Comments on: Citi reinvents end-of-the-world insurance

By: jacktrip

jacktrip — Tue, 02 Aug 2011 07:04:42 +0000

I think you were exactly right in pointing out the ludicrousness of going to ‘credit specialists at Citi’ for any kind of investment advice, particularly advice on insuring your investments. However I would think of this as a kind of ‘stupid tax’ on those masochists who like repeatedly walking into walls or running into traffic to pick up spare change on the roadway. Maybe if more of these types of investors existed Citi could focus on fleecing them while giving the rest of us smart investors some half-way decent advice.

Jack
http://www.accidentinjurydirect.co.uk

By: klhoughton

klhoughton — Thu, 11 Feb 2010 04:05:31 +0000

True, there does not have to be an upfront premium in the structure (though it would be cleaner that way).

But there will be payments made to Citi at every reset before a liquidity crisis–and the cost likely will be greater over time than just selling the (effectively) floor.

And, of course, the odds of The Big C being able to cover its promise have been fairly stated above and around.

By: zerobeta

zerobeta — Tue, 09 Feb 2010 02:25:28 +0000

From Citi PR-

“In possibly trading the index, Citi would act as a market maker, not a provider of liquidity.”

Isn’t “market maker” synonymous with liquidity provider?

By: AndrewBW

AndrewBW — Mon, 08 Feb 2010 23:45:42 +0000

Well, you know the old saying: If you’re not part of the solution there’s profit to be made prolonging the problem.

By: najdorf

najdorf — Mon, 08 Feb 2010 22:52:34 +0000

One more note: if you can use derivatives to create a risk-free return, either that return is equal to Treasuries, you’re dealing with an idiot, or you’re taking a risk you don’t understand (you’re the idiot). Why would your derivatives counterparty be giving you a free spread over Treasuries?

By: najdorf

najdorf — Mon, 08 Feb 2010 22:50:24 +0000

The email from the Citi spokesman makes this story even more negative for Citi, contrary to its intended effect. I think the last crisis was a pretty good indication that our insurance companies, pension funds, and universities have already sold enough liquidity, and that our banks are completely unable to understand how much liquidity they need. When you have (debatably) America’s #1 university exiting swaps in a panic, issuing debt at the worst possible price, and halting essential and long-planned expansion at great cost to the university and the neighborhood (I’m talking about Harvard here), universities have sold enough liquidity. When you have (debatably) America’s #1 insurance company allowing a tiny unregulated division to write billions of contracts that no one understands which totally misprice credit risk and liquidity, something is awry (I don’t even know whether to characterize pre-crisis AIG as a natural buyer or seller of liquidity given the nature of their operations, marrying a long-funded insurance company with a short-term leveraged trading operation).

Not worrying about interest rate risk any more is also pretty funny. Most of the way we’ve dealt with systematic interest rate risk has been to sell a ton of adjustable-rate debt to people with unstable and inflation-vulnerable cashflows. Fortunately the Fed has been kind enough to keep those interest rates at historic lows for a long time (really we haven’t had high rates since somewhere back in the 90s). I shudder to think what will happen to all the adjustable-rate debt if the Fed ever re-acquires its Volcker-era spine. It used to be that when interest rates rose we blew up all the banks (see early 80s Fannie/Freddie problems and the S&L crisis). Now we’re going to blow up all the marginal corporations and homeowners. Hmm. Doesn’t seem an improvement.

By: KenInIL

KenInIL — Mon, 08 Feb 2010 20:07:29 +0000

I see no real problem, provided Citi is required to set aside a bond in the full amount covered by the insurance. Perhaps they could deposit Treasury bills with the Fed; or, if you lean to a more apocalyptic end-of-the-world scenario, they could use Stephen Colbert’s triptych of gold, sheep, and women.

Absent such a bond, I agree with spectre885 and others above.

By: polit2k

polit2k — Mon, 08 Feb 2010 19:15:22 +0000

“But the only people who can stop this from happening are the technocrats at the systemic-risk regulator we desperately need to step in and get sensible about these things. And those people, unfortunately, don’t yet exist.”

So how about an Emergency Derivatives Tax as it seems most unlikely that any regulations will ever get put in place in time? What %age of their notional value would make buyers think twice about signing on the dotted line?

By: rabipete

rabipete — Mon, 08 Feb 2010 18:01:08 +0000

Two points–
1. A risk-less capitalism is not really capitalism at all, is it? Insurance on investments, especially with no up front money in premiums, destroys all risk. Rules of any game are meant to protect the game. If some can buy insurance and others cannot, then the game is not fair and is indeed fixed. And if there is not requirement for reserve capital for insurance companies that insure investments, the whole thing is a sham. That is why every sport has rules.
2. Then the tax payer has to bail out the flowed system or else everyone is punished. It is time for the governments of democratically elected societies to reflect the majority concerns, not the investment class alone.

By: BarryKelly

BarryKelly — Mon, 08 Feb 2010 17:39:10 +0000

“Citi doesn’t even get any insurance premiums up front, but still needs to pay out enormously in the event of a crisis.”

I think you meant “the taxpayer needs to pay out enormously” etc.

By: spectre855

spectre855 — Mon, 08 Feb 2010 16:41:05 +0000

Isn’t this simply a result of the bailout? The government basically told Citi that it makes the cut when it comes to TBTF so products like this are win-win for them. If the world doesn’t come to end, they make money. If the world does come to an end, the government pays the tab and all of its clients know that. This is a win-win for everybody but the taxpayer (as usual).

By: maynardGkeynes

maynardGkeynes — Mon, 08 Feb 2010 16:36:14 +0000

“….no large and leveraged financial institution would have the chutzpah to start selling world-coming-to-an-end insurance….”

Then what would you call what the Fed is doing?