Tuesday, February 9, 2010

Citi to launch new "crisis" derivative

I'm not sure what they are smoking over at Uncle Vik's place, but Citi is planning to market a so-called crisis derivative. These derivatives, if Citi does indeed launch them, will pay out in the event of a financial crisis. There is so much irony here it is hard to know where to begin. First off, I thought we were already in a financial crisis created essentially by the issuing and trading of derivatives of which no one totally understood the accounting and underestimated the risk. Second, this derivative smells like a type of insurance product which will only be as good as the party that issues it. Citi isn't exactly in the best of shape and buying insurance from a company which can't back it, well, we already tried that. Anyone remember AIG?

In summary, a derivative designed to bail you out of a crisis, typically caused by derivatives themselves backed by a company whose solvency without an injection of 45 billion of government funds is tenuous at best. Hmmm.

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