How Citigroup Hedged Bets Against Enron

New York Times ^ | Friday, February 8, 2002 | By DANIEL ALTMAN

[RGSpincich]

Rubin having failed to influence Fisher to call Moodys and the other bond raters, then effectively changed the rating themselves by offering the securities at an interest rate that was consistent with a triple A rating. Thus defrauding those investors. They could not save the Dynergy merger but they did remove much of their risk by issuing the bonds.

[Miss Marple]

Thank you for that information. I am having to learn a LOT about securities and corporate debt, a subject on which I am ill informed.

Why can't we have a good gardening scandal? THAT I could comment on with some expertise!

[RGSpincich]

Why can't we have a good gardening scandal?

Catch my wife in possesion of any living plant and in two days you will have your scandal.

[NativeNewYorker]

The risks were put on Citi's books long before Rubin joined the firm.

[TwoStep]

What is not mentioned, is our favorite, dirtbag Saudi Prince, is a big investor in Citigroup!

[lepton]

It is clear that all the executives were making far more -- and were intent on doing so -- from the stock market than from their respective salaries and bonuses.

This is part of Clinton's first budget where he penalized businesses giving CEOs a salary of more that 1 million. This sur-tax resulted in stocks and stock-options surplanting base pay, and with the run-up in the stock market, greatly increased general CEO compensation.

[lepton]

As far as Hedge funds go, one should remember back to Hillary-care, where she put her money into a fund that invested heavily in pharmeceutical hedges. Then a few days later she made her Health-care speech that resulted in a $40 Billion drop in pharmeceutical companies value. As I recall her return was 38% in just a few days.

[clintonh8r]

I guess the guys running Citigroup are smarter than the ones at Morgan, at least in this instance. As a Citi shareholder, I'm glad. If I were a Morgan shareholder I think I'd want to know why they weren't hedging this risk also.

[aristeides]

But it looks as if the risks were hedged right after Rubin came on board.

[NativeNewYorker]

I've not studied this aspect of it, but the timing is VERY suspect, yes.

I suspect the notes described in the NYT piece had bells-and-whistles that accounted for their low coupon, but they raise another question: WHO THE HELL BOUGHT THESE THINGS?

[independentmind]

WHO THE HELL BOUGHT THESE THINGS?

The exact same thought I had. To whom were the securities marketed?

How is it that the NYT reporter failed to answer this question?

[big gray tabby]

Yes, but I think now we know why he called Fischer, don't we? Since he had little real exposure, he must have been fishing for insider information to help in dealing with those he was preparing to bag with the defaulting Enron bonds.

[big gray tabby]

As they were foreign denominated, at least some and likely virtually all were marketed overseas. You're not going to find widows and orphans long these pigs.

[NativeNewYorker]

These securities are custom-made, and traded over the counter, so there is no "print" as you'd get on a stock.

Barring legal action, there is little reason for Citi to divulge the buyer, who may have traded them on to someone else anyway.

But this still smells funny to me.

Did they trade them offshore? To a credit-hungry hedge fund or insurance company? Why would it offer such a low coupon? Given the timing, wouldn't the counter-party feel that fraudulent conveyance was likely?

A socialist scribe, er, NYT reporter, is not likely to be savvy enough to know to ask these questions...of a major advertiser.

[NativeNewYorker]

BINGO! Foreign currencies means the paper traded to houses in London/Europe/Japan, where they didn't have the relationship to get Enron paper directly.

Ha!

Houston goes belly up, but the fallout drifts over NY and hits the fools overseas!

[habs4ever]

What a rotten deal! the investor gets no upside, assumes all the risk, and gets a coupon less than market rates?? I wonder, just wonder, if Citigroup leaned on their clients to take this issue??There has to be a trail for these private placements, and to make provisions in the terms suggests Citigroup knew these "Primes" should have carried a junk bond rate instead of 7.37%.Or suggests they knew that ENE really didin't create much cash flow from their continuing operations ;-)

[habs4ever]

The other, more cynical view, is to wonder if these units were created in Trusts that could be designed for no more than to create tax loss carryforwards???

[big gray tabby]

That's pretty darn cynical. I admire you.

[habs4ever]

Ah, it crossed your mind as well then??LOL...

[chainsaw]

What did Citigroup know in August 2000, and when they they know it?

Maybe I should have said 1999. It's clear in my mind that Rubin knew something about Enrons crimes when he left Treasury, and long before he got to Citigroup.