Citigroup - Fresh From Being Bailed Out of Derivatives Black Hole - Now Selling Yet Another Type of Derivative → Washingtons Blog
Citigroup - Fresh From Being Bailed Out of Derivatives Black Hole - Now Selling Yet Another Type of Derivative - Washingtons Blog

Tuesday, November 25, 2008

Citigroup - Fresh From Being Bailed Out of Derivatives Black Hole - Now Selling Yet Another Type of Derivative

Citigroup has received $45 billion in direct bailout money, plus a guarantee of $306 billion. Citigroup was brought to its knees by - among other things - credit default swaps bet against it, and huge derivatives holdings.

Goldman Sachs and JPMorgan also each got $25 billion in taxpayer bailout money. The bailout money helped save them from the black hole of derivatives debt.

So what are these grateful companies doing now? Are they confessing about the error of their ways, and warning others to stay away from derivatives?

Uh, no.

They are using a type of derivative called "Default-Recovery Swaps" to bet against other companies. As Bloomberg writes:

Goldman... Citigroup ... and JPMorgan ..., which helped turn bets on company defaults into a $47 trillion market, are among banks offering wagers on the amount investors may recover from bonds after borrowers go bankrupt.

Credit-recovery swaps are trading on the debt of about 70 companies, including automaker General Motors Corp. and bond- insurer MBIA Inc. That’s up from 40 during the summer, according to Mikhail Foux, a strategist at Citigroup in New York. ***

Also known as recovery locks, the agreements are bought as insurance by sellers of credit-default swaps, such as banks, hedge funds and insurers.

“The market definitely has potential to grow,” Foux said. “As we see more defaults -- and there’s no doubt we’re going to see more defaults -- you’re going to see more recovery swaps trading.”***

Specifics about recovery-lock contracts aren’t generally available because they are made privately and don’t trade on an exchange.

So let me get this straight.

Instead of getting out of toxic derivatives, these recipients of taxpayer handouts are selling yet another type of derivative which allows people to bet against the failure of companies like GM - that the taxpayers are probably going to end up paying to bailout.


  1. Can you believe these jokers? The solution is offered by the same people who brought you the problem. Worse, the reason fro the credit collapse--risky derivates trading--is still going on.

    No wonder the Dow isn't getting much traction. It'll pop up then collapse. Citigroup would be bankrupt if not for market intervention. I guess the reasoning is that Citigroup's collapse would cost more than saving it. Talk about moral hazard!

    Some astute commenters have gone so far as to say the creation of the FDIC is the reason for the S&L collapse back in the 80s. The premise is that banks feel that they can take on any amount of risk and the FDIC will protect their depositors.

    Problem is, the FDIC doesn't have enough money! More will have to borrowed through the Fed, meaning the banks will collect the interest on bonds issued in return for bailout cash. Banks get the subsidy (reward for failure) while taxpayers get to pay interest on the subsidy to the recipients of the bailout money!

  2. Just hang them HIGH!
    There is nothing else left fot the tax payers to do!

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