Citi Plans Crisis Derivatives

This CLX plan appears to be a pickup from my article in the investment professional where I lambasted Krugman's analysis of the Treasury's PPIP and the fallacy of expectations based risk management he perpetuated in his analysis. In particular I pointed out the rise in funding cost at times of crisis not priced into such analysis to show how the computation of the so-called free lunch to PPIP investors was misguided.
The prescription in the article was to find replication contracts such as BICs that replicate the risks taken on as early as possible and keep uncertainty to a minimum.

However this contract, interesting as it may be only marginally addresses the range of risks. Anyway was it not Citi who would have needed such a contract last time? How could it safely be the underwriter?

World Bank launches distressed assets programme - Risk.net

World Bank launches distressed assets programme - Risk.net: "World Bank launches distressed assets programme"

This program looks more like the Treasury PPIP/TARP and has copied the features of those, notably the "Public/Private" partnership dimension. Their is no discussion of the Equity/Debt distribution or source of the funds.

It is regrettable no one has thought about being a market maker on the distressed assets traded at refined levels of granularity as we proposed.

Public-Private Investment Program Almost Ready to Begin - NYTimes.com

Public-Private Investment Program Almost Ready to Begin - NYTimes.com
This article has some important numbers to bear in mind:
"The International Monetary Fund estimated last week that financial institutions worldwide still held about $2.8 trillion in troubled mortgages and securities, and that they had booked losses on less than half that amount so far. A big share of those assets is in American banks.

The Public-Private Investment Program would acquire only a tiny fraction of those assets, amounting to $12 billion. All told, the Treasury said, the five firms have thus far raised $3.07 billion in private equity. The Treasury will match that amount, dollar for dollar, with its own equity investment. It will also provide up to $6.13 billion in financing guaranteed by the government.

In effect, the money-management firms will be able to buy about $12 billion in troubled assets. The firms will split any profits evenly with the Treasury, but taxpayers would ultimately be on the hook if the investments lost money."

Finally it looks like it is going to start at long last along the lines that we outlined in The Investment Professional
http://www.theinvestmentprofessional.com/vol_2_no_3/abstract-bics.html


See also my knol articles:
1. Fair Value Pricing, Government Market Making and PPIP
2. Estimating Costs for PPIP Assets in a Market Making Framework & BICs

Fair Value Pricing, Government Market Making and PPIP - a knol by Phil Kongtcheu

I have just received notice from Prof. Zia Haqq, Conference Manger that an enhanced version of this paper Fair Value Pricing, Government Market Making and PPIP - a knol by Phil Kongtcheu, which includes the continuation paper http://knol.google.com/k/phil-kongtcheu/estimating-costs-for-ppip-assets-in-a/24v2kgtuvzk2v/4 has been accepted for presentation at the conference "Heterogeneous nations and Globalized Financial Markets: New Challenges" which will be held at Imperial College in London July 9-10,2009. www.worldbizconference.com. I submitted the paper without really thinking too much about it and now I am not sure how I can manage to participate even though I really would like to...

The paper contains a more systematic analysis of the subsidies of the govt plan for investors, as well as the pitfalls of the reasoning systematized under the term "fallacy of expectations based risk management"

FT.com / Columnists / GillianTett - Why public private plan has bankers squirming

FT.com / Columnists / GillianTett - Why public private plan has bankers squirming
Indeed it is unclear that participation is such a free lunch.