Is Shitibank prepping for another financial crisis?

[marmar]

Feb. 16, 2010, 2:55 a.m. EST

What Citigroup knows that you don't
Commentary: Citi's latest 'financial innovation' needs more scrutiny

By David Weidner, MarketWatch


NEW YORK (MarketWatch) -- Questions of the day: Would you buy a round-trip ticket on an airplane prone to crashes? How about a car with a history of serious brake problems? Interested in a TV that works great, except for the picture?

If you answered yes to any of those, do I have an investment opportunity for you.

Citigroup Inc., our taxpayer-funded national bank, is readying a new credit derivative, the CLX. Basically, the CLX is systemic risk insurance that will pay out in the event of a financial crisis. The basic premise is to allow investors to hedge against a spike in funding costs.

According to Risk Magazine "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 volatilities, Treasury rates, swap spreads, corporate bond swaption-implied volatilities, 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 recomputation from lengthy time series." Read Risk Magazine story on the CLX.

If you understood the last paragraph, please take two bailouts, a bonus and call your Treasury Secretary in the morning. ..............(more)

The complete piece is at: http://www.marketwatch.com/story/citigroups-new-plan-profit-from-the-next-crisis-2010-02-16