Did Anyone Other Than Citigroup Have Liquidity Puts?

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.

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