Tuesday, November 6, 2007

Citigroup Disclosures

The 10-Q filed by Citigroup yesterday has the following disclosures about the extent of its exposure to the continuing financial mess in the markets:

"On November 4, 2007, the Company announced significant declines since September 30, 2007 in the fair value of the approximately $55 billion in U.S. sub-prime related direct exposures in its Securities and Banking (S&B) business. Citi estimates that, at the present time, the reduction in revenues attributable to these declines ranges from approximately $8 billion to $11 billion (representing a decline of approximately $5 billion to $7 billion in net income on an after-tax basis)."

"Citi also announced that, while significant uncertainty continues to prevail in financial markets, it expects, taking into account maintaining its current dividend level, that its capital ratios will return within the range of targeted levels by the end of the second quarter of 2008. Accordingly, Citi has no plans to reduce its current dividend level."

Breakdown of $55 billion

$11.7 billion of sub-prime related exposures in its lending and structuring business.

*$2.7 billion of CDO warehouse inventory and unsold tranches of ABS CDOs.
*$4.2 billion of actively managed sub-prime loans purchased for resale or securitization at a discount to par primarily in the last six months.
*$4.8 billion of financing transactions with customers secured by sub-prime collateral.

$43 billion of exposures in the most senior tranches (super senior tranches) of collateralized debt obligations which are collateralized by asset-backed securities(ABS CDOs).

*$25 billion in commercial paper principally secured by super senior tranches of high grade ABS CDOs

*$18 billion of super senior tranches of ABS CDOs as follows:

*$10 billion of high grade ABS CDO.
*$8 billion of mezzanine ABS CDOs.
*$0.2 billion of ABS CDO-squared transactions.

The $18 billion in super senior tranches are being valued apparently using the new level 3 asset guidelines. These securities are not trading at all. There is still significant risk in these holdings due to the uncertainty described below.

"These super senior tranches are not subject to valuation based on observable market transactions. Accordingly, fair value of these super senior exposures is based on estimates about, among other things, future housing prices to predict estimated cash flows, which are then discounted to a present value."

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