CITIgroup customers mourn over worse-than-expected loss in funds

Two hedge funds affiliated to CITIgoup.Inc send their investors in real panic by reporting more than 75% loss in the value of the funds. The two funds involved branded their products as less-risky fixed income ones. However, the two funds, namely Falcon and ASTA/MAT channelled most of their cash into municipal bonds, mortgage-backed securities and other debt instruments, which bear the highest risk.

 

CITI funds fiasco 

Some of the funds’ customers are filing court suits against CITIgroup for fraud. To counteract, CITIgroup executives offer the affected fund investors $250 million as exit compensation, and the precondition to get this money is to drop all legal charges against the company. So far, the investor’s reactions to the offer are still not available.

 

CITI’s case does not come alone since the credit-crunch-led shockwave swept across the world. Banks are anxiously dealing with the situation while huge write-downs are reported from one to another. Last week, one of China’s first QDII (qualified domestic institutional investor) funds of Minsheng Bank was forced to dismantle its portfolio because the fund lost more than half of its capital. Investors of the fund also tried to bring the bank and fund managers to court but ended up in vain, because the fund had informed its investors of the potential risks when the fund was open to retail market.

 

Over confindence kills

There is one similarity for all these failed funds: they are so aggressive that they bet all the money on high-risk securities or derivatives. When they entered the market and built up portfolios, the sentiment of the market was high, however, suddenly the wind changes, huge exodus of capital appeared instantly after the horrible picture of sub-prime mortgage was unveiled last summer.

 

Hide the truth 

Besides overconfidence, low portfolio diversity also resulted in the huge loss of the funds. What’s worse was that the fund managers did not reveal the real picture to their customers, who were initially told that the funds won’t touch any risky sectors. Customers are now told that their money was gone and the situation is irreversible because the gross prospect for the whole economy is still perceived as bleak. What can they do except for accepting the sad truth?

Headcount cut show in financial industry starts

Today two obtrusive numbers come onto headlines of many financial publications: the Royal Bank of Scotland is going to layoff 7,000 its staff, and UPS will put that figure to 8,000. The horrible scene of job loss in financial market now begins to full-fledge. The big names in the industry will be hit the hardest first.

 

More than 40,000 job loss in City

Cut in RBS accounts for one fourth of the bank’s total 28,000 employees, as a formal consultation for position redundancies is already undergoing in the bank. In the beginning of the year, JP Morgan’s London arm expected that there would be as many as 40,000 job cuts for 2008 alone. Many market insiders were mocking at the JP Morgan’s estimate to be over-pessimistic, however, as more and more banks are revealing huge write-downs in their book, the job cut plans are also gaining momentum from bank to bank, people are beginning to paint more gloomy pictures.

 

Business schools reap the windfalls  

Interestingly, many business schools are now busy with putting up commercials and ads in newspaper and websites, in order to attract those who are laid off from financial sector to business schools for MBA or EMBA study. FT revealed in its February business supplement that MBA application cycle actually counters the economic cycle, in other words, the worse of the economy looks like the more people are going to apply for seats in the business schools.

 

MBA VS Recession 

The applicants are hoping that by spending generally two years in business schools, they can fend off the sluggish period of market and economy, and then enter the job market again when the economy pick up pace again. 2008 will be an excellent year to test if this assumption is true or false.