Ken Griffin wants to break up the big banks, or run one

November 14, 2013

Ken Griffin, who runs the $14 billion hedge fund Citadel, said Tuesday that he wants to break up banks:

“We don’t have a good legal justification for breaking up the banking system. But if I could wave a magic wand, I’d break up the banking system.”

Asked whether the big banks had gotten too big to fail, or too big to manage, Mr. Griffin said, “They’re both.” When asked about how he’d break up some of Wall Street’s largest institutions, Griffin suggested pulling the securities businesses out of the banking system.

“I would, in a sense, de-bank Goldman Sachs or Morgan Stanley”.

What Griffin leaves out here is that if he’d had his way, he would’ve already made Citadel into an investment bank with a hedge fund business. (Sidenote: Goldman Sachs and Morgan Stanley would probably like to go back to being a bit more like hedge funds with investment banks, too). The dream scenario for Griffin (and he’s not alone, Blackstone is trying something similar) was that investment banks would emerge from the 2008 crisis hampered by shrinking balance sheets and restraining regulations, allowing Citadel to win business from Morgan Stanley and Goldman Sachs.

When Ken Griffin rips into big banks, he’s not an in-it-for-the-common good reformer, or a disinterested observer, he’s a would-be competitor. And the scorecard so far isn’t too kind: Griffin is one for three in his attempts to build banking businesses that actually compete with big banks.

Prime Brokerage (fail)

In 2007, it started offering prime brokerage services to other hedge funds. Prime brokers are to hedge funds what stock brokers are to your uncle the day trader – they lend hedge funds stocks so they can put on short positions, and provide a litany of other trading and back office services. Having a direct competitor fill this role always had the possibility of being too awkward to succeed: for a hedge fund, even having an investment bank as a prime broker can already become intermittently uncomfortable. Having a hedge fund acting as a prime broker to other hedge funds is fraught in all sorts of new ways. And, in 2009, CBS reported that demand for Citadel’s prime brokerage services had “so far been tepid”.

Investment Banking (bigger fail)

In late 2008, Citadel opened investment banking and research divisions, aiming to compete directly with Goldman Sachs. It didn’t work. In 2011, Citadel closed its research group and sold its investment bank to Wells Fargo.

Securities Trading (success)

Citadel’s trading business, started in 2002, is far and away the firm’s oldest and most successful non-hedge fund group. It currently has 13% market share in US-listed stocks, and 20% in stock options. Despite its relative success, the unit cut 10% of its staff in March.

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