Investors, the Securitization of Bad Loans, and the Probability of Default

Abstract

As reported in a New York Times article, Citibank, a major lender to Enron, apparently protected itself from a significant portion of its Enron’s credit risk by passing it on to investors in credit-linked bonds. What the article did not mention, however, was that Citibank accomplished this risk transfer through an innovative transaction that combined credit derivatives and insurance with traditional securitization.¹