Fortune has added a new phrase to my vocabulary: liquidity puts. In an interview with Citigroup Inc. (NYSE: C) Chairman Robert Rubin, liquidity puts are defined as the right of Collateralized Debt Obligation (CDO) holders to sell back the CDO to its issuer at the original price. The liquidity put is responsible for the $25 billion worth of CDOs on Citi's balance sheet.

Before getting into how this all works, it is amazing to me how many new words I've learned as a result of the collapse of the real estate market which began in the fall of 2006 -- when I first began posting on the topic. Since then, I've been introduced to all sorts of new terms -- subprime mortgages, CDOs, Structured Investment Vehicles (SIVs), the Yen Carry Trade, and Level 3 assets -- to name just a few.

When Citi set up its $80 billion worth of SIVs, it thought that they would stay off its balance sheet. This summer, though, financial markets lost interest in financing CDOs so the holders of the liquidity-put CDOs began to return them to Citi -- the $25 billion of them represent more than half of Citi's $55 billion of subprime-related securities. The super-senior status -- meaning that they got first claim on cash flows -- of the put-laden CDOs did not protect their value because the ratings agencies decided to downgrade them, creating a panic to exercise the put and sell the CDOs back to Citi, thus locking in huge losses for the bank.

As an investor, I am hoping that Robert Rubin's vanity -- I think his once sterling reputation has been tarnished -- will engage him in fixing Citi. But I wonder whether Citi's problems could be too big for him to fix.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup shares.

Why $25 billion worth of CDO liquidity puts could sink Citi originally appeared on BloggingStocks on Mon, 12 Nov 2007 10:40:00 EST. Please see our terms for use of feeds.

How frequent are ultra-volatility days -- those during which the market moves 3% or more? More common than one might think.

Tom Dyson in Daily Wealth defines notes that ultra-volatile days -- or UVDs -- have occurred 115 times in the S&P 500 since 1950, or an average of two per year. Between 2002 and 2003, the S&P 500 had 21 UVDs. Over the same period, the Nasdaq experienced even more -- some 51 UVDs.

Says Dyson, "UVDs really aren't that extraordinary. And because they aren't, there's no need to change our investment strategies because of them. These things happen."

In fact, he notes, the only reason the press is making a big deal out of this one is because it had been a long time since we last saw one. The last UVD was in March 2003, nearly four years ago.

Continue reading Market hedges: Two liquid stocks you need to own

Market hedges: Two liquid stocks you need to own originally appeared on BloggingStocks on Fri, 02 Mar 2007 09:45:00 EST. Please see our terms for use of feeds.