Caribbean Net News – Citadel Investment Group, one of the world’s biggest hedge funds, is closing down a Bermuda reinsurer it formed in 2004, according to a source familiar with the matter.

Citadel, which manages roughly $18 billion, thought it had a winning business plan with CIG Re because it was fully collateralized, giving the insured certainty their claims would be paid if catastrophe struck.

It is unwinding the reinsurer, according to this person, because the company’s cost of capital is too high. The reinsurer, which does not have a financial strength rating, has also had a hard time competing with rivals who do.

The Chicago-based firm formed the property-catastrophe reinsurer, CIG Reinsurance Ltd, four years ago because it saw reinsurance as uncorrelated with its other investment strategies.

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Reuters – On Main Street, insurance protects people from the effects of catastrophes.

But on Wall Street, specialized insurance known as a credit default swaps are turning a bad situation into a catastrophe.

When historians write about the current crisis, much of the blame will go to the slump in the housing and mortgage markets, which triggered the losses, layoffs and liquidations sweeping the financial industry.

But credit default swaps — complex derivatives originally designed to protect banks from deadbeat borrowers — are adding to the turmoil.

"This was supposedly a way to hedge risk," says Ellen Brown, the author of the book "Web of Debt."

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