How on earth did these disappear?

Because the big audit firms can't or won't do their jobs?

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

Jerome a Paris:

A contingent commitment is still a commitment. How on earth did these disappear?

According to US GAAP (Generally Accepted Accounting Principles),

Footnotes [to financial statements] also contain disclosures relating to contingent losses. Firms are required to accrue a loss (recognize a balance sheet liability) when both of the following conditions are met:

• It is probable that assets have been impaired or a liability has been incurred.
  
• The amount of the loss can be reasonably estimated.
  

If the loss amount lies within a range, the most likely amount should be accrued. When no amount in the range is a better estimate, the firm may report the minimum amount in the range.
SFAS (Statement of Financial Accounting Standards) 5 defines probable events are those "more likely than not" to occur, suggesting that a probability of more than 50% requires recognition of a loss. However, in practice, firms generally report contingencies as losses only when the probability of loss is significantly higher.
Footnote disclosure of (unrecognized) loss contingencies is required when it is reasonable possible (more than remote but less than probable) that a loss has been incurred or when it is probable that a loss has occurred but the amount cannot be reasonably estimated. The standard provides an extensive discussion of loss contingencies.

In other words, a mess.

We have met the enemy, and he is us — Pogo