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

George Washington's Blog
(Click Here for Part 1)

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.