Saturday, October 25, 2008

Citadel Chief Denies Rumors of Trouble -

In the Journal of Behavorial Finance 2004 Allan Kimmel wrote the following about financial rumors:
"In the contemporary financial marketplace, the consequences of speculation and decision making based on unfounded assertions and false rumors can be especially potent and undeniably dangerous."
Which is what makes the following NY Times story even more worrisome: the mere fact of the rumors coming so soon after other blow-ups may be enough to start another one and given the size, there could be a bit of trouble if true. Which in a way should probably be expected since while banks and investment banks have gotten in trouble this go round, there has yet to be any major hedge fund collapse.

Citadel Chief Denies Rumors of Trouble -
"As the stock market tumbled again Friday morning, the Citadel Investment Group, which rarely discusses its business affairs publicly, took the unusual step of issuing a statement to deflect rumors that it might be in trouble. The talk, Citadel said, was “categorically false.”

"Citadel runs some of the largest and best-known hedge funds.....

“The reason we worry about something like Citadel is that it’s so large that you’d worry about systemic risk,” said William Goetzmann, a finance professor at the Yale School of Management, who has studied hedge funds.

The industry has grown fivefold in size since 1998, when many funds hit trouble, most notably Long Term Capital Management. A group of banks bought Long Term Capital Management’s assets to prevent its losses from cascading through the industry.

This time around, however, it is less likely that banks have the strength to stabilize the financial system if a big hedge fund hits trouble. It is unclear what role, if any, the government might play."
Let's hope these rumors are just that. Unfounded rumors If so, the partners at the Citadel may want to read the rest of Kimmel's paper where he suggests "actions that can be taken to minimize the potentially harmful effects of financial rumors."

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