Citibank rolled out ASTA Finance, LLC and MAT Finance, LLC in 2002 to trade muni bonds. ASTA made leveraged investments in fixed-rate munis and tried to hedge the interest-rate risk of those positions. MAT focused on arbitrage, sniffing out anomalies between tax-free munis and similar taxable bonds.
The two funds had roughly $2 billion in capital and through leverage, or borrowed money, had about $15 billion in assets.
The normally placid muni bond market has been thrown into turmoil in recent weeks as the mortgage crisis has spread into a full blown credit crunch. At the end of February, some muni arbitrage hedge funds were forced to sell assets to meet margin calls, leading to huge losses that month.
"Citi has made a $1 billion equity commitment to the master funds related to the ASTA/MAT funds of which $600 million has been funded," the Citigroup spokesman.
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