Citigroup provides $500 million credit to hedge funds

NEW YORK (Reuters) - Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) said on Friday it has provided a $500 million line of credit to support some fixed-income hedge funds, and as a result moved the funds' $10 billion of assets and liabilities onto its balance sheet.

The Falcon funds are managed by the largest U.S. bank's alternative investments unit. Citigroup said that by providing the credit facility on February 20, it became the primary beneficiary of the funds, and thus must consolidate them onto its books.

On February 15, the Wall Street Journal said Falcon Plus Strategies lost 52 percent in the fourth quarter, its first three months in existence, after making bad bets on mortgage-backed and preferred securities, and trades based on the relative values of municipal bonds and U.S. Treasuries.

Last week, Citigroup said it had suspended withdrawals from another fixed-income hedge fund, CSO Partners, following a 10 percent loss in November. The fund's manager, John Pickett, resigned, a bank spokesman said at the time. It is not unusual for hedge fund managers to suspend withdrawals, to avoid a possible fire sale of assets to pay off departing investors.

Separately, Citigroup said it ended 2007 with $4.02 billion of direct exposure to monoline bond insurers such as MBIA Inc (MBI.N: Quote, Profile, Research, Stock Buzz) and Ambac Financial Group Inc (ABK.N: Quote, Profile, Research, Stock Buzz). That's up from the $3.8 billion it had estimated on January 15.

Bond insurers are struggling with losses from covering complex debt tied to subprime mortgages, and are trying to raise capital to preserve their "triple-A" credit ratings.

Citigroup, which is based in New York, disclosed the credit facility and bond insurer exposure in its annual report filed with the U.S. Securities and Exchange Commission.

The bank lost a record $9.83 billion in the fourth quarter, hurt by write-downs tied to subprime mortgages and an increase in soured loans. Citigroup said further declines in real estate markets could lead to more write-downs for subprime mortgages and leveraged loans, and higher credit losses.

The alternative investments unit was briefly headed last year by Vikram Pandit, who in December replaced Charles Prince as the bank's chief executive. Pandit is reviewing Citigroup's operations, and may sell or streamline businesses to boost growth and investor returns.