Sunday, November 18, 2007

'Liquidity Puts' Allowed Banks To Remove CDO Debt From Their Balance Sheets

A NYTimes article explains how big banks were selling "liquidity puts" in order to be able to sell their CDOs and take the debt out of their balance sheets.

In essence they were selling the loans and presumably the risk associated with them (passing the buck). However, they were also selling the puts, or the right to the buyer to sell them back to the big banks. The problem is, big banks took the debt out of their balance sheets and thus claimed huge profits. Doesn't this sound like an Enron-like scheme? Problem is... these things are now worthless.

If you never heard of "liquidity puts" you are in good (or bad?) company. Robert E. Rubin, chairman of Citigroup, had never heard of them until this summer.

NYTimes link:

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