Citigroup Never Learns.

Citigroup incredibly is underwriting Crisis Derivatives. I mean is it April Fools Day already?

http://www.risk.net/risk-magazine/news/1590861/citi-plans-crisis-derivatives

The idea behind this article is so ludicrous. It starts out with the words Credit Specialist at Citi. This alone makes me cringe. If there's actually a credit specialist at Citigroup then there must really be an Easter Bunny. Is Big Foot really that far behind? I find it funny that when Citigroup fired their chief risk manager after the company reported tens of billions of losses, the only shock? They really had a chief risk manager?

Haven't these guys lost enough money on derivatives?

Haven't these guys read the papers with regards to AIG?

Wasn't it in fact credit specialists that lost Citi some $50B investing in stuff they had no clue about?

"Like the untraded US rates liquidity index (USRLI), the CLX is constructed as a sum of the Sharpe ratio – deviations from the mean divided by volatility – of various market factors, such as equity volatility's, Treasury rates, swap spreads, corporate bond swaption-implied volatility's, and structured credit spreads. Citi will make the CLX tradable by using fixed historical values for the mean and volatility parameters, eliminating the need for costly re computation from lengthy time series."

I can't believe there is anybody remotely smart enough at Citigroup who actually understands all of these moving parts. Hey! If it complex! It must be good stuff right?

"The great thing about the index is that it hedges your funding costs while being very simple to trade. I believe it will reduce the systemic risk in the industry, akin to how the advent of swaps means people don't worry about interest-rate exposures any more – they just pay a fee to hedge it,"

This guy truly must have missed the entire crisis. What block of ice was he just carved out of? Why can't this neanderthal understand that you just can't hedge away risk by buying fancy schmancy complex financial products.

The words "I believe it will reduce systemic risk" is a warning for "We have no clue what we are doing."

"Like a swap, the contracts envisaged by Citi would be entered into without an up-front premium, with money changing hands according to the index's movements around a fair strike value."

This is nice. No up front premium payment but we are sure to pay out when shit hits the fan. At least AIG had the brains to get up front premiums from counter parties.

"We are focused on viewing it from a brokers' perspective – we want to get natural buyers and sellers of liquidity together. But we do have an explicit hedging programme, based on the underlying assets in the index. There is a basis risk, but the beauty is that as this widens, the strategy involves buying up assets whose prices are falling, thereby providing liquidity to the market,"

They basically stand there and buy up assets that are rapidly falling in prices. All during a crisis don't forget. He considers this the "Beauty" of the product? More like stupidity don't you think?

The very existence of this type of product will destabilize markets not make them more efficient nor liquid.

Citigroup is in horrible financial shape. The government is still implicitly guaranteeing hundreds of billions of rotten to the core assets, and now they want to go out and underwrite disaster derivatives?

These guys have some balls.