Credit specialists at Citi are considering launching the first derivatives intended to pay out in the event of a financial crisis. The firm has drawn up plans for a tradable liquidity index, known as the CLX, on which products could be structured that allow buyers to hedge a spike in funding costs.

“This is basically a kind of insurance product. The main issue is: how good is the party issuing it? If it’s going to be paying out huge numbers in the event of a crisis, will it be able to meet it obligations? Insurers can buy reinsurance for their liabilities, but the buck has to stop somewhere – there’s a limit to how much a private insurer can pay out. Only the government can cover unlimited losses,

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

and from Felix Salmon | Reuters

Citi reinvents end-of-the-world insurance

In hindsight, one of the silliest and most dangerous excesses of the Great Moderation was the large number of companies — foremost among them AIG, although there were lots of monoline insurers in the same trade — basically selling insurance on the world coming to an end. It’s a great trade: either the world doesn’t come to an end, and you make lots of money, or the world does come to an end, and it doesn’t matter ‘cos you’re bust anyway. Now, however, after seeing how that trade worked out, we’re wiser, and no large and leveraged financial institution would have the chutzpah to start selling world-coming-to-an-end insurance. Would they?

http://blogs.reuters.com/felix-salmon/2010/02/08/citi-reinvents-end-of-the-world-insurance/

Meanwhile in the real world

Payback’s A Bitch For Banks Stuck Holding Euro Debt

First the governments bail out the banks who were (are) basically insolvent. Then these governments, especially in Europe, see their balance sheets explode and face escalating concerns over sovereign default. The IMF now predicts that the government debt-to-GDP ratio in the G20 nations will explode to 118% by 2014 from pre-crisis levels of around 80%. Now, the ball is put back onto the banks because many have exposure to the areas of Europe that are facing substantial fiscal problems right now. According to the Wall Street Journal, U.K. banks have $193 billion of exposure to Ireland. German banks have the same amount of exposure and an additional $240 billion to Spain. Many international bond mutual funds also have sizeable exposure to sovereign debt of Portugal, Ireland, Greece and Spain as well. Contagion risks are back. Stay defensive and expect to see heightened volatility. In a nutshell, toxic assets have basically been swept under the rug in the hopes that we will outgrow the problem. Leverage ratios across every level of society are still reaching unprecedented levels as the public sector sacrifices the sanctity of its balance sheet in its quest to stabilize the dubious financial position of the household and banking sectors in many parts of the world.

http://www.businessinsider.com/rosenberg-paybacks-a-bitch-for-banks-stuck-holding-euro-debt-2010-2

and a really downbeat view of tea parties, politicians and the US economy:

We’re Weimar

By James Howard Kunstler | February 8, 2010 6:35 AM

As the contest heats up this year between Tea Partydom and the Weimar-like remnant of the party in power expect to see a political vortex form that will suck the little remaining coherence out of American life. Personally, I’d like to see Mr. Obama have a little fun with his adversaries, even if it seals his fate as a one-term president.  I’d like to see him start by using the just-proposed national forum on health care reform as a rope-a-dope moment to expose opponents to reform as the bought-and-sold errand boys they are.

And a good overview of the state of play in Europe from Edward Harrison dated Feb 2009: It’s much worse now!!

The European problem

Europe is having a problem right now. In truth, it is many problems more than a single problem. Countries in the former Soviet bloc are in a deep downturn which has been significantly worsened by turmoil in currency markets. Western European banks are hemorrhaging losses – some will probably be nationalized. Spain, the U.K. and Ireland have all seen massive property bubbles implode. Greece, Ireland, Spain, Portugal and Italy have all seen credit warnings and downgrades. And Ukraine, Hungary and Latvia are but three nations that have been forced into the arms of the International Monetary Fund for a bailout. Clearly, the credit crisis has moved to Europe in a massive way. In my view, this was always inevitable given the available evidence after the panic in September.

read more: http://www.creditwritedowns.com/2009/02/the-european-problem.html

Tin hats time again?

Tim,
Le Touquet, France