I read a story that when Jeff Rubin was summoned for the interim job at Citi, he learned in the subsequent briefing the concept of "liquidity put" - a clause that had become common in Citi's production of CDO's for the past couple of years. The tranche contracts embed a put clause, by which the buyer also buys an option to resell to Citi at par value (a put) anytime during the life of the product (american style). These were not factored into the exposure of the risk "because the tranches were AAA rated". Although in effect it only means that Citi's keeping the risk on its book (it goes back in the minute the shit hits the fan), while giving away (for free) the coupon between the issue and the event !!! The total absolute super cluster fuck.

The write-offs revisions came from the fact that everybody wants to exercize the clause, and Citi's risk management staff did had not even realized the clauses where in the deals when they were made.

Note that we have no way to be sure that all the shit is back into the books, only what Citi will want to tell us: since the only risk for the holders is the counterparty risk on Citi, their best strategy is to keep some of it as long as possible to cash in the high-yield coupon, and send it back when the default is effective or just before Citi actually goes belly up.

Pierre