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The firm's failure to manage its liquidity put customers at risk, according to the report.
In practice, this implies pricing the unconditional liquidity guarantee (so-called "liquidity put") from official banks to their off-balance-sheet vehicles, which Basel III already requires.
Included with at least some of the CDOs created by Citigroup was a "liquidity put"—an option that allowed the purchasers of the CDOs to sell them back to Citigroup at original value.
"The glut of liquidity put in by the ECB is trumping fundamentals … which is why we believe that Spain and Italy are getting away these auctions at the levels they are.
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Consider "liquidity puts".
Citigroup came a cropper when it sold "liquidity puts" along with its CDOs.
But we now learn that some banks also handed out liquidity puts, giving buyers of C.D.O.
Similarly dicey types of transactions, such as the issuance of liquidity puts on CDOs, and the purchase of credit default swaps from dodgy counterparties, were also rampant.
The liquidity puts ended up costing the bank a king's ransom when $25 billion-worth of CDOs came back on to the balance sheet.But the strategy too was sometimes poorly handled.
But injected into somber discussions of liquidity puts, off-balance-sheet entities, cyclically adjusted capital requirements and super-senior collateralized debt obligations have been unexpected doses of dark humor.
Robert Rubin, the former Treasury secretary and current Citigroup executive, has said that he hadn't heard of "liquidity puts," an obscure kind of financial contract, until they started causing big problems for Citigroup.
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Justyna Jupowicz-Kozak
CEO of Professional Science Editing for Scientists @ prosciediting.com