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.
Now, do you remember the WSJ
attack on Merrill back on November 2? The dealings that Merrill is having
with its hedge funds sound a little bit like a liquidity put without the liquidity
part. Merrill
denies any wrongdoing, but if I were John Thain I’d certainly look into
this. If banks like Citi were selling structured products to investors with
the promise that they’d buy them back in the future if the investment didn’t
work out, then I can imagine Merrill – and other Wall Street banks –
doing the same thing.
Update: Brad DeLong says
he does not understand this whole liquidity put thing, while Alea, in the
comments, says "it’s complete nonsense". Given that all the recent
talk of liquidity puts seems to be based on a Loomis article which wasn’t really
about them, maybe we should all take a deep breath and work out, first of all,
whether these things even existed.