Citi Plagued by Commercial Paper Freeze
An article published by Financial Times takes a look at how Citi (a lender that provides Utah Home Equity Loan products as well as primary home loans) has been forced to double subprime CDO exposure due to the commercial paper freeze. According to the article:
But also just like SIVs, CDOs need to keep refinancing that CP to pay off upcoming redemptions. But where they differ is that CP issuing CDOs mitigate that rollover risks by using their arranging banks’ as underwriters on all new CP issues. Whatever CP they can’t sell, agreements are in place as backup that ensure banks will buy.
And just like with SIV CP investors, over the summer, CDO CP buyers have dried up.
Money market funds - formerly among the biggest players in the CP markets - are loathe to touch anything containing MBS.So Citi - unable to place CP on subprime CDOs it arranged as far back as 2005, - is having to buy it instead. Right when it can least afford to do so.
Crucially we should make clear that Citi isn’t necessarily being “forced” into buying that debt: not in the most literal sense of the word. The backstop “agreements” it has in place are not set in stone. It could have said no. But had it done so it may have seen CDOs default, or else a rush to sell assets to meet amortizing CP. In the event, that was evidently too ugly an option to countenance.
As people dig deeper into the source of the financial crisis, more and more problems are unearthed. Was the current market crisis brought on by corrupt officials, as many fear, or just a plethora of bad decisions? And now that the effects of these bad decisions are only abetting the crisis, is there anything anyone can really do?
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