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Derivatives: where the next crisis is coming?

In Banks, Financial competency on 30/04/2015 at 5:12 pm

Citi and Merrill Lynch used to be known as the the banks that always joined a party when it was just about to go wrong. The sub-prime crisis proved the point.

Well Merrill Lynch no longer exists but Citi survived, just. Now it’s big in derivatives, very big and GIC still has a stake in it (It’s one of LKY’s forever investments). Let’s hope it’s not curtains Citi when derivatives tank.)

CITIGROUP’S RESURGENCE Seven years after Citigroup teetered on the brink, the bank’s traders and investment bankers have come roaring back,Peter Eavis writes in DealBook. The bank’s resurgence on Wall Street, which has involved acquiring huge amounts of derivatives, comes as many of its rivals pull back in the face of new regulations intended to make the financial system safer. But even as the bank has surged ahead, it has not trumpeted its comeback. Instead, its most senior executives have largely emphasized streamlining operations that have little to do with Wall Street, like agreeing to sell a unit that focuses on subprime loans.

Citigroup’s investment bank is no longer involved in the toxic activities that were most dangerous to the bank’s health, Mr. Eavis writes. The bank also has higher levels of capital, the financial buffer that reflects a bank’s ability to absorb losses. Such steps have helped it slowly regain favor with regulators. “Still, figures for Citigroup’s Wall Street operations show a bank that is on something of a tear,” Mr. Eavis adds. The unit that encompasses the firm’s investment bank, for instance, had $1.06 trillion of assets at the end of last year, a 12 percent increase from the level in 2010.

“Perhaps most astonishing is Citigroup’s meteoric growth in derivatives, the financial contracts that allow banks and investors to place bets without actually owning an underlying stock, bond or currency,” even as new rules have persuaded many banks to cut back on the amount of derivatives they hold,” Mr. Eavis writes. Citigroup has flexed its muscles behind the scenes to protect its derivatives business from certain new rules. But the growth of Citigroup’s investment bank and its derivatives business has raised concerns among financial specialists who support tougher regulations.

(NYT’s Dealbook some months back)

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