May 20, 2008 – 11:20 am

It turns out that the big-shot traders at Citigroup’s sophisticated Falcon Strategies fund are no better at trading the market than that worthless brother-in-law who never paid you back. Witness:

Citigroup’s Falcon Strategies hedge fund, a fixed-income vehicle whose value has plunged more than 75%. Many of the fund’s investors were retail clients at the New York financial giant’s Smith Barney unit, including some who were told Falcon was a haven.

Now if that doesn’t do it for you, see how the wounded duck is dragging Wachovia and Fifth Third down with it:

At Wachovia, Falcon’s woes caused the bank’s first-quarter loss to widen to $708 million from its previously announced $393 million loss. Wachovia didn’t identify the exact source when it disclosed May 6 that it had a $315 million loss on its BOLI investments, but spokeswoman Christy Phillips-Brown confirmed that it came from Falcon.

We wondered about that ourselves when we recorded Wachovia’s Q1 2008 credit related write downs. But Wachovia wasn’t the only one to be skewered by Falcon:

Fifth Third, of Cincinnati, sank $612 million into Falcon, according to the lawsuit the regional bank filed last month in U.S. District Court for the Southern District of Ohio.

All of this takes place around a squirrelly kind of employee life insurance — and it also involves lawyers:

Besides triggering a lawsuit against an insurer and brokerage firm that arranged the hedge-fund investment for Fifth Third Bancorp, the losses may pressure Citigroup to give the banks some of their money back, as it has agreed to do for individual investors. Such a bailout would be costly, because the clobbered banks sank more than $1.6 billion into the hedge fund, according to the lawsuit and people familiar with the matter.

But you can’t solve every problem just because your lawyer can beat their lawyer:

The current banking turmoil has cause a number of suits, but almost all of them turn on one issue. How can a firm be duped by a peer? Banks are responsible for their own due diligence for their employees, their customers, and their shareholders. If they don’t bother to examine what they are buying, who is ultimately at fault?

If they don’t bother to examine what they are buying, who is ultimately at fault? Hold the ones responsible responsible — what a concept!

  1. One Response to “Wounded Duck Pulls Wachovia and Fifth Third Down”

  2. Not if you are a banker. Ultimately every loss will be socialized by horrible inflation. They do not care. It’s funny money.

    By Marc Authier on May 20, 2008

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