Monday, June 9, 2008

ASTA, MAT and Falcon Causing Citi's Pain

After record profits last year, most major firms' wealth management divisions are now suffering from a very shaky financial market. The trouble with Citigroup's hedge funds, aka ASTA/MAT and Falcon, exemplify the most dire results. Citi revenues were up 16% last year, but this year, net profits slid a whopping 33% largely due to the failure of these hedge funds.

ASTA/MAT reportedly used a large amount of leverage to buy municipal bonds and had been sold to Citi's retail clients through Smith Barney. Citi injected $661 million to shore up the funds but the funds are still down 60% to 80% this year. The other hedge fund, Falcon Portfolios, is a mix of municipal bonds and debt instruments and that also plunged in value.

Many of Citi's valuable high-net-worth clients are facing huge losses in ASTA/MAT and Falcon and neither they nor their advisors are happy about Citi's initial response to the losses. Now, Citi has reportedly agreed to pay up to $250 million for investors to get out of the Falcon fund with partial losses if they agree not to bring Citi to court. Advisors and investors, of course, are hoping for more.

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