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Citigroup, Inc. (NYSE:C)

Acquisition Call

September 29, 2008 10:30 am ET

Executives

Scott Freidenrich – Director of Investor Relations

Vikram S. Pandit - Chief Executive Officer, Director

Gary L. Crittenden - Chief Financial Officer

Analysts

Guy Moszkowski - Merrill Lynch

Glenn Schorr - UBS

Betsy Graseck - Morgan Stanley

Operator

Welcome to Citi’s investor/analyst teleconference call featuring Citi Chief Executive Officer, Vikram Pandit, and Chief Financial Officer, Gary Crittenden. Today’s call will be hosted by Scott Freidenrich, Director of Investor Relations. (Operator Instructions)

Scott Freidenrich

The presentation we will be going through is available at our website at www.citigroup.com. You may want to download that now if you have not already done so. Our Chief Executive Officer, Vikram Pandit, will make some comments and 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’d 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 Vikram.

Vikram S. Pandit

This is a historic day and this is a historic transaction. The combination that we’re going to talk about today is good for both Citi and Wachovia; it’s great for our clients and customers; and I believe it’s great for the US financial system.

All financial services businesses as you know are people businesses and the story here starts with people on both sides. Bob Steel and I have known each other for almost two decades. We’ve worked together both as colleagues and as competitors. Others on both sides of the two companies have known each other and respect each other. We believe we share each other’s values and aspirations. And all of that’s important because that’s what really makes an ideal combination.

By the time Bob and I started to talk, we at Citi had the opportunity to take a look at a number of deals. We passed on these because they were not compelling. This one is compelling. This combination creates a dominant US franchise in great markets. From an earnings and economic return perspective, this makes a lot of sense. We have contained the risk in this transaction so not only is this a high opportunity deal for us, it’s also a low-risk transaction. We’ve contained the asset risk and we believe the operational risk is also contained.

Let me start by talking about the deal. We’re buying Wachovia’s retail bank, its private bank, its middle-market business, and its corporate investment bank. We are not buying its retail brokerage and asset management businesses. We’re paying approximately $2.2 billion in common stock as consideration. To finance this deal we’re raising approximately $10 billion of common equity and are issuing $12 billion in preferred stock and warrants to the FDIC. We are reducing our dividend by half. All of these things together keep our capital ratios very strong.

We have identified $312 billion of risk assets on Wachovia’s balance sheet. Our maximum loss exposure on these assets is the $30 billion of expected losses we’re taking upfront and another $12 billion over the next three years with no more than $4 billion a year. This combination makes sense for us strategically; it makes sense for our shareholders, our customers, and our people. Let me talk about each of these.

Strategically Wachovia is amongst the best retail franchises in the country. Whether you look at its footprint, management, culture, service, technology, we all know it as a very strong and well-respected brand. This transaction completes Citi’s global universal bank model by adding depth to our US retail franchise. We’ll have approximately $600 billion of deposits in the US giving us a 9.8% deposit share. Globally we’ll have $1.3 trillion of deposits which makes it one of the largest deposit-taking institutions and clearly the largest US deposit-taking institution.

The transaction supports our goal to build a franchise with a high annuity-like earnings stream with controlled risk. It increases cash flow and capital generation which in turn will help fuel our international growth. And we believe there are significant synergies in our cash management business, in our commerce business, in the SME area, and in the mortgage business.

Let me talk about this from a shareholder perspective. This is a unique transaction. We paid $12 billion to the FDIC to limit our risk on the assets we’re acquiring. We are incurring this cost upfront but on an accounting basis we’ll expense this over the next four years on a pro rata basis. Leaving that aside, this transaction is more than 10% accretive in year two and very strongly accretive in the out years. When you look at economic value, it doesn’t matter whether you look at net present value, IRR, ROIC; whatever you look at the economics are exceptional.

The risk is capped; we’re taking $30 billion upfront losses; and the losses beyond that are capped to no more than $4 billion a year on this portfolio of assets, therefore capped at a total of $12 billion. Anything above that will be absorbed by the FDIC and for this tail risk mitigation we’ve paid them $12 billion upfront in preferred and warrants as consideration.

As I said before and I said at Citi Day, 75% of our businesses are annuity-type businesses. This increases that number significantly. That also in our view implies a lower risk earnings profile going forward. It improves our already strong liquidity and funding profile. With the $1.3 trillion in deposits we’ll have approximately 71% off our total assets funded with deposits, long-term debt and equity, which is extremely compelling. And our capital ratios remain strong.

Let me turn it over to Gary who’s going to take you through the details of the transaction, and then I’ll come back and talk about our clients and our people.

Gary L. Crittenden

Vikram took you through the key elements that are covered on the first slide in the presentation that’s entitled Transaction Structure, so I won’t repeat any of those. The unique feature of this transaction is obviously the loss protection arrangement that we have with the FDIC. So let me have you turn to page two in the presentation if I could and I’ll spend just a minute talking about the terms of the loss protection arrangement that we have with the FDIC.

This arrangement has a couple of different parts to it. In aggregate it has $12 billion of face value that will be split between preferred shares and warrants that will be granted to the FDIC. The preferred shares will have a 6% dividend and they will have a five-year non-call feature. It will be recorded at a discount to par value. For this we receive 100% Tier 1 credit and the discount accretes over time through our retained earnings. We will also issue warrants and as I said the warrants taken together with the preferred stock gives us a combined value of $12 billion and results in Tier 1 credit also of 100% of the $3 billion. So taken in aggregate the preferred shares along with the warrants give us an aggregate value of $12 billion.

Now this insurance that essentially we’re buying upfront, as Vikram said, cuts off the tail risk associated with this transaction. And let me explain, on chart number three how this tail risk insurance actually works. So what I’ve selected here is just an illustrative example. We are finalizing the exact assets that will become part of the $312 billion that the so-called protected portfolio where the riskiest assets of Wachovia will reside. In the example that I’ve used here, I’ve listed $156 billion of residential mortgages, $100 billion of commercial real estate, and $56 billion of other assets. Again, the sum total of these assets adds up to $312 billion.

Against the losses that would take place for the first $30 billion we’re reserving through purchase accounting or reporting through purchase accounting the losses associated with the first $30 billion. So that will happen at the time we close the transaction. We then have agreed to have up to $12 billion in losses over a three-year time period that would be capped at $4 billion a year. So the total exposure that we have in this portfolio after we record the $30 billion at the time the transaction takes place will be $12 billion. For the remaining amount of the tail risk in the portfolio up to $312 billion, the company bears no further risk. That risk essentially has been moved as a result of the arrangement that we have with the FDIC to the FDIC.

No Vikram talked a little bit about the economic impact of this transaction, and it is extraordinary. Let me talk first of all about the first year which will be in 2009 and then years two through four.

The transaction is expected to be accretive in the first year before accounting for $2 billion in pre-tax restructuring charges. There are also some modest restructuring charges that are taken in the purchase accounting as well, a total of $1.5 billion. But it’s accretive before the $2 billion in restructuring charges. We have approximately $1.3 billion in pre-tax expense synergies that are offset by some revenue dis-synergies associated with a modest program of branch closings. We have approximately a $3 billion pre-tax charge that is related to the loss protection agreement that we have with the FDIC. As Vikram stated, this will be taken through earnings over the first four years of this arrangement. We have a 6% dividend on this $12 billion of the face value of the preferred stock and again the warrant that is associated with that.

In years two through four it is accretive taking into account all costs and the trajectory associated with the earnings per share is very, very strong. The fully-loaded pre-tax impact of the annual expense synergies are approximately $2.8 billion to $3.2 billion depending on the year and that is offset somewhat by revenue dis-synergies of $1.5 billion to $1.7 billion. We have restructuring charges during that time period of about $600 million and again we have the same $3 billion pre-tax annual charge related to the loss protection. And then obviously we have the 6% dividend that we pay on the $12 billion of preferred stock.

As Vikram said, no matter how you look at this transaction it’s extremely strong from a net present value standpoint, internal rate of return, and return on invested capital. So what we have is we have a bank with very limited downside and extremely strong earnings power compounded by significant synergies.

So let me take you through some of the elements of the balance sheet if I could, and I’m now turning to page number five. I’m going to focus on the left-hand side of the page first and just cover a few of the balance sheet balances. This is the pro forma balance sheet assuming that we add the two companies together. So the GAAP assets will be about $2.9 trillion as you can see on the page, RAP assets $1.5 billion, our Tier 1 capital $136 billion, common equity $128 billion, and total capital of $182 billion. As you can see we have very strong pro forma capital ratios. Our Tier 1 capital is 8.8%, our TCE ratio will be about 7%, and our leverage ratio about 5%. Our total capital ratio will be just north of about 11.8%.

Taking all of these factors together we obviously have an overall improvement from the capital situation that we have today. These are pro forma numbers for the second quarter taking their second quarter numbers into account with our second quarter. And it does not include the benefit that we get from the German business from the sale of the consumer finance business that we have in Germany that we anticipate taking place in December of this year.

An important feature associated with these capital ratios is because we have insulated ourselves essentially from the loss associated with the assets that are part of the $312 billion pool, we get regulatory capital relief against those assets. So we have taken the first $30 billion of losses upfront; we have then $12 billion over three years that we have responsibility for; all of the remaining assets essentially have no risk associated with them. So we are insulated effectively for the value of essentially all of the $312 billion. As a result of that, these assets have virtually no risk waiting and that obviously plays a significant role in the overall capital ratios that we have.

The remaining assets that we have that are part of the transaction are very attractive, and let me just take you through a couple of these categories. We have approximately $200 billion of liquid securities that are in the transaction. These include cash, agency obligations, investment grade CP, note obligations, that sort of thing.

We have an approximately $110 billion loan portfolio consisting of drawn high-quality diversified loans to US and international entities. The average drawn balance is $15 million and it comprises almost 100,000 discreet individual borrowers. We also have approximately $80 billion of residential mortgage loans. Most of this portfolio is performing loans, first liens and they were originally initiated with in-house appraisals. This portfolio at origination had a weighted average LTV of less than 80% and an average FICO score in excess of 680.

The remaining assets as I said are very attractive and we have obviously appropriately reserved for those as part of our loan loss reserve.

We have a significant improvement as a result of this transaction in our structural liquidity, and Vikram mentioned this briefly. If you take the sum of our long-term debt, our deposits and our equity, it adds to approximately 71% of our total assets on a pro forma basis. And as I mentioned there is a significant portion of Wachovia’s assets that are liquid, which we anticipate to be potentially saleable.

Now let me just if I could repeat the asset amounts in the top left-hand box on the chart just to make sure that we’re all consistent. From a GAAP asset standpoint the pro forma balance sheet is $2.9 trillion, the risk weighted assets are $1.4 trillion, the Tier 1 capital $130 billion, and total capital of $170 billion.

If we now step over to chart number six, I’ll take you through a summary of what the purchase accounting looks like. The book value of the business at the time before any of this transaction takes place is $63 billion and then we make the following purchase accounting adjustments. We have a write-down of goodwill and intangibles of $39 billion; an adjustment on the credit impaired loans and securities that I just talked about, this is the same $30 billion that I talked about earlier when I described the $312 billion in assets in the portfolio; we release relative to these assets $9 billion in loan loss reserve that existed against this portfolio before the transaction took place; we have other purchase accounting adjustments that we then make and I mentioned some of this before, the restructuring expenses and so on of a total of $4 billion. So the book value approximately after purchase accounting is about $1 billion negative. As Vikram mentioned, we have purchase consideration going into the transaction of just over $2 billion and so we have goodwill and intangibles associated with the transaction of $3 billion.

The remaining business obviously is a very strong competitive entity. The final chart that I have here in the deck shows the number of branches that we will have as a result of this transaction. So we will have instead of the 1,066 branches, a total branch count of 4,412. In terms of total deposits, as Vikram mentioned, we will have total deposits on a pro forma basis of $1,252,000,000 well in excess of the next largest competitor.

With that I’ll turn the time back to Vikram.

Vikram S. Pandit

Let me talk a little bit about a couple things. Let’s start with customers. We think this is great for our clients and customers in the US and around the world. From a Wachovia customer perspective, we expect that we can bring to them everything Citi has to offer because of the global capabilities and the breadth and depth of its products. From a Citi customer perspective in the US, our clients will benefit because of Wachovia’s best-in-class service, its customer centric culture, and industry-leading technology.

As I started, a lot of this business is about people. And let me spend a minute talking about Wachovia. I believe Wachovia has a great management team with a proven record, a proven record of integration. This is a company that grew up over time with 106 acquisitions. Through all of that they’ve built a great service culture that I just mentioned and we expect that the team that is very experienced on integration will be part of our integration as well. On our side, [Terry Dial] also has a lot of experience with integration. We believe it is essential that we maintain a strong presence in Charlotte, North Carolina.

As far as this transaction is concerned, teams on both sides worked extremely hard over the last 72 hours to figure out how to put all this together. We had over 200 people from Citi working on this nonstop. That included a group of world-class risk professionals, world-class finance professionals, and also our professionals on the retail banking side and the consumer businesses.

Our plan is to fold our US retail bank which is about a third of the size of Wachovia’s retail bank into the Wachovia platform and the team is extremely strong; the Wachovia team, [Terry Dial, [Marty Lipperd].

Let me step back for a minute and talk about Citi’s overall mission. You know what we’re trying to do. We talked about it at Citi Day. We’re trying to create incredible operating leverage by getting fit, by repositioning our businesses, and driving the synergies that come from a universal banking model. And while there have been questions about the model, I hope over the events of the last many weeks and months it’s absolutely clear why we continue to believe this is the right model, and today’s transaction if nothing strengthens that model significantly for us as a company.

Most importantly I want to assure you that while we’re working on this transaction and we’ll work on the integration that this represents, nothing is going to take our eye off the ball on getting fit. We’re committed to the same things we talked to you about both in terms of expense reduction and re-engineering, but also in terms of asset reduction. That plan continues in full force.

In business there are many high return opportunities. Many of the high return opportunities also come with high risks. There are very few that are high return with contained or manageable risks. This is one of those very few. There are two risks in this transaction.

There are risks on the asset side but we managed that. We managed that by examining the entire $800 billion balance sheet in detail with world-class professionals, people I have a lot of confidence in, and we came up with $312 billion as risk assets that we needed help with. And we got that help and we contained that risk. Gary’s talked about the rest of those assets. So we have contained the risk on the asset side.

The other side of the risk is the integration risk. I just said that Wachovia grew up over time to 106 acquisitions. We did as well growing up over many acquisitions. We’ve got skill sets on both sides and we will make sure that we will execute on this with a great deal of precision and great speed.

I want to end by saying we have a great deal of confidence in our collective ability to execute on this transaction, and when we do that it is my belief this will turn out to be one of those rare high return transactions with contained risk. And that’s why when I started I said we looked at a lot of things that weren’t compelling. This one is extremely compelling to us.

Let me stop there and turn it over to Gary.

Gary L. Crittenden

Before we finish, let me make a few comments if I could about the current quarter. As you all know this quarter has been marked by extreme market volatility and there’s been continued deterioration in consumer credit, and that has had a significant negative impact on our results. On the positive side, as Vikram just said, our expenses and headcount have continued to show sequential declines and we have made progress on reducing GAAP assets and RAP assets during the course of the quarter. The combined impact of these trends is an expected decline in net income versus last quarter but an expected improvement versus the first quarter of this year.

Notwithstanding these negative headwinds, our capital ratios are expected to remain strong. Now I will walk you through our current overall expectations for revenues, expenses, credit and net losses. Please keep in mind that these are our current expectations. We’ve not yet closed the quarter and especially in light of market volatility, the numbers could change meaningfully. We will be releasing our third quarter results on October 16.

As you know, third quarter revenues historically have shown seasonal weaknesses in part driven by lower volumes in securities and banking. In keeping with historical trends this quarter showed that expected slowdown. However the slowdown was exacerbated by the continued disruptions in the credit markets and numerous adverse market events, which combined to produce extremely low levels of activity.

Markdowns on subprime related leverage finance and monoline exposures for the third quarter are expected to be substantially lower than in the second quarter. Together we expect these marks to be in the range of $1.5 billion. However marks on our SIV assets have shown a very substantial increase in the third quarter over those in the second quarter. This quarter the extreme volatility in the markets resulted in a very significant widening of the credit spreads on assets underlying our SIVs despite the fact that the credit quality of these assets remains generally strong. We expect that the markdown on these SIV assets to be in the range of $1.7 billion for the third quarter.

Additionally we expect to see securitization related losses in our cards business in the range of $2 billion in the third quarter. This was driven principally by three factors. First, the disruption in the credit markets which hampered our ability to do card securitizations during the quarter resulting in significant losses. Second, higher funding costs due to a significant widening of spreads in the asset-backed commercial paper markets. And finally, higher losses flowing through our securitization trust resulting in a downward evaluation of our IO.

There are two other factors that we have already announced which remain consistent with our current expectations. First, $500 million in pre-tax losses related to the auction rate securities settlement. This number represents the difference between the purchase price and the market value at the time of settlement. Additionally we will record in expenses a $50 million fine payable to the State of New York and a $50 million fine payable to other state regulatory agencies. Second, on September 10 we announced that the quarter-to-date pre-tax impact on revenues from trading losses and write-downs of our exposures to the preferred and convertible shares of Fannie Mae and Freddie Mac was approximately $450 million.

Before moving to credit, let me remind you that our own credit spreads have been volatile during the quarter. This has resulted in large swings in our estimation of any associated gains related to the market value of those liabilities for which the fair value option was elected. Recent market events continue to have a significant impact on our credit spreads and therefore will be a factor affecting revenues in the quarter.

On credit we expect total credit costs for Citi to be in the range of $9 billion to $10 billion in the quarter, up from approximately $7 billion last quarter. Approximately half of the increase in the credit costs is due to building loan loss reserves primarily in cards and mortgages given the continued acceleration in losses. The remaining half is due primarily to higher NCLs than we had expected.

I have said in the past that higher losses in our cards portfolio should persist for the remainder of this year and well into 2009 as unemployment and housing trends both continue to deteriorate. Our current estimates point to a net credit loss ratio that is close to a 20-year high. Unemployment has been rising but is still below historic heights. If unemployment continues to climb as expected, this will further increase credit cards in the cards business. In the mortgage portfolio both delinquencies and losses have reached historical highs.

On headcount and expenses however we continue to make excellent progress continuing the positive trends the last few quarters. Expenses are expected to decline in this quarter approximately $1 billion sequentially. So since the end of last year our total expenses will be down by more than $1.5 billion which reflects our efforts to re-engineer our cost space in the current economic environment. Our headcount is also expected to decline by approximately 10,000 during the quarter bringing our year-to-date headcount reduction to approximately 23,000. As I mentioned we have continued to reduce GAAP and RAP assets during the quarter.

Taking these factors into consideration seasonally lower revenues, continued marks and losses in the ICG business, securitization issues in cards, and significantly higher credit costs, we expect an increase in net losses versus last quarter but an improvement over the first quarter of this year.

With that operator, let me turn the time over to you for the questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Guy Moszkowski - Merrill Lynch.

Guy Moszkowski - Merrill Lynch

Just a question first of all on the details on the warrants and the perferreds, why exactly is the preferred done at a discount to par? Does it have something to do with the warrant, and can you tell us the exercise price on the warrant and the terms?

Gary L. Crittenden

We’re still finalizing the exact terms both the warrants and the preferreds, but the discount to par is simply related to the coupon. So the coupon will be 6% and as a result of that we have a discount.

Guy Moszkowski - Merrill Lynch

But any particular reason for having done it that way rather than just set the coupon at market and then just record it at par?

Gary L. Crittenden

No. That’s just the way that the conversations have evolved.

Guy Moszkowski - Merrill Lynch

And separately, the amount of the Wachovia debt that you will assume?

Gary L. Crittenden

We’re assuming the senior debt, the sub debt and the senior debt that exists within the various bank holding companies. In aggregate I think that number is just over $100 billion.

Guy Moszkowski - Merrill Lynch

Do you have some sense of the savings that you think you can generate by adopting the Wachovia operating platform for retail rather than make some of the investments that you otherwise might have needed to make to upgrade?

Gary L. Crittenden

Well obviously we’ve been working very hard on this general synergy topic and they do have excellent technology which we are very impressed with. I think we’ve had over the course of the last three days in excess of 200 people engaged in this exercise taking a look at virtually every aspect of the business that one could examine over those three days. So we obviously have looked at it, we’re impressed by what we see, and it’s a component of the synergies that we have estimated so far, but we obviously don’t break that out. We expect total synergies as I said coming out of this business that are very attractive and in the consumer business we anticipate that to be about 13.5% of the combined total.

Guy Moszkowski - Merrill Lynch

Just one more question. Regarding the risk assets of $312 billion that you’ve identified, can you give us a sense for the granularity of the asset classes and the marks that you’re taking to get to the $30 billion and ultimately $42 billion? I’m thinking of something maybe a little bit like what J.P. Morgan showed us the other day with the WaMu transaction where they had the three or four categories including the option ARMS and they told us what the marks were.

Gary L. Crittenden

I mentioned the broad categories in kind of a prior chart and obviously it does include the categories that you would think about. So it includes the option ARMs, that’s a big piece of this, the commercial real estate loans. It also includes for example variable interest entities that are currently carried off balance sheet but against which we believe there potentially could be a loss exposure. The key factor here is that our exposure against these total losses is capped. That is, the total amount where we would see a loss is capped at the $42 billion. So the $30 billion that we’re taking upfront and the $42 billion after that. So once we close the purchase accounting on this transaction, the maximum exposure that Citi is exposed to is $12 billion.

I should also point out Guy just quickly that the sub debt is protected at the holding company as well.

Guy Moszkowski - Merrill Lynch

Let me just ask you one more question which is about something that you said in your remarks. You alluded or perhaps it was Vikram who alluded to the strength of the Wachovia brand in the retail market. I was just wondering, are you planning to retain that for the retail business or will you brand everything Citibank?

Vikram S. Pandit

Guy, we clearly want to start by saying it is a great brand. It’s a respected brand. It’s an important one. And in addition to that, as I said, I think a presence in Charlotte is essential. We’re going to set up a transition team. Bob Steel and I are working through that, and we actually have it basically in place. That transition team is going to look at all the issues that we have to think through and brand is one of them. And we’re going to make sure whatever decision we make is right for our clients and right for our shareholders.

Operator

Our next question comes from Glenn Schorr - UBS.

Glenn Schorr - UBS

Am I correct to assume that you’re not taking the Wachovia preferreds?

Vikram S. Pandit

That’s correct.

Glenn Schorr - UBS

And when you say that you’re assuming the senior debt and the various pieces of debt, that means that you’re guaranteeing them, right? There’s nothing weird about that. In other words, it becomes Citi debt.

Gary L. Crittenden

It becomes Citi debt, that’s correct.

Glenn Schorr - UBS

I’m curious, on why not asset management and wealth management? You’re obviously a great wealth management franchise and asset management, one of the best businesses on earth. How come that was not included in your thought process?

Vikram S. Pandit

Glenn, the private bank is coming with us and we think that’s a clear additive to our own US private bank; makes it very strong. You bring up a good point. I don’t know exactly where that puts us. If we were number two in wealth management, I don’t know, does it leave us number two or does it - Anyway, we’ve got to work through the numbers. But the more important point is, you know we got out of the asset management business and we have no real strategic need today to be in that business. So that’s one thing. And two, you know we’ve got Smith Barney which is a great retail system. So what’s left behind is the old A.G. Edwards as well as the Prudential stuff, and it was our view that by doing it this way we would actually enhance the value both to Wachovia shareholders as well as our shareholders and keep the clarity of the fact that we only have to integrate one set of businesses. That’s why we made the decision.

Glenn Schorr - UBS

You had mentioned the comments about the quarter, you mentioned comments about where pro forma earnings is, and I think you mentioned about pro forma book as of the end of second quarter. But if you kind of put in Germany and all the other things that happened since the end of second quarter along with your comments and the capital raised, can you give us a ballpark on cap ratios? And then the separate comment is, where does that leave you leverage wise?

Gary L. Crittenden

Obviously as I mentioned there will be a loss that will take place during the course of the third quarter that will have some impact on the Tier 1 ratio that we reported at the end of last quarter. We expect that the closure of our business in German will add about 60 basis points onto our Tier 1 ratio at the time of closing. Obviously you have to factor in what the financial performance of our business will be in the fourth quarter. There’s a very substantial gain associated with the German business that would be part of that calculation. So while I can’t forecast obviously specifically where the Tier 1 ratio will be at the end of the fourth quarter for obvious reasons, we expect the Tier 1 ratio to be very strong. So the capital in the business is strong today and I think the important part is this actually makes our balance sheet stronger. We have as I mentioned a deposit base that is truly unassailable after this transaction; the strongest in the country.

Glenn Schorr - UBS

With it, I think capital and your funding is in really strong shape. At what point or does common equity matter as much as it used to, because the TCE ratio is what a lot of people have looked at as [inaudible] too many assets and too little common?

Gary L. Crittenden

What we are doing as part of this transaction as I mentioned the $10 billion worth of common equity, I can say that obviously since we have had this cross the wires our team here in the ICG has been very busy having conversations with friends of the company who have historically been significant investors. And the interest in that common equity is very strong. So we feel good about that offering; we feel good about how that $10 billion will add to the overall capital base of the company. You add to that the $12 billion worth of preferreds and warrants that we have, and then you add in addition to that this [wrapper] that we effectively have around the $312 billion in assets and the picture that you walk away with is a very strong funding position.

Glenn Schorr - UBS

And your comment earlier on the preferreds, that includes the trust preferreds as well or are they separate issues? With Wachovia not coming over?

Gary L. Crittenden

They are coming over.

Glenn Schorr - UBS

Both of them or just the trust preferreds?

Gary L. Crittenden

No, the preferreds are not coming. The trust preferreds are coming.

Operator

Our next question comes from Betsy Graseck - Morgan Stanley.

Betsy Graseck - Morgan Stanley

A follow up to the last question on the common, it’s $10 billion of new issuance and then in addition to that you’ve got the common that you’re issuing to Wachovia? Is that fair?

Gary L. Crittenden

Yes. Just over $2 billion Betsy.

Betsy Graseck - Morgan Stanley

You also have had common issuance that you did in the last fiscal year I think which would get triggered for a reset. Is that right if you were to issue more than $5 billion in common?

Gary L. Crittenden

Yes. That’s correct. And obviously it depends exactly on the numbers here but it’s about 1.6 billion in additional shares.

Betsy Graseck - Morgan Stanley

So that would be on top of the $10 billion or included in that?

Gary L. Crittenden

I’m sorry. $1.6 billion.

Betsy Graseck - Morgan Stanley

Would that be on top of the $10 billion or included with it?

Gary L. Crittenden

That would be on top of the $10 billion. That’s correct.

Betsy Graseck - Morgan Stanley

So common would be $10 billion plus $2 billion+ for Wachovia plus $1billion+ for the triggers?

Gary L. Crittenden

Correct.

Betsy Graseck - Morgan Stanley

And then the balance sheet that you’re assuming from or buying from Wachovia, I would assume at some point we’ll actually get a balance sheet? Is that fair?

Gary L. Crittenden

I think that’s a fair assumption. That’s correct.

Betsy Graseck - Morgan Stanley

The $312 billion of loss-protected portfolio, that’s only a piece of the assets you’re bringing on. Is that right?

Gary L. Crittenden

Yes, that’s correct. And I stepped through what the other components were in my earlier comments. I kind of took you down through each of the categories and the confidence that we have in those assets.

Betsy Graseck - Morgan Stanley

Right. I heard that. I just wanted to make sure because some of the asset classes don’t triangulate to what we get from Wachovia, so I just want to make sure that at some point we can actually fit those pieces together.

Gary L. Crittenden

I am sure we will be able to.

Vikram S. Pandit

One more point Betsy, I’d make is that we worked backwards from the $800 billion to work down to we think $312 billion is the number. We didn’t go the other way saying $312 billion and then figure out what you do with the rest. So we went through it methodically as you would go through it line by line and decided the $312 billion number is the number on which we need help.

Betsy Graseck - Morgan Stanley

And do you need any regulatory waiver on the preferreds that you have at all in terms of prefs as a percentage of total or trust preferreds as a percentage of total?

Gary L. Crittenden

No.

Betsy Graseck - Morgan Stanley

The common gives you enough cushion so that you don’t need that?

Gary L. Crittenden

Yes. As I mentioned last quarter, we have a little bit of additional capacity now and obviously with the common issuance we’re fine.

Vikram S. Pandit

I’d like to thank you all for listening today. If you have any questions regarding what has been discussed today, please call Investor Relations. This concludes the call.

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