links for 2007-11-16
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I Do Not Understand This

Felix Salmon writes:

Market Movers by Felix Salmon: Did Anyone Other Than Citigroup Have Liquidity Puts? Why hasn't this "liquidity put" thing gotten greater play? I never made it down to the 11th paragraph of Carol Loomis's interview with Bob Rubin, where she introduces the concept more than 900 words into her article. Floyd Norris, today, does a bit better, taking less than 400 words to get to them. A gold star, then, should go to Peter Cohan of BloggingStocks, who read the Loomis article, realized what he was looking at, and promoted the liquidity puts to headline status back on Monday.

Liquidity puts are a big thing, and indeed it seems that they were more or less singlehandedly responsible for the downfall of Chuck Prince at Citi. Basically, Citi told the world – and kidded itself – that it had sold billions of dollars in CDOs to investors. In reality, however, those CDOs had "liquidity puts" attached, which essentially transformed the CDO "sales" into glorified (or debased) repos. Any time that the investor found the CDO difficult to sell – and CDOs are always difficult to sell – he had the option to put the CDO back to Citi at par. And that's exactly what happened; it was those return-to-sender CDOs which were written down the same weekend Prince resigned.

I do not understand this. Which CDOs? What obligations, exactly, did Citigroup assume? Is this something I already know about under another name? It's not as though Loomis or Norris are comprehensive in their explanations...