Troubled Infrastructure Funds Lead To Problems For Former Citigroup Exec

Following its receipt of some $45 billion in taxpayer bail-out money during 2009, Citigroup has been burdened by numerous issues. “The problem child of banking,” as Capitol Hill refers to them, suffered huge losses in its private investments division which at the time was overseen by former Citigroup Chief Financial Officer Michael Froman.

According to a July 20, 2009 story in the Wall Street Journal, the funds in question include the Citi Infrastructure Investors fund, a private-equity fund that amassed $3.4 billion to invest in various infrastructure projects before clients pulled the plug, exercising their right to restrict new investments because of previously failed deals. Adding to the fund’s problems were resignations by several key Citigroup managers, one of whom included Froman. Another Citigroup private equity fund was shelved altogether after failing to attract clients.

In January 2009, the Obama administration welcomed the former Citigroup manager of those troubled funds - Froman - into its fold as deputy assistant to the president and deputy national security adviser for international economic affairs. Given the depth of financial problems in the two funds formerly managed by Froman, the addition of the Citigroup executive to the president’s inner circle was viewed by many as controversial.

Throughout 2009, Citigroup was immersed in legal and financial issues related to its alternative investments. Two such products, the ASTA/MAT hedge funds, currently are the focus of numerous lawsuits and arbitration claims by investors who say Citigroup misrepresented the funds as safe, conservative and stable fixed-income investments. Any losses were projected to be minimal – no more than 5% a year in the worst-case scenario.

Instead, ASTA/MAT plummeted in value during the summer of 2008 because of turmoil in the financial markets. During the same time the funds were sinking, however, Citigroup allegedly told investors to “stay the course” and to expect ASTA/MAT to rebound once the market returned to normal. That didn’t happen, of course. Investors later learned the ASTA/MAT funds were highly leveraged, borrowing approximately $8 for every $1 raised. Meanwhile, the managers ASTA/MAT continued to invest in some of the most risky and speculative investments possible, including subprime mortgages and derivatives.

Now Citigroup has new issues to deal with: massive losses in its infrastructure fund and the ongoing compensation controversy surrounding the fund’s former manager, Froman. According to the Wall Street Journal, as Froman prepared to begin his White House post in late January, he was due and later received more than $4 million in compensation from Citigroup.

Froman also had a big financial stake in the Citi Infrastructure Investors fund, which he had received as part of his pay package. When Froman wanted to cash out, he suggested Citigroup pay him at least $10 million for his stake in the fund, according to the Wall Street Journal.

Furthermore, Froman, who during the relevant time was also a part of Citigroup’s Alternative Investment division - the same department being held responsible for hundreds of millions of dollars in losses as a result of recommendations to invest in high-risk and esoteric securities. Subsequently, a number of Citigroup executives in that division - including Froman -bailed, as financial losses began to multiply, but not before claiming their large salaries and bonuses as a figurative reward for their contributions to the firm.