Fortune has added a new phrase to my vocabulary: liquidity puts. In an interview with Citigroup Inc. (NYSE: C) Chairman Robert Rubin, liquidity puts are defined as the right of Collateralized Debt Obligation (CDO) holders to sell back the CDO to its issuer at the original price. The liquidity put is responsible for the $25 billion worth of CDOs on Citi's balance sheet.
Before getting into how this all works, it is amazing to me how many new words I've learned as a result of the collapse of the real estate market which began in the fall of 2006 -- when I first began posting on the topic. Since then, I've been introduced to all sorts of new terms -- subprime mortgages, CDOs, Structured Investment Vehicles (SIVs), the Yen Carry Trade, and Level 3 assets -- to name just a few.
When Citi set up its $80 billion worth of SIVs, it thought that they would stay off its balance sheet. This summer, though, financial markets lost interest in financing CDOs so the holders of the liquidity-put CDOs began to return them to Citi -- the $25 billion of them represent more than half of Citi's $55 billion of subprime-related securities. The super-senior status -- meaning that they got first claim on cash flows -- of the put-laden CDOs did not protect their value because the ratings agencies decided to downgrade them, creating a panic to exercise the put and sell the CDOs back to Citi, thus locking in huge losses for the bank.
As an investor, I am hoping that Robert Rubin's vanity -- I think his once sterling reputation has been tarnished -- will engage him in fixing Citi. But I wonder whether Citi's problems could be too big for him to fix.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup shares.
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Reader Comments (Page 1 of 1)
11-12-2007 @ 12:22PM
CRAIG said...
Looks like stock in citigroup might not be such a good choice right now so i think I'll stick my first choice at www.earnyourrealworth.biz and let their system work for me until citigroup can work things out,Robert I wish you the best, but your only hope my be David Copperfield and hes busy right now from what I hear !
11-12-2007 @ 2:01PM
flipsbuddy said...
I think Robert RUBIN CAN FIX ANY THING. HE
IS THE MASTER WHEN IT COMES TO THESE
MATTERS.
11-12-2007 @ 2:38PM
OnceABanker said...
I don't get it -- even if Citi's assessment was that the puts were deep out of the money at the time they were written, how can it have not disclosed their existence? and how did it finagle off-balance-sheet treatment?
I'll push the question further -- even if the GAAP treatment was correct, how did the CEO and CFO get comfortable with their SOX certifications, which do not have a GAAP qualification, knowing that these time bombs were out there?
Interesting times . . .
11-13-2007 @ 11:01AM
Alexander Bauer said...
The comment by flipsbuddy that Citigroup's current problems can be fixed by the master of these matters, Robert Rubin is inane. He has been associated with City since leaving government serv ice as Treasury Secretary for Bill Clinton. Why was he not pro-active in prohibiting this situation from occurring rather than now being expected to fix things. As a former employee of Smith Barney a Citigroup subsidiary and a former shareholder I am appalled at the salaries and bonuses given to these executives. Only today it was announced that the deposed chairman Charles Prince would be getting a twelve million dollar bonus for 2007. In lieu of the current situation all of the top executives should forfeit bonuses for causing such a tremendous loss to shareholders.