Another U.S. stimulus package needed: Citadel chief

CHICAGO (Reuters) - The head of Citadel Investment Group, one of the world's biggest and most powerful hedge funds, said on Wednesday that America needs another stimulus package to boost growth and warned against new regulation for hedge funds.

Kenneth Griffin, who rarely gives interviews, said in a panel discussion that fear is partly responsible for recent dramatic moves in financial markets, but urged regulators not to make things worse with inappropriate new rules.

"Amongst the hue and cry that we need more regulation ... we need to keep in mind that it is our regulated entities that failed us first and not the unregulated part of the economy," he told about 400 executives at a hotel here.

"So I hope that our policymakers next year, when they try to ensure that what has happened recently never happens again, keep in mind that there is a balance between free markets and socialism, and that this country has achieved greatness by finding the right side of that balance to be on," he added.

Raghuram Rajan, a finance professor at the University of Chicago's Graduate School of Business, said poor enforcement of existing regulations was the real problem.

"Unfortunately, what we're going to see is a massive amount of regulation attempting to fix the problem and I fear some of it may set up the roots of the next crisis," he said.

Loosely regulated hedge funds, which jointly manage about $1.7 trillion, have come under fire recently for having accelerated stock declines when many were forced to sell holdings to meet investors' demands for their money back.

Hedge funds, unlike mutual funds, can use trading techniques like borrowed money or selling securities short. For years these techniques helped cement the industry's popularity as investors poured in so much money that industry assets doubled in about three years.

However, this year the financial crisis has left thousands of hedge funds, including Citadel's flagship portfolio, with double-digit losses. The average fund has lost about 10 percent and Griffin's flagship hedge fund lost about 15 percent in September alone.

Griffin told his investors recently that September was the worst month in the company's history as its funds faced extraordinary market conditions and global regulators' short-term ban on selling a number of stocks short. Citadel invests roughly $18 billion.

"It's been a tough, tough six weeks for us," he said on Wednesday.

Griffin also said more transparency in the $55 trillion credit default swaps market is needed to reduce risk. He said the answer is a public clearinghouse like the one Citadel is trying to establish with CME Group Inc (CME.O), which runs the Chicago Mercantile Exchange.

Niall Booker, deputy chief executive of HSBC Holdings Plc's (HSBA.L) North American businesses, said that the U.S. government may need to guarantee some aspects of the CDS market -- vilified as a major factor in the current financial crisis -- to ensure such holdings can be unwound safely.

Griffin and other panelists said another stimulus package is necessary.

Investing in infrastructure and setting up programs to reduce the cost of mortgages make sense, Griffin said, as he is worried about the destruction of wealth on paper seeping into the real economy.

The greatest challenge for the next president will be restoring consumer confidence, and moving away from using fear to drive policy change, he said.

"Fear is devastating in its impact on consumption," Griffin said, adding that billionaire investor Warren Buffett was right in saying the time to invest is when fear is high. "We are awash in fear."

Over time, people will need to save more and spend less, and fiscal policy may have to accommodate that, Booker said.

Rajan said the optimistic scenario is that the United States begins to come out of recession by the end of 2009.

Former Chicago Federal Reserve Bank President Michael Moskow said the recession is already here. "Almost every forecaster I know says that we're already in a recession and the only question is how severe that recession is going to be."

(Additional reporting by Svea Herbst-Bayliss, editing by Matthew Lewis and Gerald E. McCormick)