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The $25bn Citi CDO liquidity put - and who else has one

Doing the rounds is talk of a CDO “liquidity put” that has troubled Citi with billions in extra subprime exposure.

Speculation about the “liquidity put” kicked-off after an interview with Citi president Robert Rubin in Fortune magazine last week. Fortune recounts:

Citi started then to have ominous dealings with CDOs that carried a “liquidity put.” Never heard of a liquidity put? Google will give you a few uninformative references. But it is testimony to the obscurity of this term that Rubin says he had never heard of liquidity puts until they started harassing Citi last summer.

Peter Cohan at BloggingStocks picked up and promptly made it a lead. Felix Salmon also has some questions. Firstly, why hasn’t this got more coverage? And secondly, who else has these “liquidity puts”? Brad de Long wants answers too.

FT Alphaville noted Citi’s massive growth in CDO exposure - bizarrely through the commercial paper market - when the bank reported its Q3s. You can read all the detail here, but in a nutshell, this is the mystery “liquidity put”.

Back in early November, we didn’t know them as “liquidity puts” - just “agreements” in the structuring of Citi’s CDO deals.

Here’s the deal:

Several CDOs were created by Citi in 2005 that borrowed from technology used in designing SIVs- another market in which Citi was a leader. The rationale was that a CDO which could issue short-term commercial debt (alongside its traditional issuance) would have access to a broader funding market and would be able to more dynamically manage its funding portfolio. To mitigate any CP rollover risk, Citi entered into a series of “agreements” which forced it to buy the CDO CP if no one else would. As Mr Rubin calls them, “liquidity puts”.

And those CDO commercial paper “liquidity puts” forced a staggering $25bn increase in Citi’s CDO exposure - at a time when the market was falling apart. Like Salmon, we’re bemused as to why that notion hasn’t been more widely reported.

And it may not just be a Citi problem.

It seems that Bank of America had similarly structured CDO deals in place. In their 10Q, viewable here, there’s an admission that:

The Corporation is obligated under the written put options to provide funding to the CDOs by purchasing the commercial paper at predetermined contractual yields…

And as we understand things, those obligations forced BofA to buy $12bn of CDO CP from off balance sheet CDOs.

This entry was posted by Sam Jones on Wednesday, November 21st, 2007 at 12:40 and is filed under Capital markets. Tagged with , . You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

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Comments

  1. Nov 28   6:26 Posted by get out of debts | Sydney Financial Group [report]

    […] An article published by Financial Times gives some more detail on the current examination of the mysterious “liquidity puts” that have been troubling banks. According to the article: Doing the rounds is talk of a CDO “liquidity put” that has troubled Citi with billions in extra subprime exposure. Speculation about the “liquidity put” kicked-off after an interview with Citi president Robert Rubin in Fortune magazine last week. FT Alphaville noted Citi’s massive growth in CDO exposure - bizarrely through the commercial paper market - when the bank reported its Q3s… In a nutshell, this is the mystery “liquidity put”. Back in early November, we didn’t know them as “liquidity puts” - just “agreements” in the structuring of Citi’s CDO deals. To mitigate any CP rollover risk, Citi entered into a series of “agreements” which forced it to buy the CDO CP if no one else would. As Mr Rubin calls them, “liquidity puts”. And those CDO commercial paper “liquidity puts” forced a staggering $25bn increase in Citi’s CDO exposure - at a time when the market was falling apart. Like Salmon, we’re bemused as to why that notion hasn’t been more widely reported. And it may not just be a Citi problem. It seems that Bank of America had similarly structured CDO deals in place. […]

  2. Nov 27   18:17 Posted by Goldnotes - A Resource Investor’s Blog » London Irvine Report November 23, 2007 [report]

    […] http://ftalphaville.ft.com/blog/2007/11/21/9075/the-25bn-citi-cdo-liq […]

  3. Nov 21   17:08 Posted by Anonymous [report]

    I agree with Shareholder, while many of the people involved trained as engineers and scientists they have now become a disgrace and should be disowned. Its is hard to believe that so many smart people can be quite so stupid.

    as Hellasious says on his Sudden Debt blog:

    “Only collusion, malfeasance and determined obscurantism can transform a basket of 100% CCC loans into 85% AAA bonds and produce huge fees paid to all involved.”

    http://suddendebt.blogspot.com/2007/11/washington-not-constantinople.html

  4. Nov 21   14:32 Posted by Shareholder [report]

    “that borrowed from technology used in designing SIV”

    To all journos covering the crisis, pleas don’t insult engineers and technologists by stating that a few words and arithmetic in a financial contract constitute ‘ technology.’

    A better description would be ‘toys’ that these people play with secretly trying to maximise bonuses at shareholder risk and expense.

  5. Nov 21   13:52 Posted by bsb [report]

    liquidity puts - otherwise known as “backstop agreements” - what we mean when we say “forcing liabilities back onto balance sheets” - as if they should ever have been off-balance sheet in the first place…

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