Wanting To Be More Like AIG, Citigroup Announces Plan To Sell Financial Armageddon Derivatives
What could possibly go wrong with such brilliant thinking!?! I can't imagine the regulators will allow this, and as proof that nothing has changed, we're guessing regulators knew nothing about it until it hit the circuit today. I'll watch this one over the next few weeks, and willl update this story when we hear something from the FDIC. Obviously, the fatal flaw in selling Armageddon contracts relates to not being around to pay off in the event of catastrophe. In announcing their plans, Citigroup is saying, we are supported by taxpayers and therefore we don't have that problem.
Bullshit a la mode.
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Credit specialists at Citi are considering launching the first derivatives intended to pay out in the event of a financial crisis. The firm has drawn up plans for a tradable liquidity index, known as the CLX, on which products could be structured that allow buyers to hedge a spike in funding costs.
However, there is concern from academic circles that the counterparty risks involved in such a product could create moral hazard. Chris Rogers, chair of statistical science at Cambridge University, said the only participants able to sell CLX-based products would probably be those who are too big to fail.
"This is basically a kind of insurance product. The main issue is: how good is the party issuing it? If it's going to be paying out huge numbers in the event of a crisis, will it be able to meet it obligations? Insurers can buy reinsurance for their liabilities, but the buck has to stop somewhere – there's a limit to how much a private insurer can pay out. Only the government can cover unlimited losses," he says.
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Feb 10, 2010 at 9:27 PM
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