Citadel Expands into Investment Banking

Citadel Investment Group is expanding into investment banking and has hired three former Merrill Lynch executives to anchor the new operation, a source with knowledge of the matter said on Thursday.

Richard Drew

The source, who spoke anonymously because the news had not been announced, said Citadel wanted to establish a fully integrated financial platform with services spanning investment banking, institutional sales and trading.

The source said that the U.S. hedge fund founded by Kenneth Griffin had recruited leveraged finance specialist Todd Kaplan to be at the helm of the new division. Kaplan joined in March.
Former Merrill banker Brian Maier will join as head of industry groups, and Carl Mayer will become head of leveraged finance, both reporting to Kaplan, the source said.

Yale alumnus Kaplan had been with Merrill Lynch since 1986. The source said neither Kaplan nor the other two investment bankers hired were working at Merrill at the time of their recruitment into Citadel.

Exceptional volatility and a credit crisis triggered losses last year at many hedge funds.

The severity of the financial crisis also prompted many experts to question the viability of the investment banking model, after the forced sale of Bear Stearns, the collapse of Lehman Brothers and Bank of America's   buy-out of Merrill Lynch.

Among Wall Street's major investment banks, only Goldman Sachs and Morgan Stanley have survived independently, and that after securing access to funding by the U.S. Federal Reserve in return for closer scrutiny.

The source said that Citadel would soon announce its moves. Under the new structure, Kaplan will report to Rohit D'Souza, chief executive of Citadel Securities.

The Chicago-based hedge fund has struggled in a turbulent market. While its securities division was up more than 40 percent last year, its flagship Kensington and Wellington funds fell by more than half.

Until 2008, Citadel had recorded annual gains every year since Griffin founded the firm in 1990 with $4.2 million.

Citadel Securities, which groups every existing operation except the core Kensington and Wellington funds and other stand-alone funds, now plans to expand its market-making business to Europe from the United States, the source said.

And it hopes to grow the institutional sales and trading portion of its business, the source said.
In December, Citadel barred withdrawals from its main funds amid a rash of redemptions in the industry, but Griffin said the funds would slowly allow redemptions to begin as early as the second quarter if they met certain thresholds.

• Slideshow: The Best American CEOs of All Time
• Slideshow: Portfolio's 20 Worst CEOs in US History

As of March, Citadel's main funds managed about $8 billion, down half from their high-flying peaks. Citadel, overall, had contracted to about $11.5 billion under management, from more than $20 billion last year.

Copyright 2009 Reuters. Click for restrictions.