You heard it here first…
Carol Loomis buries the lede:
At bottom, the countdown to both [Citigroup CEO] Prince’s exit and Citi’s November shocks began in [the] summer crisis period for the credit markets. Citi started then to have ominous dealings with CDOs [financial instruments that consist of bundled debt] 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 [Citigroup Chairman and former Treasury Secretary] Rubin says he had never heard of liquidity puts until they started harassing Citi last summer.
What Citi did a couple of years ago was insert a put type of option into otherwise conventional CDOs that were backed by subprime mortgages and sold to such entities as funds set up by Wall Street firms. The put allowed any buyer of these CDOs who ran into financing problems to sell them back – at original value – to Citi. The likelihood of the put being exercised, however, was regarded as extremely remote because the CDOs were structured to be high-grade entities called “super-senior.”
Meanwhile, you might think the existence of the put would make it impossible for Citi to get those CDOs entirely off its balance sheet. [Yes, you might.] But in fact Citi found a complex accounting rationale for doing exactly that, and the CDOs jumped entirely to somebody else’s balance sheet. All that remained in Citi’s realm was this sticky little matter of the puts – which, as we shall immediately see, ultimately worked to get these CDOs right back to their creator, Citi.
Last summer, with the whole world suddenly unwilling to finance CDOs, the holders of the liquidity-put CDOs began to return them to Citi. And that’s where they now reside – $25 billion of them, a very large lump in Citi’s $55 billion of subprime-related securities. That entire package of trouble was the subject of Citi’s Nov. 5 analyst call. This was the third presentation that Citi had made to analysts in five weeks – each of these confessionals more anguished than the last – and in that time Citi’s stock and Prince’s credibility had been punished.
But remarkably, Nov. 5 was the first time that Citi mentioned liquidity puts to the world. CFO Crittenden says the need to make disclosures about the puts did not arise until the last part of October…