Citigroup Inc. Q3 2008 Earnings Call Transcript

| About: Citigroup Inc. (C)

Citigroup, Inc. (NYSE:C)

Q3 2008 Earnings Call

October 16, 2008 10:00 am ET


Scott Freidenrich - Director of Investor Relations

Gary L. Crittenden - Chief Financial Officer


John McDonald – Sanford Bernstein

Glenn Schorr - UBS

Guy Moszkowski - Merrill Lynch

Michael Mayo - Deutsche Bank Securities

Meredith Whitney - Oppenheimer & Co

Betsy Graseck – Morgan Stanley


Welcome to Citi’s third quarter 2008 earnings review featuring Citi Chief Financial Officer Gary Crittenden. (Operator Instructions) Today’s call will be hosted by Scott Freidenrich, Director of Investor Relations.

Scott Freidenrich

Welcome to our third quarter 2008 earnings review. The presentation we will be going through is available on our website at You may want to download the presentation if you have not already done so. The financial supplement is also available on the website. Our Chief Financial Officer, Gary Crittenden, will take you through the presentation. We will then be happy to take any questions you may have.

Before we get started I would like to remind you that today’s presentation may contain forward-looking statements. Citi’s financial results may differ materially from these statements so please refer to our SEC filings for a description of the factors that could cause our actual results to differ from expectations.

With that said, let me turn it over to Gary.

Gary L. Crittenden

We have slides that are available to you on the website, and as usual I’m going to walk through the slides here, so I will start with Slide 1.

Slide 1 shows you our consolidated results for the quarter. There were three factors that drive this quarter’s results: higher consumer credit costs; continued losses related to the disruption in the fixed income markets; and the general economic slowdown.

To summarize our third quarter results, our net revenues declined 23% year-over-year and 8% sequentially. Expenses were up 25 year-over-year. Excluding however, the impact of acquisitions, divestitures, and the press-release disclosed items from both quarters, expenses were down 2% versus last year. Sequentially expenses were down by $1.2 billion.

The cost of credit was up by $4.0 billion over the last year, primarily due to higher net credit losses of $2.5 billion and a $1.7 billion incremental net charge to increased loan loss reserves. The majority of the increases were in our North America Real Estate and Cards businesses. These factors drove a loss of $2.8 billion for the quarter, or a loss of $0.60 per share. This EPS is based on a basing share count of 5.3 billion. On a continuing operations basis we had a net loss of $3.4 billion, or a loss per share of $0.71.

Slide 2 highlights the major P&L items this quarter and I will go into each one of these in more detail. First, consumer net credit losses were $4.6 billion and we recorded $3.2 billion in charges to increase our loan loss reserves in the Consumer Banking and Cards businesses, both in North America and in certain countries internationally.

Second, $4.4 billion in marks in the Securities and Banking business, details of which I will discuss further and are outlined in your deck on Slide 26.

Third, a $1.4 billion downward adjustment in the valuation of the interest-only strip in our North American Cards business, driven primarily by higher expected losses flowing the securitization trust.

Fourth, write-downs and expenses on auction rate securities of $712.0 million, split equally between fixed income markets and Global Wealth Management. Of this amount, $612.0 million against revenue is related to the legal settlement announced in August. Additionally, we paid $100.0 million fines, recorded as expenses, also related to the settlement.

Fifth, repositioning charges of $459.0 million related to our ongoing re-engineering efforts.

And finally is a $347.0 million gain on the sale of CitiStreet, which we announced in May.

Slide 3 shows some of our key revenue drivers. In some cases we have chosen to curtail some of these key drivers and in other cases we have seen a slowdown due to weakening market conditions. For example, as the environment for consumer credit continues to deteriorate, we have taken many actions, such as tightening underwriting criteria and reducing credit lines, which has slowed loan growth in most regions.

Turning to deposits, in North America end-of-period retail and corporate deposits were up 6% over last quarter, driven primarily by higher deposits in Transaction Services. As the slide shows, deposits in EMEA declined 6%, primarily driven by price competition and customer rebalancing for deposit insurance coverage, especially in the UK. In Latin America and Asia, excluding the impact of foreign exchange, deposits were up 1% and 4% respectively. Overall, consumer deposits outside the U.S. are essentially flat, excluding the impact of foreign exchange.

In Transaction Services, total average deposits were up 7% versus last year and virtually flat sequentially. End-of-period deposits, however, were up by $30.0 billion versus last quarter.

In the second half of September, which marked extreme uncertainty and unprecedented events in the markets, our GTS business had deposit inflows of approximately $55.0 billion. The inflow of deposits in the last two weeks of September is particularly indicative of the flight to quality that occurred.

Card purchase sales in North American, however, have declined as we have seen higher spending on consumer necessities such as gas and food offset by a decline in discretionary spending.

The decline in investment assets under management is a result of weaker equity markets globally, which has resulted in declining asset values.

The graph on Slide 4 shows the nine-quarter sequential trend of net interest margin for the company. Net interest margin for the quarter is 3.13%. Last quarter we reported a net interest margin of 3.18%. However, when adjusted for the sale of our retail banking operations in Germany, last quarter’s net interest margin would have been 3.14%, as is shown on the slide.

Benefitting net interest margin this quarter was a decrease in overall funding rates versus the prior quarter, which reflected the Fed’s rate cuts which occurred during the second quarter. Offsetting these benefits were decreases in yields on our trading portfolio, only partially offset by increases in yields in Transaction Services and on our corporate loans.

GAAP assets were down another $50.0 billion versus last quarter, making the total reduction now $308.0 billion, versus our peak in the third quarter of last year.

Average interest-earning assets were down approximately $81.0 billion, driven by a decrease in trading account assets and loans.

Slide 5 shows the component of our year-over-year decline in revenues. The blue bars on the left and the right show our reported revenues, while the areas within the dotted lines represent the marks that we have taken in our Securities and Banking business. Adjusted for these marks, revenues for the quarter showed a $3.5 billion decline versus last year.

One could classify this revenue decline into two categories. The first is the market-sensitive category where the quarter’s results are not necessarily indicative of the future revenue potential. In other words, if market conditions improve, then trading and transaction volumes, client activity, and therefore, overall results could all resume at higher levels.

The businesses most affected by this are Securities and Banking business and our Global Wealth Management businesses, where revenues were down $1.2 billion and $355.0 million respectively.

The second category is the impact on revenue from credit losses in our securitization trust. I will take you into more detail on this in our outlook, but as I’ve said before, credit card losses may continue to rise well into 2009. This means that revenues in that business may continue to be adversely affected in that time frame in the form of reduced servicing fee revenue due to increased credit losses in the trust and the continued downward adjustments in the valuation of the interest-only strip, which has a remaining value of approximately $1.0 billion.

This quarter $2.5 billion of the total decline was related to securitization activities in the North American Card business. We also recognized a $729.0 million gain in the prior-year period related to the sale of Redecard shares. Offsetting these negative results were higher revenues in Consumer Banking and record revenues in Transaction Services.

Consumer Banking revenues were driven by 6% growth in North America, primarily due to higher net interest revenues. Transaction Services revenues were a record for the 20th consecutive quarter on new clients wins and the higher end-of-period liability balances.

We will turn now to Slide 6. This shows the trend in our expense growth. Expenses in the quarter grew 2% versus last year. This quarter there are three components contributing to expense growth. First, 3% from $459.0 million in repositioning charges related to a number of activities, such as headcount reductions. We will continue this process as we make progress on our re-engineering program.

Second, there is 1% from acquisitions and divestitures, and third, there is a 1% contribution from the $100.0 million fine related to the auction rate securities settlement that was recorded in the current quarter.

In the prior period there were two components which offset each other. They include first, a $150.0 million write-down of customer intangibles and fixed assets in the Japanese Consumer Finance business, which lowered expense growth by 1%.

Second, there was a downward adjustment in the incentive compensation as the full-year outlook for the business changed substantially in that quarter last year. The difference in this quarter’s incentive compensation accrual versus that of the prior period accounted for 1% of expense growth.

Combining all of the above factors, expenses on a business-as-usual basis were actually down 3% in a year-over-year comparison as the benefits of our re-engineering efforts are becoming apparent.

Foreign exchange contributed 1% and is reflected across all of the categories that I just mentioned.

Sequentially, expenses declined for the third quarter in a row and were down 8%, or $1.2 billion. Over half is due to lower incentive compensation in the current quarter and the remainder is largely attributable to the benefits from our re-engineering efforts.

Slide 7 shows the trend in our head count. This graph indicates that we have continued to reverse the year-over-year headcount growth from the 12% to 16% range to now a decline of 5%. This quarter’s repositioning charges relate to nearly 6,300 in headcount reductions. In the last four quarters we have recorded cumulative repositioning charges of approximately $2.1 billion relating to approximately 22,000 headcount reductions.

Of that 22,000, nearly 12, 900 have already been reduced from our headcount and with the remainder to be expected to be realized over the next 12 months. Citi Capital and CitiStreet contributed 3,700 reductions to the total year-over-year number.

Not included in these numbers are the sale of Citi Global Services and the German retail banking operations. The Citi Global Services sale will reduce headcount by approximately 12,500 and that should close in the fourth quarter. The sale of our retail banking operations in Germany, which was announced last quarter, and has not yet closed, should result in an additional headcount reduction of about 5,600.

I am turning now to Slide 8 where I will discuss credit. This shows the year-over-year growth in the components of our total cost of credit and the key drivers within each component. The total cost of credit increased by $4.2 billion, with $2.5 billion being driven by higher net credit losses and $1.7 billion being driven by higher loan loss reserve build.

First, higher net credit losses were driven primarily by the Consumer Banking and Cards business in North America. Together they comprised $1.7 billion, or 70%, of the total increase in NCLs for the quarter. In North American Residential Real Estate, net credit losses were higher by $1.1 billion over last year. Slides in the appendix will show you that there has been an increase in losses and delinquencies across the mortgage portfolios in North America.

In North American Cards, net credit losses were up by $311.0 million, reflecting the deterioration of flow rates, higher bankruptcies, rising unemployment, and lower recoveries during the quarter. Net credit losses in the Personal and Audit Loan portfolios increased by $279.0 million in the aggregate.

The net charge to increased loan loss reserves was $3.9 billion for the quarter, higher than the net charge in the prior-year period by $1.7 billion. Approximately 1/3 of the total build was in North American Residential Real Estate, to reflect an increase in our estimates of the losses inherent in that portfolio.

With the addition to reserves in our North American Mortgage business, we were at a 15-month coincident reserve coverage ratio for the Residential Real Estate portfolio, 15.2 months and 14.7 months of coincident reserve coverage for our first and second mortgage portfolios respectively.

In North American Cards we added $481.0 million net to our loan loss reserves. More than half of this build relates to balances coming back onto the balance sheet as we chose to retain these balances instead of renewing the securitizations at significantly higher funding costs. The remainder was, in part, due to a weakening of lending credit indicators, including rising unemployment, higher bankruptcy filings, and the continued decline the housing market.

The rate at which customers became delinquent has increased significantly, as has the rate at which delinquent customers are written off. These trends and other portfolio indicators led to a build in reserves for the North American Cards business in the quarter.

ICG credit costs increased by $733.0 million, driven by an incremental net charge of $442.0 million, to increase the loan loss reserve for specific counter-parties, and due to a weakening in the credit quality of the corporate loan portfolio. Net credit losses were higher by $291.0 million due to loan sales that took place during the quarter.

Now Slide 9 is a variation on a slide that I have shown for the past two quarters. It charts the net credit loss ratios of our North American Cards and First Mortgage portfolios, as well as the unemployment rate.

Here the slide is divided between the early 1990s recession and its aftermath, in the left-hand box, and the current period, beginning with the first quarter of 2007, in the narrower box on the right. As you can see, the blue and red line at the top, on the left-hand side, shows the net credit loss rate for our Cards business over these two periods, while the green checkered line at the bottom shows the same for our First Mortgages. The black line shows the unemployment rate for the time period.

If you look at the left-hand box you will notice two things. First, it took 10 quarters for the Card losses to reach their peak rate of 6.4%. Mortgage losses, while growing at a slower rate, peaked a few quarters after the peak of card losses.

Second, losses for both Cards and First Mortgages did not return to their pre-recession levels for several quarters after the unemployment rate returned to those levels. This is particularly so with First Mortgages, where losses remained elevated well into the mid-1990s. Based on our data points, one could conclude that Card losses rise and fall in concert with unemployment rates. Mortgage losses, on the other hand, generally have a more protracted cycle of increases and then declines.

Looking at the chart on the right, you can see that the NCLs in both categories are increasing more rapidly than they did in the early 1990s, while the increase in unemployment rate continues to lag the increase in Card losses.

Another point worth noting here relates to the mix of cards in the portfolio. As shown in the yellow box on the left, Citi-branded cards comprised the vast majority of our portfolio before 2004. As I said last quarter, this portfolio historically has had different loss characteristics from retail partner cards. Since 2004 we have continued to add retail partner cards to our portfolio mix, which have significantly higher losses but importantly, also higher yields than bank cards. At the end of the third quarter, retail partner cards comprised over 1/3 of the portfolio.

While it’s obviously impossible if this historical relationship will hold in this environment, it is possible that we may see loss rates exceed their historical peaks. For the Cards portfolio we are now into the fourth consecutive quarter of increasing losses, and for the Mortgage portfolio we are into the sixth consecutive quarter.

Our assumptions have been stress-tested with unemployment rates ranging between 7% and 9% into 2009. Obviously such unemployment levels could result in significantly higher credit costs well into 2009. We have obviously carefully planned both our capital and our costs with a focus on this range of outcomes.

It is harder to draw conclusions on the losses in the Mortgage portfolio based on historical patterns. However, one could say that mortgage losses are generally seen to have elongated cycles with fairly long tails.

Last quarter I told you that we reduced our marketing expenditure in Cards, particularly on new accounts reflecting the current environment. We also tightened underwriting criteria, such as initial line assignment, particularly in certain geographies where we could use mortgage data to enhance our decision-making capabilities.

While these actions continue, we are also taking specific actions in our U.S. Mortgage business that are tailored to an individual borrower’s profile. One of our goals is to help certain at-risk borrowers to refinance their mortgage into GSE- and FHA-eligible products, which will allow us to originate and sell these loans instead of having to fund them on our balance sheet.

Our pre-emptive loan refinance program is called Portfolio Express. It is in its early stages and is intended to ensure that these borrowers can stay in their homes. In this manner, customers are being pre-qualified to refinance into an agency-saleable product with payment and rate benefits. To ensure we reach these individuals in a timely manner, we deliver the offer via overnight mail and follow up with phone calls and e-mails.

We have added significantly to our loss mitigation staff, doubling it from the beginning of the year through mid-September. We expect to increase staff by another 50% from mid-September to year end.

We have also provided additional training to default servicing and collection staff to return at-risk borrowers that we are servicing to performing status.

So far this and other mitigation efforts have shown substantial progress. Using a combination of extensions, forbearance, reinstatements, modifications, and other strategies, we restructured over 64,000 mortgage loans just in the second quarter, and over 120,000 in the first half of the year, in our servicing portfolio.

The chart on Slide 10 shows our combined exposure to credit cards and consumer banking loans by our top countries outside the United States. The first column shows the country’s ranking by total average net receivables, and the next column shows the country’s ranking by its contribution to the change in net credit losses from the second quarter of this year.

As you can see from the chart, many of our largest portfolios remain fairly stable. For example, Korea accounts for 13% of our total international consumer loans, making it the largest portfolio outside of Mexico. Its share of NCLs however, was a relatively small 2%. Korea is predominantly a retail branch business and many of the loans originated there are based on face-to-face relationships in our 218 retail bank branches.

This is also true of other countries like Taiwan and Singapore, which are predominantly retail branch banking businesses. The NCL ratios and the contributions to the increase remain low in these countries.

Conversely, Brazil, which accounts for only 3% of our loans, comprised 19% of the total NCLs this quarter and contributed 24% to the sequential increase. It also had an elevated NCL ratio of 14%.

Taken together, these countries that we’ve circled, Mexico, India, and Brazil, are responsible for 74% of the sequential increase in NCLs despite comprising only 23% of the average net receivables. These losses reflect continued deterioration in India and simultaneous portfolio growth and asset-quality deterioration in Mexico and Brazil.

An important point to note here is that some of the places that did not make significant contributions to the NCL this quarter are beginning to experience a slow down in their economies. Countries including Spain, Greece, Italy, and Columbia are places where we are seeing losses accelerate, although the portfolio sizes are relatively small compared to those in Mexico, India, and Brazil.

The degree and speed at which the down turn in the U.S. economy spreads overseas will in some measure determine the extent of our international consumer credit losses over the next several quarters. Within the countries experiencing current and expected deterioration, we are implementing risk mitigation programs with the same vigilance that we are in the United States.

Now Slide 11 shows the historical trend of our asset balances on the left, and a number of our key capital ratios on the right. We have made good progress on asset reduction and since last year’s third quarter, we have reduced our assets by over $300.0 billion. During the first half of 2008 additional capital raising and diligent management of the balance sheet caused all of these ratios to improve.

This quarter, not surprisingly, our capital ratios have declines. Our sequential asset reduction of $50.0 billion benefitted the ratios but was offset by negative earnings. In the last five quarters our loan loss reserve was increased by $13.5 billion net and we have added approximately $50.0 billion in capital. Combined, these actions have strengthened the balance sheet of the company.

The total allowance for the company stood at quarter end at $25.0 billion and total capital, including Tier 1 and Tier 2, was about $175.0 billion. We are also on track to realize the gain from the sale of our German retail banking operations, which is expected to close in the fourth quarter.

Also benefitting our capital will be the newly announced plan by the U.S. Department of Treasury, the FDIC, and the Federal Reserve. As I just mentioned, we have already strengthened our balance sheet without having assumed any such benefit, therefore this is going to be incremental to the efforts that we already have in place.

Under the terms of this plan the Treasury will purchase $25.0 billion in preferred stock and warrants from us. In addition to the $25.0 billion investment, the plan includes an FDIC guarantee until June of 2012 on senior unsecured debt issued before June 30, 2009, in amounts up to 125% of our qualifying debt under the terms of the plan. Also under the terms of the plan, the Fed will buy 3-month commercial paper.

Taken together, these actions by Treasury should be significant for the financial system and should help restore investor confidence. While we have significantly strengthened our balance sheet already, the Treasury’s actions will further our ability to act on client and other opportunities as they become available to us.

Our liquidity position also remained very strong in the quarter. At the end of the quarter, we had increased our structural liquidity, which is defined as equity, long-term debt, and deposits. As a percentage of assets this ratio increased from 55% of assets one year ago, to approximately 64% at the end of the third quarter.

At quarter end we had extended the maturity profile of our Citigroup senior unsecured borrowings to a weighted average maturity of 7 years. We also reduced our commercial paper program from $35.0 billion at the end of 2007 to $29.0 billion. Our reserve of cash and highly liquid securities stood at approximately $53.0 billion at the end of the quarter, up from $24.0 billion at the year end 2007.

Continued deleveraging and the enhancement of our liquidity cushion have allowed us to fund maturing current company debt and brokered-dealer debt obligations significantly in excess of 12 months without having to access unsecured capital markets.

Now Slide 12 shows the results of our Global Card business. Managed revenues in North America were up 7% due to 4% growth in managed receivables reflecting a slow down in payment rates in North America and spread expansion. Outside North America, excluding the $729.0 million gain on Rede shares in the prior year’s quarter, growth in new accounts, purchase sales, and average receivables drove revenues up 14%. Expenses decreased 1% despite a 1% contribution from repositioning charges.

On a reported basis, revenues were down 40%, primarily driven by two factors. First, higher current expected losses and higher funding costs in the securitization trust in North American, which also drove a downward adjustment in the valuation of the interest-only strip. Second, the fact that last year’s result included a $729.0 million benefit related to Redecard.

Higher managed funding costs are due to significant widening of credit spreads in the asset-backed and commercial paper markets. Higher credit costs reflect deterioration in the consumer credit environment, both in North American and in certain parts of our portfolio in the regions. The decline in net income results primarily from these higher credit costs.

Now Slide 13 shows our results in our consumer banking business. Revenue growth was 2% with and without the impact of our Japan Consumer Finance business. Revenues in North America were up 6% reflecting higher net interest revenues, primarily driven by personal and residential real estate loans, and by increased deposit spreads, partially offset by $192.0 million loss resulting from the mark to market on the MSR and related hedges.

Similar to last year, the MSR loss was primarily driven by volatility in the markets, which caused us to continually rebalance the hedge, as many of the assumptions diverged from market indicators. Revenues in all regions outside of North America declined due to a slow down in investment activities, spread compression, and increased competition.

Expenses were down 2% with repositioning charges contributing 4%, fully offset by the write-down of consumer intangibles and fixed assets in the Japan Consumer Finance business in the prior-year period. Excluding these and the impact of acquisitions, expenses would have decreased by 3%.

Excluding Japan Consumer Finance, we reduced branches by 107 net in the last 12 months. In our Consumer Banking business in North American we have added approximately 1,200 collectors in the last 12 months.

Net income was affected primarily by higher credit costs in North America and the Residential Real Estate business.

I think on the prior slide I misstated the total amount of Tier 1 and Tier 2 capital. I think I said $175.0 billion and I think the correct number is $137.0 billion.

Let me turn now to Slide 14. Slide 14 shows our results in our Securities and Banking business. Revenues were a negative $81.0 million versus $539.0 million last quarter. We reported a net loss of $2.8 billion, $89.0 million below last quarter. The seasonal second to third quarter slow down affected most of the business but there were improvements versus last year’s third quarter in certain areas.

Interest rate and currency trading posted strong results, primarily driven by extreme volatility in the foreign exchange and rates markets. In prime finance, while hedge fund customers continued to de-lever, prime finance fees and interest-bearing balances continued to grow. We also made good progress on winning new clients in the disrupted market environment during the quarter.

More broadly, however, continued disruption in the fixed income markets, lower equity volumes, and fewer M&A transactions being closed due to the financing uncertainty, resulted in a decline in the underlying business activity.

Expenses increased 21% versus last year but declined 13% in a sequential quarter comparison. Last year’s third quarter included a significant downward adjustment to incentive compensation as the full-year outlook for the business changed substantially in that quarter.

The sequential decline in expenses reflects ongoing right-sizing efforts to reflect the current environment. Headcount in the business declined by 1,158 since last quarter and by approximately 5,000 over the last 12 months.

Securities and Banking credit costs increased by $734.0 million, driven by an incremental net charge of $447.0 million to increase loan loss reserves for specific counterparties and due to a weakening in credit quality in the corporate loan portfolio. Net credit losses were higher by $287.0 million due to loan sales.

Net income was a negative $2.8 billion driven by marks and write-downs in the business.

Now Slide 15 has a chart that we have used in prior quarters and it shows the write-downs that we have taken against each category of direct sub-prime exposure. The total write-downs, including related higher credit costs for the quarter, were $800.0 million, as shown towards the bottom of the slide, including $470.0 million taken against the lending and structuring position of $4.3 billion.

Within the lending and structuring positions, the CDO positions are virtually entirely written off. Moving to the top of the table, where we recorded a $281.0 million write-down against the net Super Senior direct exposure of $18.1 billion, shown in the middle of the first column.

We started the quarter with total sub-prime exposure of $22.5 billion, as shown at the bottom of the first column. There have been several changes in the methodology for valuing our Super Senior exposures that are worth mentioning. The discounted cash flow methodology remains generally consistent with prior quarters and was described in detail in the first quarter earnings call. As we have previously said, the model is continually subject to refinements and enhancements.

The home price appreciation assumption that we are using in our valuation methodology for this quarter has changed from the last quarter and now reflects a cumulative price decline from peak-to-trough of 32%. The assumption reflects price declines of 16% and 10% respectively for 2008 and 2009 with the remainder of the 32% decline having occurred before the end of 2007.

The projected 32% decline peak-to-trough is based both on home affordability as well as other factors, such as the large overhang of homes in foreclosure, which has further depressed prices.

We have also changed the index on which we base our home price appreciation projections from the S&P Case-Shiller Index to the loan performance index. We made this change because the loan performance provides more comprehensive data, although the loan performance and the S&P Case-Shiller national HPIs have tracked each other closely in the past.

In addition, we have updated our mortgage default model to incorporate mortgage performance data from the first half of 2008, a period of sharp home price declines and high levels of mortgage foreclosures.

As I described on the last earnings call, our valuation methodology uses a discount margin that is calibrated to the underlying instruments, such as the ABS indices and other verified cash bond marks. To determine the discount margin, we apply our mortgage default rate to the bonds underlying the ABS indices and other referenced cash bonds and solve for the discount margin that produces the market prices of those instruments.

Using this methodology, the impact of the decrease of the home price appreciation projection, from a negative 23% to a negative 32%, results in a decrease in discount margins. Taken together, these two factors directionally offset one another.

We also changed the way we value the high-grade and mezzanine positions for the quarter, from model valuation to trader prices based on the underlying assets of each high-grade and mezzanine ABS CDO. Unlike the ABCP and CDO-squared positions, the high-grade and mezzanine positions are now largely hedged through ABX and bond short positions, which of necessity are trader priced.

We believe it makes sense for there to be symmetry in the way our long positions and our short positions are valued.

Additionally, there were a number of liquidations of high-grade and mezzanine positions during the third quarter and these were at prices close to the value of trader prices. The liquidation proceeds, in total, were also above the June 30 carrying amount of the positions liquidated, contributing a substantial portion of the profit for the high-grade and mezzanine positions in the third quarter.

We intend to use trader prices to value this portion of the portfolio going forward, so long as it remains largely hedged.

With respect to monolines, the credit value adjustment for the quarter was $919.0 million, as is shown on the bottom of the slide. At quarter end, our credit value adjustment balance was $4.6 billion and the market value direct exposure to clients declined to $6.6 billion to $8.0 billion in the second quarter.

I will turn now to Slide 16. Slide 16 provides vintage and rating data for each of the exposure types. We showed you this table last quarter. Let me highlight just a couple of changes. First, in the ABCP category the percentage of AAA to AA has declined from 71% last quarter to 62% this quarter, primarily driven by downgrades of the 2005 vintages.

Second, in the high-grade category, the percentage of 2006 vintages in the portfolio substantially declined. This was due primarily to liquidations of the positions during the quarter. As a result, the overall exposure had declined as well but the mix has shifted towards the higher concentration of 2004 and 2005 vintages. All of this has resulted in a change in mark from 27% last quarter to 41% this quarter.

Finally, there are no material changes in the mezzanine exposure vintage and rating mix.

I will turn now to Slide 17. It provides more disclosure on our Alt-A exposure, which stands at $13.6 billion at the end of this quarter. Of that $13.6 billion $10.2 billion is held as available-for-sale securities in which we recorded a $580.0 million impairment charge in the quarter. The remaining $3.4 billion is held in a mark to market portfolio where the marks for the quarter were $573.0 million, net of hedges.

Moving to the box at the bottom of the page, we show you the market value of the portfolio relative to the face value and also provide vintage and ratings information.

A few points of importance. First, in the AFS portfolio approximately 1/3 of the portfolio is 2005 and earlier vintages and ¾ is rated AA to AAA. That portfolio is marked at $0.67 on the dollar.

The trading portfolio is comprised of 11% 2005 and earlier vintages. 69% is rated AA to AAA. That portfolio is marked at $0.63 on the dollar. The trading portfolio marks that I have just mentioned do not include any residual or IO positions.

Including these positions, the combined marks of the trading Alt-A portfolio would have been marked at approximately 15%, or $0.15 on the dollar.

Slide 18 provides more detail on the four major drivers of negative revenue in the Securities and Banking business. We have shown you a similar slide before but this time we have replaced the Alt-A chart with one on our SIVs. For highly leverages transactions on the top left, our commitments totaled $22.9 billion at the end of the quarter, with $9.7 billion in the funded category and $3.2 billion in unfunded commitments. During the third quarter we had a $790.0 million pre-tax write-down on these commitments.

As the graph on the bottom left shows, our Commercial Real Estate exposure is split into the same three categories we showed last quarter. Excluding interest earnings, we recorded a $518.0 million write-down, net of hedges, on the portfolio subject to fair value assessments.

Moving to the top right, our SIV assets totaled $27.5 billion at the end of the quarter. This quarter credit spreads of financial institution debt instruments, which comprised approximately half of the long-term underlying assets of the SIV, widened substantially. The credit ratings on these assets, however, remained virtually unchanged from last quarter. The $2.0 billion write-down reflects a significant spread widening during the quarter.

Finally, on auction rate securities at third quarter end we held proprietary positions with a par value of $6.7 billion in our inventory and a market value of $5.2 billion as shown in the slide. We recorded a write-down of $166.0 million on these proprietary positions in the quarter.

In addition, not shown on the slide, we have committed to purchase approximately $6.2 billion of auction rate securities for which we have recorded a pre-tax loss of $306.0 million in this businesses, which represents half the difference between the purchase price and the market value of these securities at the time of settlement.

I am going to turn now to Slide 19. In our Global Transactions Services business revenues increased 20% to a record $2.5 billion. This quarter marked the 20th consecutive record revenue quarter for the business. Performance was driven by a strong transaction pipeline and new wins and continue growth in liability balances. Expenses were higher by 5%, mostly driven by acquisitions, transfers, and FX. Expenses were well below the revenue growth rate, even as we continued to invest in our global platform.

Every region had double-digit revenue and net income growth with record revenues and net income in North America and in EMEA. Total average deposits were up 7% versus last year and virtually flat sequentially. Assets under custody are down 6% versus last year, reflecting a drop in asset values in global equity markets.

As I have already talked about, in the second half of September, which marked extreme uncertainty and unprecedented events in the market, our GTS business had deposit inflows of approximately $55.0 billion, which increased end-of-period deposits by $30.0 billion in a sequential-quarter comparison. Clearly we saw a flight to quality and we were able to benefit nicely from that trend.

Slide 20 shows our results in Global Wealth Management. Revenues were down 10%, reflecting a particularly challenging global market affecting both investment and capital market revenues. In North America, revenues included a $347.0 million benefit from the sale of CitiStreet, which partially was offset by a $306.0 million write-down related to the auction rate securities settlement.

In North America and in Asia results were particularly reflective of the slow down in capital markets activities. Assets under fee-based management were down 19%, due mainly to the adverse impact of market actions. Deposit balances were up 4% driven by growth in Asia and North America. We saw net client asset close of $3.0 billion in the quarter.

Expenses were down 4% due to lower variable expense and incentive compensation, partially offset by a $15.0 million charge related to the fines in the auction rate settlement. Headcount in [inaudible] was down by approximately 3,500 in this quarter, mainly reflecting the CitiStreet divestiture and the impact of re-engineering programs.

Overall, the decline in net income mainly reflected the market-driven decline in capital markets revenues in the U.S. and Asia, combined with the impact of declining client asset values on our fee-based revenues.

Slide 21 shows the results in our Corporate Other and Discontinued Operations. In Corporate Other improved revenue reflects lower funding costs and effective hedging activities, partially offset by funding of higher tax assets and enhancements to our liquidity positions. Net income reflects tax benefits contained at Corporate during the quarter.

Discontinued Operations reflects three major items, all related to the sale of our German retail banking operations, which is expected to close in the fourth quarter. First, $112.0 million of net income from the business this quarter. Second, a $213.0 million after-tax benefit related to foreign exchange hedging of the expected gain on sale. This is an economic hedge and an offsetting impact in the gain on sale will be recorded in the fourth quarter when the transaction is expected to close. Finally, the recognition of a tax benefit of $279.0 million related to German tax losses arising as a result of the sale.

Now to wrap up, let me say a few words on our performance in the quarter and talk a bit about our outlook. There are really four factors that drove results for the quarter and are related to the risk positions we hold, the economic environment, or movements in the capital markets in the quarter.

First is the continued volatility in fixed income markets, which has caused negative mark to market valuations, disrupted funding costs, and created wide-spread illiquidity. We are managing this by lowering our risk positions aggressively, which has resulted in lower marks again for the third sequential quarter. We have also built a strong capital and liquidity position and continue to right-size our business to reflect the realities of the current economic environment.

To the extent that this will affect us in the future depends on the valuations of the risk premiums, which in turn are dependent on a return of liquidity in the markets and investor confidence.

The secondary is consumer credit, which is affecting us primarily in cards and mortgages in the U.S. and less so internationally. Here I have discussed the many risk mitigation strategies in place to manage our losses, however, if unemployment rates continue to rise and there is continued deterioration in the economic environment, there are several possible outcomes, one of which is that card losses could exceed their historical peaks and mortgage losses could continue to grow.

Third, in this quarter we are experiencing an unusually slow economic environment, which affected a number of our businesses. While third quarter seasonal slow down is normal, this quarter’s activity was particularly affected by the volatility and lack of general investor confidence, as few transactions were being completed and investors continued to sit on the sidelines.

Fourth, the other factor to consider in thinking about future quarters, is the degree to which our own credit spreads and those of our counterparties move from one quarter to the next. To use two examples, you have seen the impact of these movements on the liabilities for which we elect fair value. And then also on our SIV positions this quarter. To the extent the volatility in the market continues, we expect to see an impact on quarterly results from changes in credit spreads.

On those things we can control we have made excellent progress and we are going to continue this. Assets were down by $50.0 billion sequentially, with a $48.0 billion reduction in legacy assets, so in total now, our legacy assets are down by over $100.0 billion.

Expenses were down by $1.2 billion sequentially, the single biggest sequential quarter decline in recent history. Headcount came down by 11,000 sequentially and our Tier 1 ratio was 8.2% and our liquidity position remains strong.

While the current market disruption presents many challenges for us, it also presents many opportunities. While we have positioned ourselves with a strong balance sheet and a liquidity base to avail ourselves of those opportunities, we will only do so in the most disciplined and methodic way, as you have seen us do very recently.

That concludes the financial review of the quarter and we are very happy now to turn to questions and answers.

Question-and-Answer Session


(Operator Instructions) Your first question comes from John McDonald – Sanford Bernstein.

John McDonald – Sanford Bernstein

First question on the government preferreds. Where does that put you in terms of the cap, the maximum amount, that Tier 1 that can be composed of preferred?

Gary L. Crittenden

Well, essentially it is a mute point. If we treated these as normal hybrid securities that we funded in the open market, we would be above our cap. But because this equity is by its very nature deemed as Tier 1, it still factors into our Tier 1 calculation.

John McDonald – Sanford Bernstein

So the whole pie goes up so it doesn’t matter.

Gary L. Crittenden

That’s correct.

John McDonald – Sanford Bernstein

And is the straight tangible-to-common equity ratio important to any of your constituents, rating indices, regulators? Is anyone tracking that?

Gary L. Crittenden

That conversation really never comes up, in a regulatory session, in a rating agency session. I have yet to have that question posed to me since I have been at Citigroup.

John McDonald – Sanford Bernstein

The second question I have is on the international consumer credit. It’s hard for us to evaluate it in the outlook there. Can you separate where you’re having some rising losses because of seasoning, because or where you’ve been growing fast, and where you’re seeing economic stress in some of the international consumer businesses and maybe kind of separate regions and products?

Gary L. Crittenden

I think maybe the best way to think about it, if you turn to Slide 10 that I talked about earlier in the presentation, you obviously can see the split by business. Outside the U.S. we were growing rapidly before we saw these type of increases in our net credit losses. And so I would say that most of what you are seeing here is a fundamental deterioration in credit. And relatively little of this would be related to seasoning, because our growth rate here has been going on for some time period.

What I think is important to note, however, is that it appears, at least at this point, to be relatively concentrated. So it’s concentrated, as I said, in Mexico, India, and Brazil. On the right-hand side of that chart you can see the percentage contribution that each of those made to the sequential increases in our NCL ratio.

And so while there is some deterioration outside the United States, at this point it appears to fairly concentrated in a few places but generally there is some deterioration in credit broadly. It turns out that both the best opportunities for us and the places where you’re going to have the possibility of credit risk overlap. Clearly we’re trying to grow our business in these regions, we’re carefully managing our credit exposures there, but there is some risk associated with that growth.

John McDonald – Sanford Bernstein

And that slide combines both credit cards and the global consumer?

Gary L. Crittenden

That’s exactly right. So this takes both those things into account.

John McDonald – Sanford Bernstein

In the U.S. Card, the securitization loss, is that a combination of higher assumed charge-offs going forward and funding costs?

Gary L. Crittenden

That’s exactly right. Most of it was related to credit costs but it also included the higher funding costs.

John McDonald – Sanford Bernstein

And why do the higher funding costs not seem to impact your NIM, on a managed basis, in the U.S. card?

Gary L. Crittenden

There were other factors in aggregate that offset it. So if you kind of play through the details, the fact that funding costs overall had come down quarter-over-quarter was sufficient to ensure to our NIMs stayed stable during the quarter.

John McDonald – Sanford Bernstein

And do you have any outlook on the card NIM, whether you can hold it stable or is the prime [inaudible] starting to hurt more?

Gary L. Crittenden

What is fundamentally happening here is payment rates have in fact slowed a bit as we have come into this more difficult credit cycle. As payment rates have slowed obviously that’s had a yield benefit associated with it. So if you anticipate that that’s going to persist as we go through the next few quarters, particularly compared to the prior year, and you add to that the fact that it’s unlikely, at least in the short term I think, for funding costs to go up, it’s a reasonable assumption I think that the NIM here is durable for a while.


Your next question comes from Glenn Schorr – UBS.

Glenn Schorr - UBS

Could you help us with what some of the larger components of the unrealized loss position on the balance sheet. And such a big change this quarter, maybe just point us in the larger buckets.

Gary L. Crittenden

I would be happy to. There was a change, obviously, in the quarter that took place in OCI. If you go to the supplement, under the balance sheet section of the supplement, you can get a good sense for what that looks like. So quarter-over-quarter it went up about $6.0 billion. So if you look at the split of that, it was in two separate categories. The two separate categories are the AFS book and then the marks that we take as a result of deteriorating currencies in countries outside the U.S. where we have significant investments.

For example, if we have an investment in Brazil, that investment is held in local currency terms, we hedge that position, obviously. When those currencies deteriorate, that has a negative impact on our OCI calculation. And that accounts for roughly half of the value.

The other half, as I said, was related primarily to spread widening in AFS securities. And the single largest component of that was in the Alt-A category and I took you through some detail on the Alt-A category in the earlier presentation.

Glenn Schorr - UBS

And I would assume that both go toward standard tests over time for a permanent impairment and that will just probably not play out over time.

Gary L. Crittenden

We have a very comprehensive process that we go through that reviews this each quarter. What we do is we look at all our positions in the book, we compare those positions against where they are currently trading. If there was a trading analog to these securities. We make estimates about the realizability of the position that we are carrying. Unless we are absolutely convinced that for some reason we can hold these securities to value and recognize the amount that we are carrying them for, we then take an impairment as we need to.

And in this quarter you saw, I think, something over $500.0 million in impairments that we took against AFS securities for exactly that purpose.

So for those, obviously, have an other than temporary impairment are recognized as appropriate. And in the case of the FX impact, or the $3.0 million or so that was related, those kind of impairments would only be realized if we actually sold our position in a particular market.

Glenn Schorr - UBS

Maybe you could provide some commentary on undrawn commitments, what you’ve experienced so far from the clients side and what have you been doing proactively that you could actually start reassessing those cuttings where you need to cut, repricing where you need to reprice.

Gary L. Crittenden

As you might guess we have anticipated this time for quite a while. So the first time I participated in a meeting where we discussed this was probably a little over a year ago, where we sat down and we looked at other historical periods of economical weakness, how much had been drawn on lines during that time period, and we did a pretty comprehensive view of what we thought the maximum draws might be and where those draws might come from, and we started a program back then to proactively manage our relationship with those accounts where we thought we might have the most negative effect. And particularly if the breadth of our relationship was such that it was not particularly profitable.

And so we’ve been working on that for a while. Now we’re actually obviously into a period now of economic weakness and we’ve seen accounts begin to draw on their credit lines. At this point there is nothing out of pattern with those draw-downs that we haven’t seen in prior recessions. And we clearly have thought very carefully about the liquidity implications of this.

So as part of our normal ongoing stress events, one of the things we look at is the impact of that draw-down, the impact of that on our liquidity and we manage our liquidity to ensure that we’re in a position to absorb that.

So I think as we view things now, obviously draw-downs have increased, it seems to be roughly in pattern with what we’ve seen in other economic slow downs and I think we’re managing it well from a liquidity stand point.

Glenn Schorr - UBS

And just in general, do you have the ability to reduce and eliminate, and that goes across both consumer and corporate, because similar to your comments on how you never know but credit card loss rates could be higher, I would think draw-down rates could be higher, too, especially when the CP world freezes up the way it did.

Gary L. Crittenden

So we have very actively managed that. So as client accounts come up for renewal, as these lines come up for renewal, we do an active evaluation of that and in some cases we size them down, in some cases we eliminate them all together and in some cases we stay where we are. It just depends on what the situation is. But we’ve had a very active process to do that.

One of the best ways to actually see evidence of that is to look at the corporate loan portfolio. On the second slide in the deck I showed that the corporate loan portfolio in this quarter was down something like 15%. And that’s reflective of the fact that we really are very focused on client profitability.

So one of the reasons why our assets are down by the $308.0 billion over the course of the last few quarters, is that we have taken a very hard look at customer profitability and have ensured that we have a good breadth of relationships with the customers that we serve so that we can fully meet all of their needs, but do it within the confines of the profitability that we set out for ourselves.

Glenn Schorr - UBS

It seems like between expenses, the undrawn commitments, customer profitability, you are controlling what you can control in this horrible environment. On the heels of the Wachovia mess, what do you think now on the strategic front? Do we wait for the next situation to arise, because we all know that more situations will arise?

Gary L. Crittenden

Here’s what I think we would say internally, what we’re saying to ourselves. Basically we had a strategy that we outlined at Citi Day that had us focusing on growing five businesses. Two of those are asset businesses, our card business and our markets and banking businesses and three of those are liability-gathering businesses, deposit gathering businesses. That’s our wealth management business, our consumer retail business, and our GTS business.

Our focus is behind those businesses and that remains exactly as it was before. And in order to fund those businesses we have the program underway that you just talked about. We’re cutting our expenses, we’re showing good traction on that, we’re moving assets out of categories that don’t fit with that profile. We’ve been selling businesses that didn’t match there. We’ve carefully managed down our headcount. So we have worked very hard to execute against that strategy. And that’s our strategy.

Now, opportunistically, we had the chance, obviously, to acquire Wachovia. For all of the reasons you’re aware of, that’s not going to happen. But the net result of that is not a change in our strategy. Our strategy still fundamentally remains as it was, to execute against the plan that we had set out at Citi Day. And I think as you correctly said, we’re doing our level best to execute on all of the factors that are in our control.


Your next question comes from Guy Moszkowski – Merrill Lynch.

Guy Moszkowski - Merrill Lynch

Could you comment on the degree to which you have thought through the potential use of the tarp for disposition of mortgage-related assets? Is that something that you think might be appropriate for Citi?

Gary L. Crittenden

We are in the process of doing that. So as you know, all of the parameters here are still ill-defined. What we have tried to do is go through a whole set of scenarios about how this might work. We’ve obviously had many conversations with Treasury about this, going back more than a month ago, about how this might work. And obviously depending on how it’s structured is of more or less use to us. So at this point I would say there is active engagement but little concrete that I can report in terms of how we think we might potentially use it.

Guy Moszkowski - Merrill Lynch

On the newer portion of the program, which is the capital injection, you talked about the $25.0 billion, how are you thinking about the use of those funds? Are you looking at is as more of an opportunity just to shore up the balance sheet or actually an opportunity to, in conjunction with the availability of debt funding, at a very low cost with the FDIC guarantee, being able to sort of more aggressively use this as a way of say going out into the market and acquiring distressed assets?

Gary L. Crittenden

I think you asked the question in just the right way. So I think in the first instance we can say that we felt good about our capital position before this whole thing happened. We didn’t know this was going to happen until we actually found out about it on Monday, and we felt good about the fact that we had a strong capital position, about to become stronger as a result of the sale of our business in Germany. And so this represents, in many ways, something that we had not counted on, something that we hadn’t planned for.

And it does present, then, the possibility of our taking advantages of opportunities that otherwise might have [inaudible] to us. Now, as we think about that, the way we approach it is in the same disciplined manner that we’ve approached these other opportunities over the last few weeks. So I think in total now we have looked in detail at the possibility of acquiring three institutions, two of which you’re aware of and one that we haven’t talked about publicly in any way.

And as we approached that, we did it with a very well-defined set of parameters. There is only a certain set of circumstances which made sense for us to do that. We will think about the use of this capital in the same way. It is an attractively priced amount of equity capital, and as you correctly said, an attractively priced amount of fixed income, that can match with that.

But we’re going to approach it with exactly the same discipline. If it makes sense for us, if it grows our business in the five areas that I talked about, if it furthers our strategic agenda in some way that is fundamental, then we’ll use it in that way. But we’re not going to treat this like a windfall and in some way back off of the measures that we have underway to get the company fit because we have this as an additional capital capacity.

Guy Moszkowski - Merrill Lynch

What is the Tier 1 impact of the sale of the German operation and CitiStreet?

Gary L. Crittenden

We had estimated that the German business would impact by about 60 basis points or so, at the time that it takes place. And CitiStreet has a gain I think of about $300.0 million, so the impact on Tier 1 is relatively modest.

Guy Moszkowski - Merrill Lynch

And you gave a number of the marks at which you are now carrying various described assets. But I don’t think you can us that for leveraged finance assets.

Gary L. Crittenden

The reason for that is obviously there are a discrete number of names that are held in our highly-leveraged finance commitment bucket and we just don’t think that competitively it makes sense for us talk about where those are marked.

Guy Moszkowski - Merrill Lynch

Well, let me try a different way. JP Morgan talked about $0.71 yesterday. Would you be materially different from that?

Gary L. Crittenden

The way to think about this is there is lots of benchmark information out here and we look at those benchmarks all the time. Obviously from the things that are funded, to the extent that there are marks, we carry them at whatever those marks are. For the things that are unfunded, we compare all the time, the nature of those agreements, what those agreements look like, with other securities in the market and we ensure that we conform with the other securities in the market.

So you don’t have to worry about there being some odd mark associated with this segment of our balance sheet. I think we do a pretty good job of ensuring that it’s properly marked.

Guy Moszkowski - Merrill Lynch

You spoke to rolling securitized card balances into balance sheet funding. Is there any update more broadly on the potential for asset securitizations to have to be consolidated under either FAS, I think it’s FSP 140-3 or 46R?

Gary L. Crittenden

I’m impressed by your ability to pull those out of the air. There isn’t really any update. I mean, the current anticipation is that on January 1, 2010, the QSPEs will come onto the balance sheet. For us that primarily has an impact on our credit card receivables that have been securitized. As we go through this year next year, as we go through 2009, the amount of securitization that we do and the amount that will actually just come back on our balance sheet as loans will in large measure be a function of the funding opportunities that exist in the different markets.

So if the markets for securitization open up, funding costs come down, we are likely to continue to do more securitization. If they don’t and if they’re tight and if funding costs are high, as they were at the back end of the last quarter, then we’re likely to have those come onto our balance sheet.

In some ways this would then represent a gradual movement from where we are to the position that we would be at at the beginning of 2010. And obviously this whole thing continues to evolve and we’re not sure that 2010 is going to be the final number. But that’s what we know today at least.


Your next question comes from Michael Mayo – Deutsche Bank Securities.

Michael Mayo - Deutsche Bank Securities

I have an easy, medium, and hard question. The easy question is what’s the size of the tax benefits in Corporate and Other?

Gary L. Crittenden

Because it’s an easy question, I don’t know it off the top of my head. I just don’t know it as a fact, so if it is immaterial we’ll handle it just from a regular call. You can call the IR team.

Michael Mayo - Deutsche Bank Securities

The medium question, you’ve downsized assets by $300.0 billion from the peak. How much more do you have to go and what’s the timing?

Gary L. Crittenden

Here’s what we set out to do. And in fact it’s actually a good question because it allows me to clarify something a little bit. As you know, at Citi Day we talked about legacy assets of between $400.0 billion and $500.0 billion. Let’s assume for a minute that that number was $450.0 billion and we talked about over a three-year time period getting down to a $100.0 billion. That would kind of be the target. So the objective was $350.0 billion over a three-year time frame.

We have now taken $67.0 billion of that out in the last quarter and in the quarter that we’re in we’ve taken out about $48.0 billion or so. So you take the $67.0 billion and you add it to the $48.0 billion, we’re somewhat up over $100.0 billion of the $350.0 billion target that we’ve had. So we’re a little bit better than a third of our way there after two quarters’ worth of effort.

And I think the good news about that is obviously this has been in a time period where it hasn’t been easy to reduce those assets, where it’s been difficult to do it. So we feel good about the progress. I think that gives you rough benchmarks on kind of the bookends of where we’re trying to head.

And we are seeing some benefit of that, obviously in our NIM. So we did have, as I mentioned, some improvement in yield and part of that is due to the fact that we’re peeling off low-yielding assets.

Michael Mayo - Deutsche Bank Securities

So the new $25.0 billion of preferred, maybe you don’t lend so aggressively with that new money but just it gives you more flexibility to de-lever faster and take some marks if you need to?

Gary L. Crittenden

I wouldn’t necessarily say that. I mean, the way we are approaching it is just the way I just described it, which is we hadn’t planned on this capital. It’s incremental to what our plans have been and we want to make sure we use it in the smartest way possible. So we’re going to be opportunistic with that. And as we see opportunities that when approached in a highly disciplined fashion are things that we think make sense to do, we will continue to do that. Even if that would imply growth to the balance sheet as we’re bringing down other balance sheet categories that we’re trying to exit.

Michael Mayo - Deutsche Bank Securities

Then the hard question. What can the government do to bring down LIBOR and how much does that hurt you? Because LIBOR is still not coming down, despite the new government plan and that’s a little frustrating. On the other hand, I guess it’s an opportunity for you that they’re guaranteeing a three year debt so you can term out your debt a little bit more. So can you talk about how LIBOR is bad but the new government guarantee is good and how do you benefit from that and what else can the government do?

Gary L. Crittenden

Obviously there are a lot of people who are focused on what can happen to bring LIBOR down. And I wouldn’t pretend to be able to say that I have the answer that will finally make that change happen. I think the important thing is, if it continues at these rather dislocated levels, we will obviously have to take some steps in our business that will allow us to have different basis on which we recognize our cost of funds. If we have this dislocation between the pricing mechanism we use, for example, in our card business, and the cost of funds, over time that disparity is something that we would not able to tolerate and so we would make adjustments in the way that we approach things, to reflect the discontinuity that exists.

So it is a little bit puzzling, given all the efforts that have taken place, that the movements have been so modest. But again, a lot of these things have not happened yet. I mean, they’ve been announced, we’re in the process of implementing them. It’s going to take time to actually get them implemented. And when they actually get implemented is the time at which it kind of changes your perspective on things.

The funding, for example, which I think is very helpful, I think for any institution to be able to borrow at these rates, plus the insurance premium that you pay as a result to having access to this fixed income funding, is a real benefit. And obviously it goes a long way to ensuring that there will be adequate funding to be able to pursue business opportunities. But that’ not available yet. It’s not part of the process yet.

I think the way I have thought about it is that these are good incremental steps that obviously have added on to where we thought the world was headed, that with time are more likely than not, to help the financial system overall. And we will see how they actually play out but I generally think of them as very positive.

Michael Mayo - Deutsche Bank Securities

So when can we expect some new three-year debt from Citigroup with that government guarantee so then we can monitor how it’s working?

Gary L. Crittenden

We don’t know exactly what the time is going to be. I don’t think anybody knows exactly the timing of when this is going to be available. We have I think something like $7.0 billion worth of maturities that are happening through the remainder of this year. And so assuming things happen kind of in the normal course here, we will probably have the opportunity to do at least that $7.0 billion.


Your next question comes from Meredith Whitney – Oppenheimer & Co.

Meredith Whitney - Oppenheimer & Co.

On the card business and the funding, and this quarter’s charge, prospectively if things don’t change, how does the IO write-downs and then whatever funding problems you had during this quarter, how does that model out for future quarters, at least the fourth quarter. And then maybe the first or second quarter of 2009?

Gary L. Crittenden

I went into that in some detail in the material that I covered. So the IO strip itself has about $1.0 billion and so that’s kind of the maximum amount at risk would be the way to think about that. So if you had a major dislocation in credit markets it could be at a much higher level, over time, that would be recognized and there would be a P&L impact associated with that.

The second piece, as regards the residuals that flow out of the trust, that had an impact on the financial results this quarter, that is mainly a credit impact. It’s only partially funding. Funding is a relatively small portion of the total. To the extent that there continue to be higher credit losses, we’re going to see that impact. And when I went through the revenue slide in the early part of the deck, I specifically talked about that as being one of the effects that could continue, it could be durable and we might have to face over time and wouldn’t be a head wind for our results as we go into next year.

Meredith Whitney - Oppenheimer & Co.

I follow that. I guess what I am specifically asking is if any of your card receivables were funded with ABCP and that market was unavailable, what costs would be associated with that going forward?

Gary L. Crittenden

We have a wide range of choices for how we fund the receivables, I think is the way I would think about that. You know, we have the entire right-hand of the balance sheet for the most part. And so if one category doesn’t become available to us, we would shift and fund in a different category.

And so as I talked about just a minute ago, the decisions that we make about securitization will largely evolve over time. We will look and see how those markets look and what the funding costs look appropriate, then we will probably do that. If not, then there’s a wide range of additional sources that are available to us to fund.

Meredith Whitney - Oppenheimer & Co.

With respect to the investment banking, or institutional clients group, will you look at what’s gone on over the past year and you look at the size of that business, what’s the appropriate quarterly expense base for that business and has that changed over the last few months?

Gary L. Crittenden

I think obviously the volume levels are down. There’s no doubt about that. And some aspects of the business are down for the foreseeable future. And so as I said in some of the comments I’ve made, we have taken 5,000 people out over the course of the last year. I think we took 1,100 people out over the course of the last quarter. We are very focused on making sure that that business is right-sized for the future opportunities that the business has.

Now, the third quarter was unusually dislocated period. And so I wouldn’t extrapolate off of that base necessarily to say that’s the ongoing business volumes that we have. In fact, the best way to think about it is, we had a terrific quarter in the second quarter. We had a less than average quarter in the third quarter. You really have to look at these things over the course of a number of quarters to kind of get the real run rate levels.

But that doesn’t take away from the point that the business is going to be smaller down the road, we have taken aggressive action so far to make sure that the staffing is right-size and we are going to continue to do that, if necessary.

Meredith Whitney - Oppenheimer & Co.

Has that impacted any of your technology efforts, in terms of your technology spends?

Gary L. Crittenden

No, in fact, the opposite. So we’ve had a pretty significant effort that is focused on upgrading our technology there and the fact that we have reduced our heads has not impacted the effort around technology. In fact, if anything, it gives us more incentive to make sure that we complete this program.


Your final question comes from Betsy Graseck – Morgan Stanley.

Betsy Graseck – Morgan Stanley

On the card side, I just want ask a little bit about the revenue line as it relates to some of those proposals that are outstanding by the Fed and the regulations that they’re reviewing currently. Could you speak to any that you may need to change in the event that that went through?

Gary L. Crittenden

I think it obviously just depends on exactly how these proposals shake out. In its current form, they would have what I would say is probably a material impact on the way we currently approach the card business and it would require us to make changes to our business model.

There have been things like this that have happened in other places around the world and generally the competitors who participate in the business change the nature of the business model to reflect what the new regulation is.

At the end of the day, you have to earn a return on capital in the business that justifies the risk that you’re taking, and that can come from a number of different ways. We currently have a process that has that coming from merchant discount fees, it comes from fees that customers sometimes pay for cards, depending on the card product, depending on the interest rate that we earn. There are back-end fees, there’s a whole variety of sources from which we take income.

And if the legislation or the regulations come through, as they are kind of currently contemplated, my guess is it will change the mix of those items that are currently used as revenue generation around the business.

What I’m quite sure of is that people are going to want to continue to use charge cards as a payment product. It’s going to an important part of the payment system, not only in the United States, but globally. And that we’re going to be a major factor in that. And although all of those things may not happen perfectly, that is we might get impacted by one thing before we’re able to make the changes, in an additional quarter, and it might take some time to sort its way out, my guess is over the course of time this will be a business that’s going to have the turns that are sufficient to attract the capital that’s necessary to support it. But we’ll see. I think it will play out probably over the next few months.

Betsy Graseck – Morgan Stanley

And then on the LIBOR stress that’s going on, at what point do you decide to take action on that? And clearly it’s hard for any of us to know exactly when it’s going to start.

Gary L. Crittenden

Probably sooner rather than later. So it is something we are very focused on and it has obviously put the squeeze on the cost of funding. And so this has now gone on for a while. We are well into the second quarter where this has become an issue. So we are very focused on it. And we are looking at a number of different scenarios and I think we will see how this whole thing plays out here over the next few weeks. But we will take action obviously if it continues to be kind of disconnected.

Thank you all very much. We appreciate you joining us on the call


This concludes today’s conference call.

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