Citigroup May Lose Investors and Brokers over ASTA and MAT

Already mired in a series of write-downs, Citigroup must now deal with the mess from blowups in ASTA and MAT hedge funds. High-net-worth clients with losses approaching $2 billion are threatening to move their money to competing banks, which is prompting some of Citigroup's top brokers to consider jumping ship as well.

In a desperate bid to do keep their investors and talent, Citigroup recently injected $661 million into six ailing hedge funds and devised a restructuring plan that would allow investors to potentially recoup some of their money. The company is also holding weekly conference calls with its sales force to show they aren't underestimating the impact of the failed funds. However, it's not clear if this will work in Citigroup's favor because clients and brokers alike have claimed that the funds were marketed as low-risk to them and the restructuring plan may be too little too late for the wealthiest investors who already lost most of their initial investment.

The six troubled hedge funds, sold under the brand names ASTA and MAT, used a large amount of leverage to buy municipal bonds. At its peak, the funds controlled $15 billion wroth of muni bonds when they only had $1.9 billion in investors' money. The funds borrowed about $8 for every $1 raised. When the municipal bond market suffered a meltdown in February, the funds sank. Even after Citigroup's cash infusion this year, the funds are down 60% to 80% because the funds owned some of the hardest hit muni bonds. These losses came just as the $1 billion Falcon Strategies, another group of highly leveraged funds run by Citigroup, took a steep plunge due to a series of bad bets on the mortgage market.

So far, at least one broker with a number of clients in the hedge funds has switched over to Morgan Stanley. Some brokers are referring frustrated clients to lawyers. Meanwhile, the bank is trying to stay out of litigation by requiring investors to agree that they won't sue as part of the restructuring plan.

Citigroup isn't the only bank facing the trouble with investors and brokers. Bear Stearns, UBS, Merrill Lynch, and Lehman Brothers are all dealing with settling with clients, lawsuits, and losing brokers. However, the threat of clients and brokers leaving is more troubling for Citigroup which has been one of the few bright stars in the brokerage business.