-assuming (rather than buck-passing), and transparent way, Guambat is prepared to accept that there is a role for them to play on the modern financial market pitch.

But if they insist on being the warrantless Ninjas of some shadow world, where lights don't shine because they are too far up someone's hiney, then Guambat reckons the world will be a better place without them.