Economics of Contempt

This is kind of humiliating for Citi. Credit defaults swaps on Citi's subordinated debt are now trading on a points-upfront basis—that is, in addition to fixed quarterly premiums of 500bps, protection sellers are demanding substantial upfront payments to insure Citi's sub debt. Upfront payments are only required for CDS on the riskiest references (i.e., companies with credit ratings below investment grade). A move to trading a company's CDS on a points-upfront basis is sort of like being downgraded to junk status by the CDS market. According to Reuters, CDS on Citi's sub debt is trading at 9.5 percent upfront (i.e., $950,000 upfront and $500,000 quarterly to insure $10 million of Citi's debt for 5 years). For the sake of comparison, the week before Lehman filed for bankruptcy, CDS on Lehman's senior debt was trading at around 11-12 percent upfront. Obviously there's a difference between senior and subordinated CDS, but still, this is a little embarrassing for Citi.