Form 10-K
Table of Contents

CITIGROUP’S 2008 ANNUAL REPORT ON FORM 10-K

 

THE COMPANY

  2

Citigroup Segments

  3

Citigroup Regions

  3

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

  4

MANAGEMENT’S DISCUSSION AND ANALYSIS

  6

2008 in Summary

  6

Outlook for 2009

  7

Events in 2008

  9

Events in 2007

  15

SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

  18

SEGMENT AND REGIONALNET INCOME (LOSS) AND REVENUES

  25

Citigroup Net Income (Loss)—Segment View

  25

Citigroup Net Income (Loss)—Regional View

  26

Citigroup Revenues—Segment View

  27

Citigroup Revenues—Regional View

  28

GLOBAL CARDS

  29

Global Cards Outlook

  30

CONSUMER BANKING

  31

Consumer Banking Outlook

  33

INSTITUTIONAL CLIENTS GROUP (ICG)

  34

Institutional Clients Group Outlook

  35

GLOBAL WEALTH MANAGEMENT

  36

Global Wealth Management Outlook

  37

CORPORATE/OTHER

  38

REGIONAL DISCUSSIONS

  39

North America

  39

EMEA

  40

Latin America

  41

Asia

  42

TARP AND OTHER REGULATORY PROGRAMS

  44

RISK FACTORS

  47

MANAGING GLOBAL RISK

  51

Risk Management

  51

Risk Aggregation and Stress Testing

  51

Risk Capital

  52

Credit Risk Management Process

  52

Loans Outstanding

  53

Details of Credit Loss Experience

  54

Non-Performing Assets

  55

Renegotiated Loans

  56

Foregone Interest Revenue on Loans

  56

Loan Maturities and Fixed/Variable Pricing

  57

Consumer Credit Risk

  57

Consumer Portfolio Review

  57

Corporate Credit Risk

  65

Global Corporate Portfolio Review

  67

Exposure to U.S. Real Estate in Securities and Banking

  68

Market Risk Management Process

  72

Operational Risk Management Process

  76

Country and FFIEC Cross-Border Risk Management Process

  77

 

BALANCE SHEET REVIEW

  78

Segment Balance Sheet at December 31, 2008

  81

Average Balances and Interest Rates—Assets

  83

Average Balances and Interest Rates—Liabilities and Equity, and Net Interest Revenue

  84

Analysis of Changes in Interest Revenue

  85

Analysis of Changes in Interest Expense and Net Interest Revenue

  86

Reclassification of Financial Assets

  87

DERIVATIVES

  90

CAPITAL RESOURCES AND LIQUIDITY

  94

Capital Resources

  94

Funding

  98

Liquidity

  101

Off-Balance-Sheet Arrangements

  104

Pension and Postretirement Plans

  106

FAIR VALUATION

  107

CORPORATE GOVERNANCE AND CONTROLS AND PROCEDURES

  108

FORWARD-LOOKING STATEMENTS

  108

GLOSSARY OF TERMS

  109

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

  112

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMINTERNAL CONTROL OVER FINANCIAL REPORTING

  113

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMCONSOLIDATED FINANCIAL STATEMENTS

  114

FINANCIAL STATEMENTS AND NOTES TABLE OF CONTENTS

  115

CONSOLIDATED FINANCIAL STATEMENTS

  116

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

  122

FINANCIAL DATA SUPPLEMENT (Unaudited)

  226

Ratios

  226

Average Deposit Liabilities in Offices Outside the U.S.

  226

Maturity Profile of Time Deposits ($100,000 or more) in U.S. Offices

  226

Short-Term and Other Borrowings

  226

LEGAL AND REGULATORY REQUIREMENTS

  227

Securities Regulation

  228

Capital Requirements

  228

General Business Factors

  229

Properties

  229

Legal Proceedings

  229

Unregistered Sales of Equity Securities and Use of Proceeds

  236

10-K CROSS-REFERENCE INDEX

  239

CORPORATE INFORMATION

  240

Exhibits and Financial Statement Schedules

  240

CITIGROUP BOARD OF DIRECTORS

  242

 

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THE COMPANY

 

Citigroup Inc. (Citigroup and, together with its subsidiaries, the Company, Citi or Citigroup) is a global diversified financial services holding company whose businesses provide a broad range of financial services to consumer and corporate customers. Citigroup has more than 200 million customer accounts and does business in more than 100 countries. Citigroup was incorporated in 1988 under the laws of the State of Delaware.

The Company is a bank holding company within the meaning of the U.S. Bank Holding Company Act of 1956 registered with, and subject to examination by, the Board of Governors of the Federal Reserve System (FRB). Some of the Company’s subsidiaries are subject to supervision and examination by their respective federal and state authorities. At December 31, 2008, the Company had approximately 134,400 full-time and 4,100 part-time employees in the United States and approximately 188,400 full-time employees outside the United States.

During 2008, the Company benefited from substantial U.S. government financial involvement, including (i) raising an aggregate of $45 billion through the sale of Citigroup non-voting perpetual, cumulative preferred stock and warrants to purchase common stock to the U.S. Department of the Treasury, (ii) entering into a loss-sharing agreement with various U.S. government entities covering $301 billion of Company assets, and (iii) issuing $5.75 billion of senior unsecured debt guaranteed by the Federal Deposit Insurance Corporation (FDIC) (in addition to $26.0 billion of commercial paper and interbank deposits of Citigroup’s subsidiaries guaranteed by the FDIC outstanding at the end of 2008). In connection with these programs and agreements, Citigroup is required to pay consideration to the U.S. government, including in the form of dividends on the preferred stock and other fees. In addition, Citigroup has agreed not to pay common stock dividends in excess of $0.01 per share per quarter for three years (beginning in 2009) or to repurchase its common stock without the consent of U.S. government entities. For additional information on the above, see “TARP and Other Regulatory Programs” on page 44.

On January 16, 2009, the Company announced a realignment, for management and reporting purposes, into two businesses: Citicorp, primarily comprised of the Company’s Global Institutional Bank and the Company’s international regional consumer banks; and Citi Holdings, primarily comprised of the Company’s brokerage and asset management business, local consumer finance business, and a special asset pool. Citigroup believes that the realignment will optimize the Company’s global businesses for future profitable growth and opportunities and will assist in the Company’s ongoing efforts to reduce its balance sheet and simplify its organization. See “Outlook for 2009—Changes to Citi’s Organizational Structure” on page 7.

On February 27, 2009, the Company announced an exchange offer of its common stock for up to $27.5 billion of its existing preferred securities and trust preferred securities at a conversion price of $3.25 per share. The U.S. government will match this exchange up to a maximum of $25 billion of its preferred stock at the same conversion price. These transactions are intended to increase the Company’s tangible common equity (TCE) and will require no additional U.S. government investment in Citigroup. See “Outlook for 2009” on page 7.

The principal executive offices of the Company are located at 399 Park Avenue, New York, New York 10022, telephone number 212 559 1000. Additional information about Citigroup is available on the Company’s Web site at www.citigroup.com. Citigroup’s recent annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, as well as the Company’s other filings with the Securities and Exchange Commission (SEC) are available free of charge through the Company’s Web site by clicking on the “Investors” page and selecting “All SEC Filings.” The SEC Web site contains reports, proxy and information statements, and other information regarding the Company at www.sec.gov.


 

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At December 31, 2008, Citigroup was managed along the following segment and product lines (as noted above, on January 16, 2009, Citigroup announced a realignment of its businesses to be effective, for reporting purposes, in the second quarter of 2009):

LOGO

The following are the four regions in which Citigroup operates. The regional results are fully reflected in the segment results.

LOGO

 

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FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA   Citigroup Inc. and Subsidiaries

 

In millions of dollars, except per share amounts and ratios   2008 (1)     2007     2006     2005     2004  

Revenues, net of interest expense

  $ 52,793     $ 78,495     $ 86,327     $ 80,077     $ 76,223  

Operating expenses

    71,134       59,802       50,301       43,549       48,149  

Provisions for credit losses and for benefits and claims

    34,714       17,917       7,537       7,971       6,658  

Income (loss) from continuing operations before taxes, minority
interest, and cumulative effect of accounting change

  $ (53,055 )   $ 776     $ 28,489     $ 28,557     $ 21,416  

Provision (benefits) for income taxes

    (20,612 )     (2,498 )     7,749       8,787       6,130  

Minority interest, net of taxes

    (349 )     285       289       549       218  

Income (loss) from continuing operations before cumulative effect of
accounting change

  $ (32,094 )   $ 2,989     $ 20,451     $ 19,221     $ 15,068  

Income from discontinued operations, net of taxes (2)

    4,410       628       1,087       5,417       1,978  

Cumulative effect of accounting change, net of taxes (3)

                      (49 )      

Net income (loss)

  $ (27,684 )   $ 3,617     $ 21,538     $ 24,589     $ 17,046  

Earnings per share

         

Basic:

         

Income (loss) from continuing operations

  $ (6.42 )   $ 0.60     $ 4.17     $ 3.78     $ 2.94  

Net income

    (5.59 )     0.73       4.39       4.84       3.32  

Diluted:

         

Income (loss) from continuing operations

    (6.42 )     0.59       4.09       3.71       2.88  

Net income

    (5.59 )     0.72       4.31       4.75       3.26  

Dividends declared per common share

  $ 1.12     $ 2.16     $ 1.96     $ 1.76     $ 1.60  

At December 31

         

Total assets

  $ 1,938,470     $ 2,187,480     $ 1,884,167     $ 1,493,886     $ 1,483,950  

Total deposits

    774,185       826,230       712,041       591,828       561,513  

Long-term debt

    359,593       427,112       288,494       217,499       207,910  

Mandatorily redeemable securities of subsidiary trusts (4)

    23,899       23,594       9,579       6,264       6,209  

Common stockholders’ equity

    70,966       113,447       118,632       111,261       108,015  

Total stockholders’ equity

    141,630       113,447       119,632       112,386       109,140  

Direct staff (in thousands)

    323       375       327       296       283  

Ratios:

         

Return on common stockholders’ equity (5)

    (28.8 )%     2.9 %     18.8 %     22.4 %     17.0 %

Return on total stockholders’ equity (5)

    (20.9 )     3.0       18.7       22.2       16.9  

Tier 1 Capital

    11.92 %     7.12 %     8.59 %     8.79 %     8.74 %

Total Capital

    15.70       10.70       11.65       12.02       11.85  

Leverage (6)

    6.08       4.03       5.16       5.35       5.20  

Common stockholders’ equity to assets

    3.66 %     5.19 %     6.30 %     7.45 %     7.28 %

Total stockholders’ equity to assets

    7.31       5.19       6.35       7.52       7.35  

Dividend payout ratio (7)

    NM       300.0       45.5       37.1       49.1  

Book value per common share

  $ 13.02     $ 22.71     $ 24.15     $ 22.34     $ 20.79  

Ratio of earnings to fixed charges and preferred stock dividends

    NM       1.01 x     1.50 x     1.79 x     1.99 x

 

(1) As announced in its fourth quarter 2008 earnings press release (January 16, 2009), Citigroup continued to review its goodwill to determine whether a goodwill impairment had occurred as of December 31, 2008. Based on the results of this review and testing, the Company recorded a pretax charge of $9.568 billion ($8.727 billion after-tax) in the fourth quarter of 2008. The goodwill impairment charge was recorded in North America Consumer Banking, Latin America Consumer Banking, and EMEA Consumer Banking, and resulted in a write-off of the entire amount of goodwill allocated to those reporting units. The charge does not result in a cash outflow or negatively affect the Tier 1 or Total Regulatory Capital ratios, Tangible Equity or the Company’s liquidity position as of December 31, 2008. In addition, Citi recorded a $374 million pretax charge ($242 million after-tax) to reflect further impairment evident in the intangible asset related to Nikko Asset Management at December 31, 2008.
     As disclosed in the table above, giving effect to these charges, Net Income (Loss) from Continuing Operations for 2008 was $(32.094) billion and Net Income (Loss) was $(27.684) billion, resulting in Diluted Earnings per Share of $(6.42) and $(5.59) respectively. The primary cause for the goodwill impairment in the reporting units mentioned above, and the additional intangible asset impairment in Nikko Asset Management, was the rapid deterioration in the financial markets, as well as in the general global economic outlook, particularly during the period beginning mid-November 2008 through December 31, 2008. This deterioration further weakened the near term prospects for the financial services industry. See “Significant Accounting Policies and Significant Estimates” on page 18, and Note 19 to the Consolidated Financial Statements on page 166 for further discussion.
(2) Discontinued operations for 2004 to 2008 reflect the sale of Citigroup’s German Retail Banking Operations to Credit Mutuel, and the Company’s sale of CitiCapital’s equipment finance unit to General Electric. In addition, discontinued operations for 2004 to 2006 include the operations and associated gain on sale of substantially all of Citigroup’s Asset Management business, the majority of which closed on December 1, 2005. Discontinued operations from 2004 to 2006 also include the operations and associated gain on sale of Citigroup’s Travelers Life & Annuity, substantially all of Citigroup’s international insurance business and Citigroup’s Argentine pension business to MetLife Inc. The sale closed on July 1, 2005. See Note 3 to the Consolidated Financial Statements on page 135.
(3) Accounting change of $(49) million in 2005 represents the adoption of Financial Accounting Standards Board (FASB) Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of SFAS No. 143, (FIN 47).
(4) During 2004, the Company deconsolidated the subsidiary issuer trusts in accordance with FIN 46(R). For regulatory capital purposes, these trust securities remain a component of Tier 1 Capital.
(5) The return on average common stockholders’ equity is calculated using net income less preferred stock dividends divided by average common stockholders’ equity. The return on total stockholders’ equity is calculated using net income divided by average stockholders’ equity.
(6) Tier 1 Capital divided by each year’s fourth quarter adjusted average assets (hereinafter as adjusted average assets).
(7) Dividends declared per common share as a percentage of net income per diluted share.

NM Not Meaningful

 

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Certain reclassifications have been made to the prior periods’ financial statements to conform to the current period’s presentation.

Certain statements in this Form 10-K, including, but not limited to, statements made in “Management’s Discussion and Analysis,” particularly in the “Outlook” discussions, are “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from those included in these statements due to a variety of factors including, but not limited to, those described under “Risk Factors” beginning on page 47.


 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

 

2008 IN SUMMARY

Citigroup reported a $32.1 billion loss from continuing operations ($6.42 per share) for 2008. The results were impacted by continued losses related to the disruption in the fixed income markets, higher consumer credit costs, and a deepening of the global economic slowdown.

The net loss of $27.7 billion ($5.59 per share) in 2008 includes the results and sales of the Company’s German retail banking operations and CitiCapital (which were reflected as discontinued operations), as well as a $9.568 billion Goodwill impairment charge based on the results of its fourth quarter of 2008 goodwill impairment testing. The goodwill impairment charge was recorded in North America Consumer Banking, Latin America Consumer Banking and EMEA Consumer Banking.

During 2008, the Company benefited from substantial U.S. government financial involvement, including (i) raising an aggregate $45 billion in capital through the sale of Citigroup non-voting perpetual, cumulative preferred stock and warrants to purchase common stock to the U.S. Department of the Treasury (UST), (ii) entering into a loss-sharing agreement with various U.S. government entities covering $301 billion of Company assets, and (iii) issuing $5.75 billion of senior unsecured debt guaranteed by the Federal Deposit Insurance Corporation (FDIC) (in addition to $26.0 billion of commercial paper and interbank deposits of Citigroup’s subsidiaries guaranteed by the FDIC outstanding as of December 31, 2008). In connection with these programs and agreements, Citigroup is required to pay consideration to the U.S. government, including in the form of dividends on the preferred stock and other fees. In addition, Citigroup has agreed not to pay common stock dividends in excess of $0.01 per share per quarter for three years (beginning in 2009) or to repurchase its common stock without the consent of U.S. government entities. For additional information on the above, see “TARP and Other Regulatory Programs” on page 44.

In addition to the equity issuances to the UST under TARP, Citigroup raised $32 billion of capital in private and public offerings during 2008.

In addition, on January 16, 2009, the Company announced a realignment, for management and reporting purposes, into two businesses: Citicorp, primarily comprised of the Company’s Global Institutional Bank and the Company’s regional consumer banks; and Citi Holdings, primarily comprised of the Company’s brokerage and asset management business, local consumer finance business, and a special asset pool. Citigroup believes that the realignment will optimize the Company’s global businesses for future profitable growth and opportunities and will assist in the Company’s ongoing efforts to reduce its balance sheet and simplify its organization. See “Outlook for 2009” on page 7.

On February 27, 2009, the Company announced an exchange offer of its common stock for up to $27.5 billion of its existing preferred securities and trust preferred securities at a conversion price of $3.25 per share. The U.S. government will match this exchange up to a maximum of $25 billion of its preferred stock at the same conversion price. These transactions are intended to increase the Company’s tangible common equity (TCE) and will require no additional U.S. government investment in Citigroup. See “Outlook for 2009” on page 7.

During 2008, the Company also completed 19 strategic divestitures which were designed to strengthen our franchises.

Revenues of $52.8 billion decreased 33% from 2007, primarily driven by significantly lower revenues in ICG due to write-downs related to subprime

CDOs and leveraged lending and other fixed income exposures. Revenues outside of ICG declined 6%. The Company’s revenues outside North America declined 4% from 2007.

Net interest revenue grew 18% from 2007, reflecting the lower cost of funds, as well as lower rates outside the U.S. The lower cost of funds more than offset the decrease in the asset yields during the year. Net interest margin in 2008 was 3.06%, up 65 basis points from 2007 (see the discussion of net interest margin on page 82). Non-interest revenue decreased $34 billion from 2007, primarily reflecting subprime and fixed income write-downs.

Although the Company made significant progress in reducing its expense base during the year, operating expenses increased 19% from the previous year with lower operating expenses being offset by a $9.568 billion goodwill impairment charge, higher restructuring/ repositioning charges and the impact of acquisitions. Excluding the goodwill impairment charge, expenses have declined for four consecutive quarters, due to lower incentive compensation accruals and continued benefits from re-engineering efforts. Headcount was down 52,000 from December 31, 2007.

The Company’s equity capital base and trust preferred securities were $165.5 billion at December 31, 2008. Stockholders’ equity increased by $28.2 billion during 2008 to $141.6 billion, which was affected by capital issuances discussed above, and the distribution of $7.6 billion in dividends to common and preferred shareholders. Citigroup maintained its “well-capitalized” position with a Tier 1 Capital Ratio of 11.92% at December 31, 2008.

Total credit costs of $33.3 billion included NCLs of $19.0 billion, up from $9.9 billion in 2007, and a net build of $14.3 billion to credit reserves. The build consisted of $10.8 billion in Consumer ($8.2 billion in North America and $2.6 billion in regions outside North America), $3.3 billion in ICG and $249 million in GWM (see “Credit Reserves” on page 11 for further discussion). The Consumer loan loss rate was 3.75%, a 149 basis-point increase from the fourth quarter of 2007. Corporate cash-basis loans were $9.6 billion at December 31, 2008, an increase of $7.8 billion from year-ago levels. This increase is primarily attributable to the transfer of non-accrual loans from the held-for-sale portfolio to the held-for-investment portfolio during the fourth quarter of 2008. The allowance for loan losses totaled $29.6 billion at December 31, 2008, a coverage ratio of 4.27% of total loans.

The effective tax rate (benefit) of (39)% in 2008 primarily resulted from the pretax losses in the Company’s Securities and Banking business taxed in the U.S. (the U.S. is a higher tax-rate jurisdiction). In addition, the tax benefits of permanent differences, including the tax benefit for not providing U.S. income taxes on the earnings of certain foreign subsidiaries that are indefinitely invested, favorably affected the Company’s effective tax rate.

At December 31, 2008, the Company had increased its structural liquidity (equity, long-term debt and deposits) as a percentage of assets from 62% at December 31, 2007 to approximately 66% at December 31, 2008. Citigroup has continued its deleveraging, reducing total assets from $2,187 billion at December 31, 2007 to $1,938 billion at December 31, 2008.

At December 31, 2008, the maturity profile of Citigroup’s senior long-term unsecured borrowings had a weighted average maturity of seven years. Citigroup also reduced its commercial paper program from $35 billion at December 31, 2007 to $29 billion at December 31, 2008.

Recently, Robert Rubin, Sir Win Bischoff and Roberto Hernández Ramirez announced they would not stand for re-election at Citigroup’s 2009 Annual Meeting of Stockholders. On February 23, 2009, Richard Parsons became the Chairman of the Company.


 

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OUTLOOK FOR 2009

We enter the challenging environment of 2009 after a difficult and disappointing 2008. While numerous risks remain, the Company has made progress in decreasing the risks arising from its balance sheet and building capital to generate future earnings. As examples, and as more fully disclosed throughout this MD&A:

 

 

Our total allowance for loan losses was $29.6 billion at December 31, 2008;

 

As part of the decreasing of risks, we completed the loss-sharing agreement with various U.S. government entities, which provides significant downside protection against losses on $301 billion of assets; and

 

We have reclassified certain assets from mark-to-market classification to held-to-maturity which could provide some reduction in earnings volatility.

Changes to Citi’s Organizational Structure

On January 16, 2009, given the economic and market environment, Citi announced the acceleration of the implementation of its strategy to focus on its core businesses. As a result of its proposed realignment, Citigroup will be comprised of two businesses, Citicorp and Citi Holdings. Citigroup believes that the realignment will optimize the Company’s global businesses for future profitable growth and opportunities and will assist in the Company’s ongoing efforts to reduce its balance sheet and simplify its organization. Citigroup’s plan is to transition to this structure as quickly as possible, taking into account the interests of all stakeholders, including customers and clients, debt holders, preferred and common stockholders, employees, and the communities it serves. The Company recognizes that major legal vehicle restructuring changes such as the realignment will require regulatory approvals and the resolution of tax and other issues. Citigroup has, however, managed the Company consistent with this structure since February 2009 and management reporting will reflect this structure starting with the second quarter of 2009.

Citicorp

Citicorp, a global bank for businesses and consumers, will have two primary underlying businesses: the Global Institutional Bank serving corporate, institutional, public sector and private banking clients; and Citigroup’s regional consumer banks which provide traditional banking services, including branded cards as well as small and middle market commercial banking. It is anticipated that Citicorp will focus on its unique competitive advantage of having a strong presence in the fastest-growing areas of the world.

 

Citi Holdings

Citi Holdings will have three primary segments: brokerage and asset management, local consumer finance and a special asset pool. Citigroup continues to believe that many of Citi Holdings’ businesses are attractive long-term businesses with strong market positions, but they do not sufficiently enhance the capabilities of Citigroup’s core businesses. Citi Holdings will continue to focus on risk management and credit quality as it seeks to build value in these businesses.

Exchange Offer and U.S. Government Exchange

On February 27, 2009, Citigroup announced an exchange offer of its common stock for up to $27.5 billion of its existing preferred securities and trust preferred securities at a conversion price of $3.25 per share. The U.S. government will match this exchange up to a maximum of $25 billion of its preferred stock at the same conversion price. As announced, the transactions will increase the Company’s tangible common equity (TCE). The transactions will require no additional U.S. government investment in Citigroup and will not change the Company’s overall strategy or operations. In addition, the transactions will not change the Company’s Tier 1 Capital Ratio of 11.9% as of December 31, 2008. In connection with the transactions, Citigroup will suspend dividends on its preferred securities (other than its trust preferred securities) and, as a result, on its common stock. Full implementation of the proposed exchange offer is subject to approval of Citigroup’s shareholders and participation by holders of Citigroup’s preferred stock and trust preferred securities, which cannot be guaranteed. See also “Risk Factors” on page 47.

Our Goals in 2009

• Returning to profitability

• Risk reduction and mitigation

• Implementation and management of TARP and TARP funds

• Expense reduction

• Headcount reduction

• Asset reduction

• Implementing organizational changes/management realignment

Economic Environment

Citigroup’s financial results are closely tied to the global economic environment. The global markets are experiencing the impact of a significant U.S. and international economic downturn. This is restricting the Company’s growth opportunities both domestically and internationally. Should economic conditions not improve or further deteriorate, the Company could experience continued revenue pressure across its businesses and increased costs of credit. In addition, continuing deterioration of the U.S. or global real estate markets could adversely impact the Company’s revenues, including additional losses on subprime and other exposures, additional losses on leveraged loan commitments and cost of credit, including increased credit losses in mortgage-related and other activities. Further adverse rating actions by credit rating agencies in respect of structured credit products or other credit-related exposures, or of monoline insurers, could result in revenue reductions in those or similar securities. See “Risk Factors” on page 47 for a further discussion of these risks.


 

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Credit Costs

We believe that credit costs are expected to increase during 2009.

 

 

As we go into the first half of 2009, we expect NCLs for our consumer portfolios could be $1 billion to $2 billion higher each quarter when compared to the NCLs in the third quarter of 2008. At this time we believe that we will be at the higher end of this range.

 

Our assumption on unemployment is that it could peak as late as the first half of 2010. This implies that we will most likely continue to add to our Consumer reserves until the end of 2009.

 

Corporate credit is inherently difficult to predict given the economic environment. It is expected that corporate loan default rates will increase. As such, we expect to continue to add to reserves and will likely see higher Corporate NCLs.

A detailed review and outlook for each of our business segments, as of December 31, 2008, are included in the discussions that follow, and the risks are more fully discussed on pages 29 to 38.

 

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EVENTS IN 2008

Certain significant events during 2008 had, or could have, an effect on Citigroup’s current and future financial condition, results of operations, liquidity and capital resources. These events are summarized below and discussed in more detail throughout this MD&A.

TARP AND OTHER REGULATORY PROGRAMS

Issuance of $25 Billion of Perpetual Preferred Stock and a Warrant to Purchase Common Stock under TARP

On October 28, 2008, Citigroup raised $25 billion through the sale of non-voting perpetual, cumulative preferred stock and a warrant to purchase common stock to the UST as part of the UST Troubled Asset Relief Program (TARP) Capital Purchase Program. All of the proceeds were treated as Tier 1 Capital for regulatory purposes.

Additional Issuance of $20 Billion of Perpetual Preferred Stock and a Warrant to Purchase Common Stock under TARP

On December 31, 2008, related to the U.S. Government Loss-Sharing Agreement described below, Citigroup raised an additional $20 billion through the sale of non-voting perpetual, cumulative preferred stock and a warrant to purchase common stock to the UST as part of TARP. All of the proceeds were treated as Tier 1 Capital for regulatory purposes.

U.S. Government Loss-Sharing Agreement

On January 15, 2009, Citigroup entered into a definitive agreement providing for loss sharing by the UST, FDIC and the Federal Reserve Bank of New York on a $301 billion portfolio of Citigroup assets (valued as of November 21, 2008). In consideration for this loss-sharing agreement, Citigroup issued $7.3 billion of non-voting perpetual, cumulative preferred stock and a warrant to purchase common stock to the UST and the FDIC. Of the issuance, $3.5 billion will be treated as Tier 1 Capital for regulatory purposes.

Use of TARP Proceeds

Citigroup has established a formal process for its use of the TARP proceeds which is directed by senior executives and emphasizes expanding the flow of credit and strengthening the financial system in the United States, consistent with the objectives of TARP. Citigroup’s first quarterly progress report regarding its implementation and management of TARP was issued on February 3, 2009. See “TARP and Other Regulatory Programs” on page 44.

FDIC’s Temporary Liquidity Guarantee Program

Under the terms of the FDIC’s guarantee program, the FDIC will guarantee, until the earlier of its maturity or June 30, 2012, certain qualifying senior unsecured debt issued by certain Citigroup entities between October 14, 2008 and June 30, 2009 (proposed to be extended to October 30, 2009), in amounts up to 125% of the qualifying debt for each qualifying entity. The FDIC will charge Citigroup a fee ranging from 50 to 100 basis points in accordance with a prescribed fee schedule for any new qualifying debt issued with the FDIC guarantee. At December 31, 2008, Citigroup had issued $5.75 billion of long-term debt that is covered under the FDIC guarantee, with $1.25 billion maturing in 2010 and $4.5 billion maturing in 2011. In January and February 2009, Citigroup and its affiliates issued an additional $14.9 billion in senior unsecured debt under this program.

 

In addition, Citigroup, through its subsidiaries, also had $26.0 billion in commercial paper and interbank deposits backed by the FDIC outstanding as of December 31, 2008. FDIC guarantees of commercial paper (and interbank deposits) cease to be available after June 30, 2009 (proposed to be extended to October 30, 2009), and the FDIC charges a fee ranging from 50 to 100 basis points in connection with the issuance of those instruments.

Lowering of Quarterly Dividend to $0.01 Per Share

In accordance with various TARP programs, commencing in 2009, Citigroup has agreed not to pay common stock dividends in excess of $0.01 per share per quarter for three years without the consent of the UST, FDIC and the Federal Reserve Bank of New York.

On January 20, 2009, Citigroup declared a $0.01 quarterly dividend on the Company’s common stock. This dividend was paid on February 22, 2009 to stockholders of record on February 2, 2009.

For additional details on each of these programs, see “TARP and Other Regulatory Programs” beginning on page 44 for further discussion.

PRIVATE AND PUBLIC ISSUANCES OF PREFERRED AND COMMON STOCK

During the first quarter of 2008, Citigroup issued $12.5 billion of 7% convertible preferred stock in a private offering, $3.2 billion of 6.5% convertible preferred stock in public offerings, and $3.715 billion of 8.125% non-convertible preferred stock in public offerings.

In the second quarter of 2008, Citigroup raised $8.0 billion of capital through public offerings of non-convertible preferred stock and issued approximately $4.9 billion of common stock.

In total, the Company raised $32.3 billion in capital in private and public offerings during 2008, excluding issuances to the UST under TARP. See Note 21 on page 172 for further information.


 

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ITEMS IMPACTING THE SECURITIES AND BANKING BUSINESS

 

Securities and Banking Significant Revenue Items and Risk Exposure          
    Pretax Revenue
Marks

(in millions)
     Risk Exposure
(in billions)
 
     2008     2007 (1)      Dec. 31,
2008
   Dec. 31,
2007
   % Change  

Sub-prime related direct exposures (2)

  $ (14,283 )   $ (18,312 )    $ 14.1    $ 37.3    (62 )%

Monoline insurers Credit Valuation Adjustment (CVA)

    (5,736 )     (967 )      N/A      N/A     

Highly leveraged loans and financing commitments (3)

    (4,892 )     (1,487 )      10.0      43.2    (77 )

Alt-A mortgage securities (4)

    (3,812 )            12.6      22.0    (43 )

Auction Rate Securities (ARS) (5)

    (1,733 )            8.8      8.0    10  

Commercial Real Estate (CRE) (6)

    (2,627 )            37.5      53.7    (30 )

Structured Investment Vehicles (SIVs)

    (3,269 )            16.6      46.4    (63 )

CVA on Citi liabilities at fair value option

    4,558       888        N/A      N/A     

 

Total significant revenue items

  $ (31,794 )   $ (19,878 )         

 

 

(1) Represents the third and fourth quarters of 2007, reflecting revenue marks since the commencement of the current credit crisis.
(2) Net of impact from hedges against direct subprime asset-backed securities collateralized debt obligation super senior positions.
(3) Net of underwriting fees.
(4) Net of hedges.
(5) Excludes losses of $306 million and $87 million in the third and fourth quarters of 2008, respectively, arising from the ARS legal settlement.
(6) Excludes CRE positions that are included in the SIV portfolio.

 

Subprime-Related Direct Exposures

In 2008, Securities and Banking (S&B) recorded losses of $14.3 billion pretax, net of hedges, on its subprime-related direct exposures. The Company’s remaining $14.1 billion in U.S. subprime net direct exposure in S&B at December 31, 2008 consisted of (i) approximately $12.0 billion of net exposures to the super senior tranches of CDOs, which are collateralized by asset-backed securities, derivatives on asset-backed securities or both, and (ii) approximately $2.1 billion of subprime-related exposures in its lending and structuring business. In 2007, Citigroup recorded losses of $18.3 billion pretax, net of hedges, on subprime-related direct exposures. See “Exposure to U.S. Real Estate” on page 68 for a further discussion of such exposures and the associated losses recorded.

Monoline Insurers Credit Valuation Adjustment (CVA)

During 2008, Citigroup recorded a pretax loss on CVA of $5.736 billion on its exposure to monoline insurers. CVA is calculated by applying forward default probabilities, which are derived using the counterparty’s current credit spread, to the expected exposure profile. In 2007, the Company recorded pretax losses of $967 million. The majority of the exposure relates to hedges on super senior positions that were executed with various monoline insurance companies. See “Direct Exposure to Monolines” on page 70 for a further discussion.

Highly Leveraged Loans and Financing Commitments

Due to the continued dislocation of the credit markets and reduced market interest in higher risk/higher yield instruments that began during the second half of 2007, liquidity in the market for highly leveraged financings has been very limited. This resulted in the Company’s recording pretax losses of $4.892 billion on funded and unfunded highly leveraged finance exposures in 2008 and $1.487 billion in 2007.

 

Citigroup’s exposure to highly leveraged financings totaled $10.0 billion at December 31, 2008 ($9.1 billion in funded and $0.9 billion in unfunded commitments), reflecting a decrease of $33.2 billion from December 31, 2007. See “Highly Leveraged Financing Commitments” on page 71 for further discussion.

Alt-A Mortgage Securities

In 2008, Citigroup recorded pretax losses of approximately $3.812 billion, net of hedges, on Alt-A mortgage securities held in S&B. For these purposes, Alt-A mortgage securities are non-agency residential mortgage-backed securities (RMBS) where (i) the underlying collateral has weighted average FICO scores between 680 and 720 or (ii) for instances where FICO scores are greater than 720, RMBS have 30% or less of the underlying collateral composed of full documentation loans.

The Company had $12.6 billion in Alt-A mortgage securities at December 31, 2008, which decreased from $22.0 billion at December 31, 2007. Of the $12.6 billion, $1.1 billion was classified as Trading account assets, on which $2.201 billion of fair value losses, net of hedging, was recorded in earnings, and $11.5 billion was classified as HTM investments, on which $1.611 billion of losses were recorded in earnings due to other-than-temporary impairments.

Auction Rate Securities (ARS)

In 2008, Citigroup recorded pretax losses of approximately $1.733 billion on Auction Rate Securities (ARS). At December 31, 2008, the Company’s exposure to ARS totaled $8.8 billion including both legacy positions and ARS purchased under the ARS settlement agreement with the federal and state regulators (see “Other Items” on page 13). Of the $8.8 billion, $5.5 billion is classified as held to maturity and $3.3 billion as available for sale (AFS). The $8.8 billion comprises $3.7 billion of student loan ARS, $3.2 billion of preference share ARS backed by municipal or other taxable securities, $1.4 billion of municipal ARS, and $0.5 billion of ARS backed by other ABS.


 

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Commercial Real Estate

S&B’s commercial real estate exposure is split into three categories: assets held at fair value; held to maturity/held for investment; and equity. During 2008, pretax losses of $2.6 billion net of hedges were booked on exposures recorded at fair value. See “Exposure to Commercial Real Estate” on page 69 for a further discussion.

Structured Investment Vehicles (SIVs)

On December 13, 2007, Citigroup announced a commitment to provide support facilities to its Citi-advised SIVs for the purpose of resolving the uncertainty regarding the SIVs’ senior debt ratings. As a result of this commitment, the Company consolidated the SIVs’ assets and liabilities onto Citigroup’s Consolidated Balance Sheet as of December 2007. This resulted in an increase of assets of $59 billion.

On February 12, 2008, Citigroup finalized the terms of these support facilities, which took the form of a commitment to provide $3.5 billion of mezzanine capital to the SIVs. The mezzanine capital facility was increased by $1.0 billion to $4.5 billion, with the additional commitment funded during the fourth quarter of 2008. During the period to November 18, 2008, Citigroup recorded $3.3 billion of trading account losses on SIV assets.

To complete the wind-down of the SIVs, Citigroup committed to purchase all remaining assets out of the SIV legal vehicles at fair value, with a trade date of November 18, 2008. Citigroup funded the purchase of the assets by assuming the obligation to pay amounts due under the medium-term notes issued by the SIVs as the notes mature. The assets purchased from the SIVs and the liabilities assumed by the Company were previously recognized at fair value on the Company’s balance sheet due to the consolidation of the SIV legal vehicles in December 2007.

The net cash funding provided by Citigroup for the asset purchase was $0.3 billion. As of December 31, 2008, the balance for these repurchased SIV assets totaled $16.6 billion, of which $16.5 billion is classified as held to maturity. See “Structured Investment Vehicles” on page 15 for a further discussion.

Credit Valuation Adjustment on Citi’s Liabilities for Which Citi Has Elected the Fair Value Option

Under SFAS 157, the Company is required to use its own-credit spreads in determining the current value for its derivative liabilities and all other liabilities for which it has elected the fair value option. When Citi’s credit spreads widen (deteriorate), Citi recognizes a gain on these liabilities because the value of the liabilities has decreased. When Citi’s credit spreads narrow (improve), Citi recognizes a loss on these liabilities because the value of the liabilities has increased.

During 2008, the Company recorded a gain of approximately $4.6 billion on its fair value option liabilities due to the widening of the Company’s credit spreads. $2.49 billion of this gain was due to a change in methodology for estimating the credit valuation adjustment implemented in the fourth quarter. As of December 31, 2008, the Company estimates the market value of the liabilities by incorporating the Company’s credit spreads observed in the bond market (cash spreads). Prior to that date, the Company incorporated the Company’s credit default swaps spreads in the valuation of these liabilities. For further discussion regarding this change, see “Significant Accounting Policies and Significant Estimates” on page 18.

 

CREDIT RESERVES

During 2008, the Company recorded a net build of $14.3 billion to its credit reserves. The build consisted of $10.8 billion in Consumer ($8.2 billion in North America and $2.6 billion in regions outside of North America), $3.3 billion in ICG and $249 million in GWM.

The $8.2 billion build in North America Consumer included additional reserves for the increased number of loan modification adjustments to customer loans across all product lines. The higher credit costs primarily reflected a weakening of leading credit indicators, including higher delinquencies on first and second mortgages, unsecured personal loans, credit cards and auto loans. Reserves also increased due to trends in the U.S. macroeconomic environment, including the housing market downturn and rising unemployment rates.

The $2.6 billion build in regions outside of North America was primarily driven by deterioration in Mexico, Brazil, the U.K., Spain, Greece and India.

The build of $3.3 billion in ICG primarily reflects a weakening in overall portfolio credit quality, as well as loan loss reserves for specific counterparties.

As the environment for consumer credit continues to deteriorate, the Company has taken additional actions to manage risks, such as tightening underwriting criteria and selectively reducing credit lines. However, credit losses are expected to rise through 2009 and it is likely that the Company’s loss rates may exceed their historical peaks.

The total allowance for loan losses and unfunded lending commitments totaled $30.5 billion at December 31, 2008.

GOODWILL

Based on the results of goodwill impairment testing as of December 31, 2008, Citigroup recorded a pretax charge of approximately $9.6 billion ($8.7 billion after tax) in the fourth quarter of 2008 for goodwill impairments related to its North America Consumer Banking, Latin America Consumer Banking and EMEA Consumer Banking reporting units. This charge resulted in the write-off of the entire amount of goodwill allocated to those reporting units. However, this charge did not result in a cash outflow or negatively affect Tier 1 and Total Regulatory Capital Ratios, Tangible Capital or the Company’s liquidity position.

The primary cause for the goodwill impairment in the above reporting units was the rapid deterioration in the financial markets as well as in the global economic outlook particularly during the period beginning mid-November and through year end December 2008. This deterioration further weakened the near-term prospects for the financial services industry. These and other factors, including the increased possibility of further government intervention, also resulted in the decline in the Company’s market capitalization from approximately $90 billion at July 1, 2008 and approximately $74 billion at October 31, 2008 to approximately $36 billion at December 31, 2008. See “Significant Accounting Policies and Significant Estimates” on page 18 for a further discussion of goodwill.


 

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COST REDUCTION INITIATIVES

During the past two years, Citigroup has undergone several cost reduction initiatives.

2008 Re-Engineering Projects

In the fourth quarter of 2008, the Company recorded restructuring charges of $1.797 billion pretax related to the implementation of a company-wide re-engineering plan. This initiative will generate a reduction in headcount of approximately 20,600. These charges are reported in the Restructuring line on the Company’s Consolidated Statement of Income, and are recorded in each segment.

In addition, during 2008, several businesses initiated their own re-engineering projects to reduce expenses. A total expense of $1.732 billion was incurred generating a reduction in headcount of 16,807. These repositioning charges are reported in the lines Compensation and benefits and Premises and equipment on the Company’s Consolidated Statement of Income. These charges were recorded in the individual segments.

Structural Expense Review

In 2007, the Company completed a review of its structural expense base in a company-wide effort to create a more streamlined organization, reduce expense growth, and provide investment funds for future growth initiatives. As a result of this review, a pretax restructuring charge of $1.4 billion was recorded in Corporate/Other during the first quarter of 2007. Additional charges of $151 million (net of changes in estimates) were recognized in subsequent quarters throughout 2007 and a net release of $31 million was recorded in 2008 due to a change in estimates. These charges are reported in the Restructuring line on the Company’s Consolidated Statement of Income.

Separate from these restructuring charges were additional repositioning expenditures of $539 million incurred for re-engineering initiatives taken on by several businesses to further reduce expenses beyond the company-wide initiatives. These repositioning charges are included in the lines Compensation and benefits and Premises and equipment on the Company’s Consolidated Statement of Income. These charges were recorded in the individual segments.

 

DIVESTITURES

Sale of Citigroup’s German Retail Banking Operations

On December 5, 2008, Citigroup sold its German retail banking operations to Credit Mutuel for Euro 5.2 billion in cash. The German retail bank’s operating net earnings accrued in 2008 through the closing. The sale resulted in an after-tax gain of approximately $3.9 billion, including the after-tax gain on the foreign currency hedge of $383 million recognized during the fourth quarter of 2008, and was recorded in Discontinued Operations. In addition, a foreign currency hedge gain of $211 million was recorded in the third quarter of 2008.

The sale does not include the corporate and investment banking business or the Germany-based European data center.

See Note 3 on page 136 for further discussion regarding this sale.

Sale of CitiCapital

On July 31, 2008, Citigroup sold substantially all of CitiCapital, the equipment finance unit in North America, to GE Capital. An after-tax net loss of $305 million ($506 million pretax) was recorded in 2008 in Discontinued Operations on the Company’s Consolidated Statement of Income.

See Note 3 on page 136 for further discussion regarding this sale.

Sale of Upromise Cards Portfolio

During 2008, Global Cards sold substantially all of the Upromise Cards portfolio to Bank of America for an after-tax gain of $127 million ($201 million pretax). The portfolio sold had balances of approximately $1.2 billion of credit card receivables.

Divestiture of Diners Club International

On June 30, 2008, Citigroup completed the sale of Diners Club International (DCI) to Discover Financial Services, resulting in an after-tax gain of approximately $56 million ($111 million pretax).

Citigroup will continue to issue Diners Club cards and support its brand and products through ownership of its many Diners Club card issuers around the world.

Sale of CitiStreet

On July 1, 2008, Citigroup and State Street Corporation completed the sale of CitiStreet, a benefits servicing business, to ING Group in an all-cash transaction valued at $900 million. CitiStreet is a joint venture formed in 2000 which, prior to the sale, was owned 50% each by Citigroup and State Street. The transaction closed on July 1, 2008 and generated an after-tax gain of $222 million ($347 million pretax).

Sale of Citigroup Global Services Limited

In 2008, Citigroup sold all of its interest in Citigroup Global Services Limited (CGSL) to Tata Consultancy Services Limited (TCS) for all-cash consideration of approximately $515 million, resulting in an after-tax gain of $192 million ($263 million pretax). CGSL was the Citigroup captive provider of business process outsourcing services solely within the Banking and Financial Services sector.


 

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In addition to the sale, Citigroup signed an agreement with TCS for TCS to provide, through CGSL, process outsourcing services to Citigroup and its affiliates in an aggregate amount of $2.5 billion over a period of 9.5 years.

Sale of Citigroup Technology Services Limited

On December 23, 2008, Citigroup announced an agreement with Wipro Limited to sell all of Citigroup’s interest in Citi Technology Services Ltd., Citigroup’s India-based captive provider of technology infrastructure support and application development, for all-cash consideration of approximately $127 million. A substantial portion of the proceeds from this sale will be recognized over the period in which Citi has a service contract with Wipro Limited. This transaction closed on January 20, 2009 and a loss of approximately $7 million was booked at that time.

Sale of Citi’s Nikko Citi Trust and Banking Corporation

Citigroup has executed a definitive agreement to sell all of the shares of Nikko Citi Trust and Banking Corporation to Mitsubishi UFJ Trust and Banking Corporation (MUTB). At the closing, MUTB will pay all-cash consideration of 25 billion yen, subject to certain purchase price adjustments. The sale is expected to close on or around April 1, 2009, pending regulatory approvals and other closing conditions, and result in an estimated after-tax gain of $53 million ($89 million pretax).

 

OTHER ITEMS

Auction Rate Securities Settlement

On August 7, 2008, Citigroup announced an agreement in principle with state and federal regulators under which it agreed to offer to purchase the failed ARS of its retail clients for par value. This agreement resulted in a $926 million loss being recorded in 2008.

The loss comprises: (1) fines of $100 million ($50 million to the State of New York and $50 million to the other state regulatory agencies); (2) losses of $425 million, recorded at the time of the announcement, reflecting the estimated difference between the fair value and par value of the securities to be purchased; and (3) an incremental loss of $401 million due to the decline in value of these ARS since the time of announcement. The securities purchased by Citigroup under this agreement have a notional value of $6.1 billion. The purchase commitment for the remaining undelivered securities is estimated to be approximately $1.0 billion as of December 31, 2008. The pretax losses of $926 million have been divided equally between S&B and GWM, both in North America.

Income Taxes

The Company recorded an income tax benefit for 2008. The Company’s effective tax rate (benefit) on continuing operations was (38.9)% in 2008. The 2008 effective tax rate is higher than 35% because of the impact of indefinitely invested international earnings and other permanent differences on the pretax loss. The 2008 tax rate included a $994 million tax benefit related to the restructuring of the legal vehicles in Japan.

Sale of Redecard Shares

In the first quarter of 2008, Citigroup sold approximately 46.8 million Redecard shares, which decreased Citigroup’s ownership in Redecard from approximately 23.9% to approximately 17%. An after-tax gain of $426 million ($661 million pretax) was recorded in the Global Cards business in Latin America.

Lehman Brothers Holding, Inc. Bankruptcy and Related Matters

On September 15, 2008, Lehman Brothers Holding, Inc. (“LBHI” and, together with its subsidiaries, “Lehman”) filed for Chapter 11 bankruptcy in U.S. Federal Court. A number of LBHI subsidiaries have subsequently filed bankruptcy or similar insolvency proceedings in the U.S. and other jurisdictions. Lehman’s bankruptcy caused Citigroup to terminate cash management and foreign exchange clearance arrangements, close out approximately 40,000 Lehman foreign exchange, derivative and other transactions and quantify other exposures. Citigroup expects to file claims in the relevant Lehman bankruptcy proceedings, as appropriate.

Visa Restructuring and Litigation Matters

During 2008, Citigroup recorded a $723 million increase to pretax income resulting from events surrounding Visa. These events included: (i) a $359 million gain on the redemption of Visa shares primarily recorded in U.S. Consumer; (ii) a $108 million gain from an adjustment of the regional share allocation related to the fourth quarter 2007 Visa reorganization, primarily recorded in International Consumer; (iii) a $157 million reduction of litigation reserves that were originally booked in the fourth quarter of 2007 primarily in U.S. Consumer; and (iv) a gain on the sale of Visa shares of $99 million.


 

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Write-Down of Intangible Asset Related to Old Lane

As a result of Old Lane Partners, L.P. and Old Lane Partners GP, LLC notifying their investors that they would have the opportunity to redeem their investments in the hedge fund, without restriction effective July 31, 2008, ICG recorded a pretax write-down of $202 million on intangible assets related to this multi-strategy hedge fund during the first quarter of 2008. By April 2008, substantially all unaffiliated investors had notified Old Lane of their intention to redeem their investments. See Note 19 on page 166 for additional information.

Write-Down of Intangible Asset Related to Nikko Asset Management

During the fourth quarter of 2008, Citigroup performed an impairment analysis of Japan’s Nikko Asset Management fund contracts which represent the rights to manage and collect fees on investor assets and are accounted for as indefinite-lived intangible assets. As a result, an impairment loss of $937 million pretax ($607 million after-tax) was recorded in ICG.

Nikko Cordial

Citigroup began consolidating Nikko Cordial’s financial results and the related minority interest on May 9, 2007, when Nikko Cordial became a 61%-owned subsidiary. Later in 2007, Citigroup increased its ownership stake in Nikko Cordial to approximately 68%. Nikko Cordial results are included in Citigroup’s Securities and Banking and Global Wealth Management businesses.

On January 29, 2008, Citigroup completed the acquisition of the remaining Nikko Cordial shares that it did not already own by issuing 175 million Citigroup common shares (approximately $4.4 billion based on the exchange terms) in exchange for those remaining Nikko Cordial shares. The share exchange was completed following the listing of Citigroup’s common shares on the Tokyo Stock Exchange on November 5, 2007.

Transaction with Banco de Chile

In 2007, Citigroup and Quiñenco entered into a definitive agreement to establish a strategic partnership that combines Citigroup operations in Chile with Banco de Chile’s local banking franchise to create a banking and financial services institution with approximately 20% market share of the Chilean banking industry. The transaction closed on January 1, 2008.

Under the agreement, Citigroup sold its Chilean operations and other assets in exchange for an approximate 32.96% stake in LQIF, a wholly owned subsidiary of Quiñenco that controls Banco de Chile. This investment is accounted for under the equity method of accounting. As part of the overall transaction, Citigroup also acquired the U.S. branches of Banco de Chile for approximately $130 million. The new partnership calls for active participation by Citigroup in the management of Banco de Chile including board representation at both LQIF and Banco de Chile. In addition, as part of the definitive agreement, Citigroup and Quiñenco agreed on certain transactions that could increase Citigroup’s stake in LQIF to approximately 50%. Specifically, Quiñenco has a put that would require Citigroup to buy an additional approximately 8.5% stake in LQIF. Citigroup has a call on, or the option to buy, this increased ownership percentage as well. Further,

Citigroup has an option to buy an additional approximately 8.5% in LQIF, resulting in a potential 50% ownership stake in LQIF. Each of these potential additional acquisitions will be exercisable in 2010.

SUBSEQUENT EVENT

Joint Venture with Morgan Stanley

On January 13, 2009, Citigroup reached a definitive agreement to sell its Smith Barney business, which includes Smith Barney in the U.S., Smith Barney in Australia and Quilter in the U.K., to a joint venture to be formed with Morgan Stanley in exchange for a 49% stake in the joint venture and an upfront cash payment of $2.7 billion from Morgan Stanley. The joint venture, to be called Morgan Stanley Smith Barney, will combine the sold businesses with Morgan Stanley’s Global Wealth Management Group. It will not include Citi Private Bank, Nikko Cordial Securities or Citigroup’s bank branch-based financial advisors.

The joint venture’s combined businesses have more than 20,000 financial advisors, 1,000 offices, $1.7 trillion in client assets at December 31, 2008, $14.9 billion in 2008 pro forma combined revenues, and $2.8 billion in 2008 pro forma combined pretax profit.

Upon closing, and following the cash payment of $2.7 billion from Morgan Stanley to Citigroup, Morgan Stanley will own 51% and Citi will own 49% of the joint venture. Morgan Stanley and Citi will have various purchase and sale rights for the joint venture, but Citi is expected to retain the full amount of its stake at least through year three and to continue to own a significant stake in the joint venture at least through year five.

The transaction, which is subject to and contingent upon regulatory approvals and other customary closing conditions, is expected to close in the third quarter of 2009. At closing, and based on current estimates of the fair value of the joint venture, the Company estimates that it will recognize a pretax gain of approximately $9.5 billion (approximately $5.8 billion after tax) and will generate approximately $6.5 billion of tangible common equity.


 

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EVENTS IN 2007

CREDIT RESERVES

During 2007, the Company recorded a net build of $6.9 billion to its credit reserves. The build consisted of $6.2 billion in Consumer ($5.0 billion in North America Consumer and $1.2 billion in regions outside North America), $562 million in ICG and $100 million in GWM.

The $5.0 billion build in North America Consumer reflected a weakening of leading credit indicators including delinquencies on first and second mortgages and deterioration in the housing market (approximately $3.0 billion), a downturn in other economic trends including unemployment and GDP, as well as the impact of housing market deterioration, affecting all other portfolios ($1.3 billion), and a change in the estimate of loan losses inherent in the portfolio, but not yet visible in delinquency statistics (approximately $700 million).

The $1.2 billion build in regions outside North America included a change in estimate of loan losses inherent in the portfolio but not yet visible in delinquency statistics (approximately $600 million), along with volume growth and credit deterioration in certain countries. With the exception of Mexico, Japan and India, the international consumer credit environment remained generally stable.

The build of $562 million in ICG primarily reflected a slight weakening in overall portfolio credit quality, as well as loan loss reserves for specific counterparties. The loan loss reserves for specific counterparties include $327 million for subprime-related direct exposures.

INCOME TAXES

The Company recorded an income tax benefit for 2007. The effective tax rate of (321.9)% primarily resulted from the pretax losses in the Company’s S&B and North America Consumer Banking businesses (the U.S. is a higher tax jurisdiction). In addition, the tax benefits of permanent differences, including the tax benefit for not providing U.S. income taxes on the earnings of certain foreign subsidiaries that are indefinitely invested, favorably affected the Company’s effective tax rate.

STRUCTURED INVESTMENT VEHICLES (SIVs)

On December 13, 2007, Citigroup announced its decision to commit to provide a support facility that would resolve uncertainties regarding senior debt repayment facing the Citi-advised Structured Investment Vehicles (SIVs). As a result of the Company’s commitment, which was not legally required, Citigroup consolidated the assets and liabilities of the SIVs as of December 31, 2007. This resulted in an increase of assets of $59 billion.

 

ACQUISITIONS

North America

Acquisition of ABN AMRO Mortgage Group

In 2007, Citigroup acquired ABN AMRO Mortgage Group (AAMG), a subsidiary of LaSalle Bank Corporation and ABN AMRO Bank N.V. AAMG is a national originator and servicer of prime residential mortgage loans. As part of this acquisition, Citigroup purchased approximately $12 billion in assets, including $3 billion of mortgage servicing rights, which resulted in the addition of approximately 1.5 million servicing customers. Results for AAMG are included in Citigroup’s North America Consumer Banking business from March 1, 2007 forward.

Acquisition of Old Lane Partners, L.P.

In 2007, the Company completed the acquisition of Old Lane Partners, L.P. and Old Lane Partners, GP, LLC (Old Lane). Old Lane was the manager of a global, multi-strategy hedge fund and a private equity fund with total assets under management and private equity commitments of approximately $4.5 billion. Results for Old Lane are included within ICG from July 2, 2007 forward.

Acquisition of BISYS

In 2007, the Company completed its acquisition of BISYS Group, Inc. (BISYS) for $1.47 billion in cash. Citigroup completed the sale of the Retirement and Insurance Services Divisions of BISYS, making the net cost of the transaction to Citigroup approximately $800 million. Citigroup retained the Fund Services and Alternative Investment services businesses of BISYS, which provides administrative services for hedge funds, mutual funds and private equity funds. Results for BISYS are included in Citigroup’s Transaction Services business from August 1, 2007 forward.

Acquisition of Automated Trading Desk

In 2007, Citigroup completed its acquisition of Automated Trading Desk (ATD), a leader in electronic market making and proprietary trading, for approximately $680 million ($102.6 million in cash and approximately 11.17 million shares of Citigroup common stock). Results for ATD are included in Citigroup’s Securities and Banking business from October 3, 2007 forward.


 

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Latin America

Acquisition of Grupo Financiero Uno

In 2007, Citigroup completed its acquisition of Grupo Financiero Uno (GFU), the largest credit card issuer in Central America, and its affiliates, with $2.2 billion in assets. The results for GFU are included in Citigroup’s Global Cards and Latin America Consumer Banking businesses from March 5, 2007 forward.

Acquisition of Grupo Cuscatlán

In 2007, Citigroup completed the acquisition of the subsidiaries of Grupo Cuscatlán for $1.51 billion ($755 million in cash and 14.2 million shares of Citigroup common stock) from Corporacion UBC Internacional S.A. Grupo. The results of Grupo Cuscatlán are included from May 11, 2007 forward and are recorded in Latin America Consumer Banking.

Asia

Acquisition of Bank of Overseas Chinese

In 2007, Citigroup completed its acquisition of Bank of Overseas Chinese (BOOC) in Taiwan for approximately $427 million. Results for BOOC are included in Citigroup’s Asia Consumer Banking, Global Cards and Securities and Banking businesses from December 1, 2007 forward.

EMEA

Acquisition of Quilter

In 2007, the Company completed the acquisition of Quilter, a U.K. wealth advisory firm, from Morgan Stanley. Quilter’s results are included in Citigroup’s Smith Barney business from March 1, 2007 forward. Quilter is being disposed of as part of the sale of Smith Barney to Morgan Stanley described in Subsequent Events.

Acquisition of Egg

In 2007, Citigroup completed its acquisition of Egg Banking plc (Egg), a U.K. online financial services provider, from Prudential PLC for approximately $1.39 billion. Results for Egg are included in Citigroup’s Global Cards and EMEA Consumer Banking businesses from May 1, 2007 forward.

Purchase of 20% Equity Interest in Akbank

In 2007, Citigroup completed its purchase of a 20% equity interest in Akbank, the second-largest privately owned bank by assets in Turkey for approximately $3.1 billion. This investment is accounted for using the equity method of accounting.

Sabanci Holding, a 34% owner of Akbank shares, and its subsidiaries have granted Citigroup a right of first refusal or first offer over the sale of any of their Akbank shares in the future. Subject to certain exceptions, including purchases from Sabanci Holding and its subsidiaries, Citigroup has otherwise agreed not to increase its percentage ownership in Akbank.

 

OTHER ITEMS

Sale of MasterCard Shares

In 2007, the Company recorded a $367 million after-tax gain ($581 million pretax) on the sale of approximately 4.9 million MasterCard Class B shares that had been received by Citigroup as a part of the MasterCard initial public offering completed in June 2006. The gain was recorded in the following businesses:

 

In millions of dollars   2007
Pretax
total
  

2007

After-tax

total

   2006
Pretax
total
  

2006

After-tax

total

Global Cards

  $ 466    $ 296    $ 94    $ 59

Consumer Banking

    96      59      27      18

ICG

    19      12      2      1

Total

  $ 581    $ 367    $ 123    $ 78

Redecard IPO

In 2007, Citigroup (a 31.9% shareholder in Redecard S.A., the only merchant acquiring company for MasterCard in Brazil) sold approximately 48.8 million Redecard shares in connection with Redecard’s initial public offering in Brazil. Following the sale of these shares, Citigroup retained approximately 23.9% ownership in Redecard. An after-tax gain of approximately $469 million ($729 million pretax) was recorded in Citigroup’s 2007 financial results in the Global Cards business.

Visa Restructuring and Litigation Matters

In 2007, Visa USA, Visa International and Visa Canada were merged into Visa Inc. (Visa). As a result of that reorganization, Citigroup recorded a $534 million (pretax) gain on its holdings of Visa International shares primarily recognized in the Consumer Banking business. The shares were then carried on Citigroup’s balance sheet at the new cost basis. In addition, Citigroup recorded a $306 million (pretax) charge related to certain of Visa USA’s litigation matters primarily recognized in the North America Consumer Banking business.


 

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ACCOUNTING CHANGES

Adoption of SFAS 157—Fair Value Measurements

The Company elected to adopt SFAS No. 157, Fair Value Measurements (SFAS 157), as of January 1, 2007. SFAS 157 does not determine or affect the circumstances under which fair value measurements are used, but defines fair value, expands disclosure requirements around fair value and specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

 

 

Level 1–Quoted prices for identical instruments in active markets.

 

Level 2–Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

Level 3–Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

For some products or in certain market conditions, observable inputs may not be available. For example, during the market dislocations that occurred in the second half of 2007, and continued throughout 2008, certain markets became illiquid, and some key inputs used in valuing certain exposures were unobservable. When and if these markets are liquid, the valuation of these exposures will use the related observable inputs available at that time from these markets.

Under SFAS 157, Citigroup is required to take into account its own credit risk when measuring the fair value of derivative positions as well as other liabilities for which it has elected fair value accounting under SFAS 155 Accounting for Certain Hybrid Financial Instruments (SFAS 155) and SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159), after taking into consideration the effects of credit-risk mitigants. The adoption of SFAS 157 has also resulted in some other changes to the valuation techniques used by Citigroup when determining the fair value of derivatives, most notably changes to the way that the probability of default of a counterparty is factored in, and the elimination of a derivative valuation adjustment which is no longer necessary under SFAS 157. The cumulative effect at January 1, 2007 of making these changes was a gain of $250 million after tax ($402 million pretax), or $0.05 per diluted share, which was recorded in the 2007 first quarter earnings within the S&B business.

SFAS 157 also precludes the use of block discounts for instruments traded in an active market, which were previously applied to large holdings of publicly traded equity securities, and requires the recognition of trade-date gains related to certain derivative trades that use unobservable inputs in determining their fair value. Previous accounting guidance allowed the use of block discounts in certain circumstances and prohibited the recognition of day-one gains on certain derivative trades when determining the fair value of instruments not traded in an active market. The cumulative effect of these changes resulted in an increase to January 1, 2007 Retained earnings of $75 million.

 

Adoption of SFAS 159—Fair Value Option

In conjunction with the adoption of SFAS 157, the Company also adopted SFAS 159, as of January 1, 2007. SFAS 159 provides for an election by the Company, on an instrument-by-instrument basis for most financial assets and liabilities to be reported at fair value with changes in fair value reported in earnings. After the initial adoption, the election is made at the time of the acquisition of a financial asset, financial liability or a firm commitment, and it may not be revoked. SFAS 159 provides an opportunity to mitigate volatility in reported earnings that resulted prior to its adoption from being required to apply fair value accounting to certain economic hedges (e.g., derivatives) while having to measure the assets and liabilities being economically hedged using an accounting method other than fair value.

Under the SFAS 159 transition provisions, the Company elected to apply fair value accounting to certain financial instruments held at January 1, 2007 with future changes in value reported in earnings. The adoption of SFAS 159 resulted in an after-tax decrease to January 1, 2007 retained earnings of $99 million ($157 million pretax). See Note 27 to the Consolidated Financial Statements on page 202 for additional information.


 

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SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

 

Note 1 to the Consolidated Financial Statements on page 122 contains a summary of the Company’s significant accounting policies, including a discussion of recently issued accounting pronouncements. These policies, as well as estimates made by management, are integral to the presentation of the Company’s financial condition. While all of these policies require a certain level of management judgment and estimates, this section highlights and discusses the significant accounting policies that require management to make highly difficult, complex or subjective judgments and estimates, at times regarding matters that are inherently uncertain and susceptible to change. Management has discussed each of these significant accounting policies, the related estimates and its judgments with the Audit and Risk Management Committee of the Board of Directors. Additional information about these policies can be found in Note 1 to the Consolidated Financial Statements on page 122.

VALUATIONS OF FINANCIAL INSTRUMENTS

The Company holds fixed income and equity securities, derivatives, retained interests in securitizations, investments in private equity and other financial instruments. In addition, the Company purchases securities under agreements to resell and sells securities under agreements to repurchase. The Company holds its investments, trading assets and liabilities, and resale and repurchase agreements on the balance sheet to meet customer needs, to manage liquidity needs and interest rate risks, and for proprietary trading and private equity investing.

Substantially all of these assets and liabilities are reflected at fair value on the Company’s balance sheet. In addition, certain loans, short-term borrowings, long-term debt and deposits as well as certain securities borrowed and loaned positions that are collateralized with cash are carried at fair value. In total, approximately 33.2% and 38.9% of assets, and 19.9% and 23.1% of liabilities, are accounted for at fair value as of December 31, 2008 and 2007, respectively.

When available, the Company generally uses quoted market prices to determine fair value, and classifies such items within Level 1 of the fair value hierarchy established under SFAS 157 (see “Events in 2007—Accounting Changes” above). If quoted market prices are not available, fair value is based upon internally developed valuation models that use, where possible, current market-based or independently sourced market parameters, such as interest rates, currency rates, option volatilities, etc. Where a model is internally developed and used to price a significant product, it is subject to validation and testing by independent personnel. Such models are often based on a discounted cash flow analysis.

Items valued using such internally generated valuation techniques are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though some readily observable inputs are used in the valuation.

As seen during the second half of 2007, the credit crisis has caused some markets to become illiquid, thus reducing the availability of certain observable data used by the Company’s valuation techniques. This illiquidity continued through 2008. When or if liquidity returns to these markets, the valuations will revert to using the related observable inputs in verifying internally calculated values. For additional information on Citigroup’s fair value analysis, see “Managing Global Risk” and “Balance Sheet Review” on page 78.

 

Recognition of Changes in Fair Value

Changes in the valuation of the trading assets and liabilities, as well as all other assets (excluding available-for-sale securities) and liabilities carried at fair value are recorded in the Consolidated Statement of Income. Changes in the valuation of available-for-sale securities, other than write-offs, generally are recorded in Accumulated other comprehensive income (loss), which is a component of Stockholders’ equity on the Consolidated Balance Sheet. A full description of the Company’s related policies and procedures can be found in Notes 1, 26, 27 and 28 to the Consolidated Financial Statements on pages 122, 192, 202 and 205, respectively.

Evaluation of Other-than-Temporary Impairment

The Company conducts periodic reviews to identify and evaluate each investment that has an unrealized loss, in accordance with FASB Staff Position No. 115-1, The Meaning of Other-Than Temporary Impairment and Its Application to Certain Investments (FSP FAS 115-1). An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in Accumulated other comprehensive income (AOCI) for available-for-sale securities, while such losses related to held-to-maturity securities are not recorded, as these investments are carried at their amortized cost (less any permanent impairment). For securities transferred to held-to-maturity from Trading account assets, amortized cost is defined as the fair-value amount of the securities at the date of transfer. For securities transferred to held-to-maturity from available-for-sale, amortized cost is defined as the original purchase cost, plus or minus any accretion or amortization of interest, less any impairment recognized in earnings.

Regardless of the classification of the securities as available-for-sale or held-to-maturity, the Company has assessed each position for credit impairment.

For a further discussion, see Note 16 to the Consolidated Financial Statements on page 158.

Key Controls over Fair-Value Measurement

The Company’s processes include a number of key controls that are designed to ensure that fair value is measured appropriately, particularly where a fair-value model is internally developed and used to price a significant product. Such controls include a model validation policy requiring that valuation models be validated by qualified personnel independent from those who created the models and escalation procedures to ensure that valuations using unverifiable inputs are identified and monitored on a regular basis by senior management.

CVA Methodology

SFAS 157 requires that Citi’s own credit risk be considered in determining the market value of any Citi liability carried at fair value. These liabilities include derivative instruments as well as debt and other liabilities for which the fair-value option was elected. The credit valuation adjustment (CVA) is recognized on the balance sheet as a reduction in the associated liability to arrive at the fair value (carrying value) of the liability.


 

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Citi has historically used its credit spreads observed in the credit default swap (CDS) market to estimate the market value of these liabilities. Beginning in September 2008, Citi’s CDS spread and credit spreads observed in the bond market (cash spreads) diverged from each other and from their historical relationship. For example, the three-year CDS spread narrowed from 315 basis points (bps) on September 30, 2008, to 202 bps on December 31, 2008, while the three-year cash spread widened from 430 bps to 490 bps over the same time period. Due to the persistence and significance of this divergence during the fourth quarter, management determined that such a pattern may not be temporary and that using cash spreads would be more relevant to the valuation of debt instruments (whether issued as liabilities or purchased as assets). Therefore, Citi changed its method of estimating the market value of liabilities for which the fair-value option was elected to incorporate Citi’s cash spreads. (CDS spreads continue to be used to calculate the CVA for derivative positions, as described on page 92.) This change in estimation methodology resulted in a $2.5 billion pretax gain recognized in earnings in the fourth quarter of 2008.

The CVA recognized on fair-value option debt instruments was $5,446 million and $888 million as of December 31, 2008 and 2007, respectively. The pretax gain recognized due to changes in the CVA balance was $4,558 million and $888 million for 2008 and 2007, respectively.

The table below summarizes the CVA for fair-value option debt instruments, determined under each methodology as of December 31, 2008 and 2007, and the pretax gain that would have been recognized in the year then ended had each methodology been used consistently during 2008 and 2007 (in millions of dollars).

 

In millions of dollars   2008    2007

Year-end CVA reserve balance as calculated using:

    

CDS spreads

  $ 2,953    $ 888

Cash spreads

    5,446      1,359

Difference (1)

  $ 2,493    $ 471

Year-to-date pretax gain from the change in CVA reserve that would have been recorded in the income statement as calculated using:

    

CDS spreads

  $ 2,065    $ 888

Cash spreads

    4,087      1,359

 

(1) In changing the methodology for calculating the CVA reserve, the Company recorded the 2008 cumulative difference of $2.493 billion in December 2008, resulting in a year-to-date pretax gain of $4.558 billion recorded in the Company’s Consolidated Statement of Income.

ALLOWANCE FOR CREDIT LOSSES

Management provides reserves for an estimate of probable losses inherent in the funded loan portfolio on the balance sheet in the form of an allowance for loan losses. In addition, management has established and maintains reserves for the potential credit losses related to the Company’s off-balance- sheet exposures of unfunded lending commitments, including standby letters of credit and guarantees. These reserves are established in accordance with Citigroup’s Loan Loss Reserve Policies, as approved by the Audit and Risk Management Committee of the Company’s Board of Directors. The Company’s Chief Risk Officer and Chief Financial Officer review the adequacy of the credit loss reserves each quarter with representatives from the Risk and Finance staffs for each applicable business area.

During these reviews, the above-mentioned representatives covering the business area having classifiably managed portfolios (that is, portfolios

where internal credit-risk ratings are assigned, which are primarily ICG, the commercial lending businesses of Consumer Banking and Global Wealth Management) and modified consumer loans where a concession was granted due to the borrowers’ financial difficulties, and present recommended reserve balances for their funded and unfunded lending portfolios along with supporting quantitative and qualitative data. The quantitative data include:

 

 

Estimated probable losses for non-performing, non-homogeneous exposures within a business line’s classifiably managed portfolio and impaired smaller-balance homogenous loans whose terms have been modified due to the borrowers’ financial difficulties, and it was determined that a concession was granted to the borrower. Consideration is given to all available evidence when determining this estimate including, as appropriate: (i) the present value of expected future cash flows discounted at the loan’s contractual effective rate; (ii) the borrower’s overall financial condition, resources and payment record; and (iii) the prospects for support from financially responsible guarantors or the realizable value of any collateral.

 

Statistically calculated losses inherent in the classifiably managed portfolio for performing and de minimis non-performing exposures. The calculation is based upon: (i) Citigroup’s internal system of credit-risk ratings, which are analogous to the risk ratings of the major rating agencies; (ii) the Corporate portfolio database; and (iii) historical default and loss data, including rating-agency information regarding default rates from 1983 to 2007, and internal data dating to the early 1970s on severity of losses in the event of default.

 

Additional adjustments include: (i) statistically calculated estimates to cover the historical fluctuation of the default rates over the credit cycle, the historical variability of loss severity among defaulted loans, and the degree to which there are large obligor concentrations in the global portfolio; and (ii) adjustments made for specifically known items, such as current environmental factors and credit trends.

In addition, representatives from both the Risk Management and Finance staffs that cover business areas that have delinquency-managed portfolios containing smaller homogeneous loans (primarily the non-commercial lending areas of Consumer Banking) present their recommended reserve balances based upon leading credit indicators including delinquencies on first and second mortgages and deterioration in the housing market, a downturn in other economic trends including unemployment and GDP, changes in the portfolio size, and a change in the estimated loan losses inherent in the portfolio but not yet visible in the delinquencies (change in estimate of loan losses). This methodology is applied separately for each individual product within each different geographic region in which these portfolios exist.

This evaluation process is subject to numerous estimates and judgments. The frequency of default, risk ratings, loss recovery rates, the size and diversity of individual large credits, and the ability of borrowers with foreign currency obligations to obtain the foreign currency necessary for orderly debt servicing, among other things, are all taken into account during this review. Changes in these estimates could have a direct impact on the credit costs in any quarter and could result in a change in the allowance. Changes to the reserve flow through the Consolidated Statement of Income on the lines Provision for loan losses and Provision for unfunded lending


 

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commitments. For a further description of the loan loss reserve and related accounts, see “Managing Global Risk” and Notes 1 and 18 to the Consolidated Financial Statements on pages 51, 122 and 165, respectively.

SECURITIZATIONS

The Company securitizes a number of different asset classes as a means of strengthening its balance sheet and accessing competitive financing rates in the market. Under these securitization programs, assets are sold into a trust and used as collateral by the trust to obtain financing. The cash flows from assets in the trust service the corresponding trust securities. If the structure of the trust meets certain accounting guidelines, trust assets are treated as sold and are no longer reflected as assets of the Company. If these guidelines are not met, the assets continue to be recorded as the Company’s assets, with the financing activity recorded as liabilities on Citigroup’s balance sheet.

Citigroup also assists its clients in securitizing their financial assets and packages and securitizes financial assets purchased in the financial markets. The Company may also provide administrative, asset management, underwriting, liquidity facilities and/or other services to the resulting securitization entities and may continue to service some of these financial assets.

Elimination of QSPEs and Changes in the FIN 46(R) Consolidation Model

The FASB has issued an exposure draft of a proposed standard that would eliminate Qualifying Special Purpose Entities (QSPEs) from the guidance in FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 140). While the proposed standard has not been finalized, if it is issued in its current form it will have a significant impact on Citigroup’s Consolidated Financial Statements as the Company will lose sales treatment for certain assets previously sold to a QSPE, as well as for certain future sales, and for certain transfers of portions of assets that do not meet the proposed definition of “participating interests.” This proposed revision could become effective on January 1, 2010.

In connection with the proposed changes to SFAS 140, the FASB has also issued a separate exposure draft of a proposed standard that proposes three key changes to the consolidation model in FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (FIN 46(R)). First, the revised standard would include former QSPEs in the scope of FIN 46(R). In addition, FIN 46(R) would be amended to change the method of analyzing which party to a variable interest entity (VIE) should consolidate the VIE (such consolidating entity is referred to as the “primary beneficiary”) to a qualitative determination of power combined with benefits or losses instead of the current risks and rewards model. Finally, the proposed standard would require that the analysis of primary beneficiaries be re-evaluated whenever circumstances change. The existing standard requires reconsideration only when specified reconsideration events occur.

The FASB is currently deliberating these proposed standards, and they are, accordingly, still subject to change. Since QSPEs will likely be eliminated from SFAS 140 and thus become subject to FIN 46(R) consolidation guidance and because the FIN 46(R) method of determining which party must consolidate a VIE will likely change should this proposed standard become effective, the Company expects to consolidate certain of the currently unconsolidated VIEs and QSPEs with which Citigroup was involved as of December 31, 2008.

 

The Company’s estimate of the incremental impact of adopting these changes on Citigroup’s Consolidated Balance Sheets and risk-weighted assets, based on December 31, 2008 balances, our understanding of the proposed changes to the standards and a proposed January 1, 2010 effective date, is presented below. The actual impact of adopting the amended standards as of January 1, 2010 could materially differ.

The pro forma impact of the proposed changes on GAAP assets and risk-weighted assets, assuming application of existing risk-based capital rules, at January 1, 2010 (based on the balances at December 31, 2008) would result in the consolidation of incremental assets as follows:

 

     Incremental
    GAAP    Risk-
weighted
In billions of dollars   assets    assets
Credit cards   $  91.9    $88.9
Commercial paper conduits   59.6   
Private label consumer mortgages   4.4    2.1
Student loans   14.4    3.5
Muni bonds   6.2    1.9

Mutual fund deferred sales commission securitization

  0.8    0.8
Investment funds   1.7    1.7
Total   $179.0    $98.9

The table reflects (i) the estimated portion of the assets of QSPEs to which Citigroup, acting as principal, has transferred assets and received sales treatment as of December 31, 2008 (totaling approximately $822.1 billion), and (ii) the estimated assets of significant unconsolidated VIEs as of December 31, 2008 with which Citigroup is involved (totaling approximately $288.0 billion) that would be consolidated under the proposal. Due to the variety of transaction structures and level of the Company’s involvement in individual QSPEs and VIEs, only a subset of the QSPEs and VIEs with which the Company is involved are expected to be consolidated under the proposed change.

A complete description of the Company’s accounting for securitized assets can be found in Note 1 to the Consolidated Financial Statements on page 122.


 

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GOODWILL

Citigroup has recorded on its Consolidated Balance Sheet Goodwill of $27.1 billion (approximately 1.4% of assets) and $41.1 billion (approximately 1.9% of assets) at December 31, 2008 and December 31, 2007, respectively. The December 31, 2008 balance is net of a $9.6 billion goodwill impairment charge recorded as a result of testing performed as of December 31, 2008. The impairment is composed of $5.1 billion pretax charge ($4.5 billion after tax) related to North America Consumer Banking, $4.3 billion pretax charge ($4.1 billion after tax) related to Latin America Consumer Banking, and $0.2 billion pre-tax charge ($0.1 billion after tax) related to EMEA Consumer Banking.

The primary cause for the goodwill impairment in the above reporting units was the rapid deterioration in the financial markets as well as in the global economic outlook particularly during the period beginning mid-November through year end 2008. This deterioration further weakened the near-term prospects for the financial services industry. These and other factors, including the increased possibility of further government intervention, also resulted in the decline in the Company’s market capitalization from approximately $90 billion at July 1, 2008 and approximately $74 billion at October 31, 2008 to approximately $36 billion at December 31, 2008.

The following summary describes Citigroup’s process for accounting for goodwill and testing for impairment.

Goodwill is allocated to the reporting units at the date the goodwill is initially recorded. Once goodwill has been allocated to the reporting units, it generally no longer retains its identification with a particular acquisition, but instead becomes identified with the reporting unit as a whole. As a result, all of the fair value of each reporting unit is available to support the value of goodwill allocated to the unit. As of December 31, 2008, the Company operated in four core business segments as discussed on page 138. Goodwill impairment testing is performed at the reporting unit level, one level below the business segment.

The changes in the management structure during 2008 resulted in the creation of new business segments. As a result, commencing with the third quarter of 2008, the Company identified new reporting units as required under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). Goodwill affected by the change was reallocated from the previous seven reporting units to ten new reporting units, using a relative fair value approach. The ten new reporting units, which remain unchanged at December 31, 2008, are Securities and Banking, Global Transaction Services, International Wealth Management, N.A. Wealth Management, North America Consumer Banking, N.A. Cards, EMEA Consumer Banking, Latin America Consumer Banking, Asia Consumer Banking and International Cards.

Under SFAS 142, the goodwill impairment analysis is done in two steps. The first step requires a comparison of the fair value of the individual reporting unit to its carrying value including goodwill. If the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and no further analysis is necessary. If the carrying value of the reporting unit exceeds the fair value, there is an indication of potential impairment and a second step of testing is performed to measure the amount of impairment, if any, for that reporting unit.

 

When required, the second step of testing involves calculating the implied fair value of goodwill for each of the affected reporting units. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit determined in step one over the fair value of the net assets and identifiable intangibles as if the reporting unit were being acquired. If the amount of the goodwill allocated to the reporting unit exceeds the implied fair value of the goodwill in the pro forma purchase price allocation, an impairment charge is recorded for the excess. An impairment charge recognized cannot exceed the amount of goodwill allocated to a reporting unit and cannot be reversed subsequently even if the fair value of the reporting unit recovers.

Goodwill impairment testing involves management judgment, requiring an assessment of whether the carrying value of the reporting unit can be supported by the fair value of the individual reporting unit using widely accepted valuation techniques, such as the market approach (earnings multiples and/or transaction multiples) and/or discounted cash flow methods (DCF). In applying these methodologies the Company utilizes a number of factors, including actual operating results, future business plans, economic projections and market data. A combination of methodologies is used and weighted appropriately for reporting units with significant adverse changes in business climate. Management may engage an independent valuation specialist to assist in the Company’s valuation process.

Prior to 2008, the Company primarily employed the market approach for estimating fair value of the reporting units. As a result of significant adverse changes during 2008 in certain of the Company’s reporting units and the increase in financial sector volatility primarily in the U.S., the Company engaged the services of an independent valuation specialist to assist in the Company’s valuation of the following reporting units—Securities and Banking, North America Consumer Banking, Latin America Consumer Banking and N.A. Cards. The DCF method was incorporated to ensure reliability of results. The Company believes that the DCF method, using management projections for the selected reporting units and an appropriate risk-adjusted discount rate is most reflective of a market participant’s view of fair values given current market conditions. For the reporting units where both methods were utilized in 2008, the resulting fair values were relatively consistent and appropriate weighting was given to outputs from both methods.

The DCF method used at the time of each impairment test used discount rates that the Company believes adequately reflected the risk and uncertainty in the financial markets generally and specifically in the internally generated cash flow projections. The DCF method employs a capital asset pricing model in estimating the discount rate. The Company continues to value the remaining reporting units where it believes the risk of impairment to be low using primarily the market approach.


 

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The Company prepares formal three-year Strategic Plans for its businesses and presents the plans to the Board of Directors. The Company used the 2008 Strategic Plan as a basis for its annual goodwill impairment test performed as of July 1, 2008. These projections incorporated certain external economic projections developed at the point in time the Strategic Plan was developed. The financial forecasts were updated for the interim impairment tests as of October 31, 2008 and December 31, 2008 (as discussed below) to reflect current economic conditions. For those interim impairment tests, the Company utilized revised economic projections incorporating the rapidly deteriorating market outlook.

As discussed above, management tests goodwill for impairment annually as of July 1. The Company is also required to test goodwill for impairment whenever events or circumstances make it more likely than not that impairment may have occurred, such as a significant adverse change in the business climate, a decision to sell or dispose of all or a significant portion of a reporting unit or a significant decline in the Company’s stock price. The results of the July 1, 2008 test validated that the fair values exceeded the carrying values for all reporting units. Based on negative macro-economic and Citigroup-specific events, Citigroup performed two goodwill impairment tests during the fourth quarter of 2008. The first test, performed as of October 31, 2008, validated that the fair value of all reporting units was in excess of the associated carrying values and, therefore, that there was no indication of goodwill impairment. In mid-January, management determined that another goodwill impairment test was needed using data as of December 31, 2008, due to the rapid deterioration in the financial markets as well as in the global economic outlook particularly during the period beginning mid-November and through year end December 2008.

Based on the updated goodwill impairment test performed using data as of December 31, 2008, there was an indication of impairment principally due to the decline in fair value of the Company’s North America Consumer Banking, Latin America Consumer Banking and EMEA Consumer Banking reporting units. The primary cause for the decline in the fair values in the above reporting units was the rapid deterioration in the financial markets as well as in the global economic outlook particularly during the period beginning mid-November through year end 2008. Accordingly, the second step of testing was performed for those reporting units. Based on the results of the second step, the Company recorded a $9.6 billion pretax ($8.7 billion after tax) goodwill impairment charge in the fourth quarter of 2008. This charge resulted in the write-off of the entire amount of goodwill allocated to those reporting units.

The testing for goodwill impairment is conducted at a reporting unit level. Since none of the Company’s reporting units are publicly traded, individual reporting unit fair value determinations cannot be directly correlated to the Company’s stock price. The sum of the fair values of the reporting units significantly exceeds the overall market capitalization of the Company. However, the Company believes that it is not meaningful to reconcile the sum of the fair values of the Company’s reporting units to its market capitalization due to several factors. These factors, which do not directly impact the individual reporting unit fair values, include the increased possibility of further government intervention, unprecedented levels of volatility in stock price and short-selling. In addition, the market capitalization of Citigroup reflects the execution risk in a transaction involving Citigroup due to its size. However, the individual reporting unit’s

fair values are not subject to the same level of execution risk or a business model which is perceived to be complex.

While no impairment was noted in step one of our Securities and Banking reporting unit impairment test at October 31, 2008 and December 31, 2008, goodwill present in that reporting unit may be particularly sensitive to further deterioration in economic conditions. Under the market approach for valuing this reporting unit, the earnings multiples and transaction multiples were selected from multiples obtained using data from guideline companies and acquisitions. The selection of the actual multiple considers operating performance and financial condition such as return on equity and net income growth of Securities and Banking as compared to the guideline companies and acquisitions. For the valuation under the income approach, the Company utilized a discount rate which it believes reflects the risk and uncertainty related to the projected cash flows, and selected 2013 as the terminal year. In 2013, the value was derived assuming a return to historical levels of core-business profitability for the reporting unit, despite the significant losses experienced in 2008. This assumption is based on management’s view that this recovery will occur based upon various macro-economic factors such as the recent U.S. government stimulus actions, restoring marketplace confidence and improved risk-management practices on an industry-wide basis. Furthermore, Company-specific actions such as its recently announced realignment of its businesses to optimize its global businesses for future profitable growth, will also be a factor in returning the Company’s core Securities and Banking business to historical levels.

Small deterioration in the assumptions used in the valuations, in particular the discount rate and growth rate assumptions used in the net income projections, could significantly affect the Company’s impairment evaluation and, hence, results. If the future were to differ adversely from management’s best estimate of key economic assumptions and associated cash flows were to decrease by a small margin, the Company could potentially experience future material impairment charges with respect to the goodwill remaining in our Securities and Banking reporting unit. Any such charges by themselves would not negatively affect the Company’s Tier 1 and Total Regulatory Capital Ratios, Tangible Capital or the Company’s liquidity position.

The goodwill allocated to this reporting unit was approximately $9.8 billion as of December 31, 2008.


 

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INCOME TAXES

The Company is subject to the income tax laws of the U.S., its states and municipalities and the foreign jurisdictions in which the Company operates. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of these inherently complex tax laws. The Company must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions, both domestic and foreign.

Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit.

The Company treats interest and penalties on income taxes as a component of income tax expense.

Deferred taxes are recorded for the future consequences of events that have been recognized in the financial statements or tax returns, based upon enacted tax laws and rates. Deferred tax assets (DTAs) are recognized subject to management’s judgment that realization is more likely than not.

Although realization is not assured, the Company believes that the realization of the recognized net deferred tax asset of $44.5 billion is more likely than not based on expectations as to future taxable income in the jurisdictions in which it operates and available tax planning strategies, as defined in SFAS 109, that could be implemented if necessary to prevent a carryforward from expiring. The Company’s net deferred tax asset (DTA) of $44.5 billion consists of approximately $36.5 billion of net U.S. Federal DTAs, $4 billion of net state DTAs and $4 billion of net foreign DTAs. Included in the net federal DTA of $36.5 billion are deferred tax liabilities of $4 billion that will reverse in the relevant carryforward period and may be used to support the DTA. The major components of the U.S. Federal DTA are $10.5 billion in foreign tax credit carryforwards, $4.6 billion in a net operating loss carryforward, $0.6 billion in a general business credit carryforward, $19.9 billion in net deductions which have not yet been taken on a tax return, and $0.9 billion in compensation deductions which reduced additional paid-in capital in January, 2009 and for which SFAS 123(R) did not permit any adjustment to such DTA at December 31, 2008 because the related stock compensation was not yet deductible to the Company. In general, the Company would need to generate approximately $85 billion of taxable income during the respective carryforward periods to fully realize its federal, state and local DTAs.

As a result of the losses incurred in 2008, the Company is in a three-year cumulative pretax loss position at December 31, 2008. A cumulative loss position is considered significant negative evidence in assessing the realizability of a DTA. The Company has concluded that there is sufficient positive evidence to overcome this negative evidence. The positive evidence includes two means by which the Company is able to fully realize its DTA. First, the Company forecasts sufficient taxable income in the carryforward period, exclusive of tax planning strategies, even under stressed scenarios. Secondly, the Company has sufficient tax planning strategies, including potential sales of businesses and assets that could realize the excess of appreciated value over the tax basis of its assets, in an amount sufficient to fully realize its DTA. The amount of the deferred tax asset considered

realizable, however, could be significantly reduced in the near term if estimates of future taxable income during the carryforward period are significantly lower than forecasted due to further decreases in market conditions.

Based upon the foregoing discussion, as well as tax planning opportunities and other factors discussed below, the U.S. and New York State and City net operating loss carryforward period of 20 years provides enough time to utilize the DTAs pertaining to the existing net operating loss carryforwards and any NOL that would be created by the reversal of the future net deductions which have not yet been taken on a tax return.

The U.S. foreign tax credit carryforward period is 10 years. In addition, utilization of foreign tax credits is restricted to 35% of foreign source taxable income in that year. Due to the passage of the American Jobs Creation Act of 2004, overall domestic losses that the Company has incurred of approximately $35 billion are allowed to be reclassified as foreign source income to the extent of 50% of domestic source income produced in subsequent years and are in fact sufficient to cover the foreign tax credits being carried forward. As such, the foreign source taxable income limitation will not be an impediment to the foreign tax credit carryforward usage as long as the Company can generate sufficient domestic taxable income within the 10-year carryforward period. Regarding the estimate of future taxable income, the Company has projected its pretax earnings based upon the “core” businesses that the Company intends to conduct going forward, as well as Smith Barney and Primerica Financial Services. These “core” businesses have produced steady and strong earnings in the past.

The Company has taken steps to ring-fence certain legacy assets to minimize any losses from the legacy assets going forward. During 2008, the “core” businesses have been negatively affected by the large increase in consumer credit losses during this sharp economic downturn cycle. The Company has already taken steps to reduce its cost structure. In addition, its funding structure has been changed by the issuance of preferred stock, which is funded by non-tax deductible dividends, as opposed to debt type securities, which are funded by tax deductible interest payments. Taking these items into account, the Company is projecting that it will generate sufficient pretax earnings within the 10-year carryforward period alluded to above to be able to fully utilize the foreign tax credit carryforward, in addition to any foreign tax credits produced in such period.

The Company has also examined tax planning strategies available to it in accordance with SFAS 109 which would be employed, if necessary, to prevent a carryforward from expiring. These strategies include repatriating low taxed foreign earnings for which an APB 23 assertion has not been made, accelerating taxable income into or deferring deductions out of the latter years of the carryforward period with reversals to occur after the carryforward period (e.g., selling appreciated intangible assets and electing straight-line depreciation), holding onto AFS debt securities with losses until they mature and selling certain assets which produce tax exempt income, while purchasing assets which produce fully taxable income. In addition, the sale or restructuring of certain businesses, such as the announced Smith Barney joint venture with Morgan Stanley with an estimated pretax gain of $9.5 billion, can produce significant taxable income within the relevant carryforward periods.

See Note 11 to the Consolidated Financial Statements on page 152 for a further description of the Company’s tax provision and related income tax assets and liabilities.


 

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LEGAL RESERVES

The Company is subject to legal, regulatory and other proceedings and claims arising from conduct in the ordinary course of business. These proceedings include actions brought against the Company in its various roles, including acting as a lender, underwriter, broker-dealer, investment advisor or reporting company. Reserves are established for legal and regulatory claims in accordance with applicable accounting requirements based upon the probability and estimability of losses. The Company reviews outstanding claims with internal counsel, as well as external counsel when appropriate, to assess probability and estimates of loss. The risk of loss is reassessed as new information becomes available, and reserves are adjusted as appropriate. The actual cost of resolving a claim may be substantially higher, or lower, than the amount of the recorded reserve. See Note 30 to the Consolidated Financial Statements on page 214 and the discussion under “Legal Proceedings” beginning on page 227.

ACCOUNTING CHANGES AND FUTURE APPLICATION OF ACCOUNTING STANDARDS

See Note 1 to the Consolidated Financial Statements on page 122 for a discussion of “Accounting Changes” and the “Future Application of Accounting Standards.”

 

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SEGMENT AND REGIONALNET INCOME (LOSS) AND REVENUES

 

The following tables present net income (loss) and revenues for Citigroup’s businesses on a segment view and on a regional view for the respective periods:

CITIGROUP NET INCOME (LOSS)SEGMENT VIEW

 

In millions of dollars   2008     2007      2006     

% Change

2008 vs. 2007

   

% Change

2007 vs. 2006

 

Global Cards

           

North America

  $ (529 )   $ 2,713      $ 3,887      NM     (30 )%

EMEA

    (117 )     232        121      NM     92  

Latin America

    491       1,233        652      (60 )%   89  

Asia

    321       496        318      (35 )   56  

Total Global Cards

  $ 166     $ 4,674      $ 4,978      (96 )%   (6 )%

Consumer Banking

           

North America

  $ (9,003 )   $ 780      $ 4,002      NM     (81 )%

EMEA

    (606 )     (122 )      5      NM     NM  

Latin America

    (3,822 )     660        1,003      NM     (34 )

Asia

    1,151       839        1,063      37 %   (21 )

Total Consumer Banking

  $ (12,280 )   $ 2,157      $ 6,073      NM     (64 )%

Institutional Clients Group (ICG)

           

North America

  $ (20,471 )   $ (6,733 )    $ 3,533      NM     NM  

EMEA

    (1,102 )     (1,900 )      2,010      42 %   NM  

Latin America

    1,292       1,630        1,112      (21 )   47 %

Asia

    164       2,848        1,956      (94 )   46  

Total ICG

  $ (20,117 )   $ (4,155 )    $ 8,611      NM     NM  

Global Wealth Management (GWM)

           

North America

  $ 968     $ 1,415      $ 1,209      (32 )%   17 %

EMEA

    84       77        23      9     NM  

Latin America

    56       72        48      (22 )   50  

Asia

    (17 )     410        163      NM     NM  

Total GWM

  $ 1,091     $ 1,974      $ 1,443      (45 )%   37 %

Corporate/Other

  $ (954 )   $ (1,661 )    $ (654 )    43 %   NM  

Income (loss) from continuing
operations

  $ (32,094 )   $ 2,989      $ 20,451      NM     (85 )%

Income from discontinued operations

    4,410       628        1,087      NM     (42 )

Net income (loss)

  $ (27,684 )   $ 3,617      $ 21,538      NM     (83 )%

NM Not meaningful

 

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CITIGROUP NET INCOME (LOSS)REGIONAL VIEW

 

In millions of dollars   2008     2007      2006     

% Change

2008 vs. 2007

   

% Change

2007 vs. 2006

 

North America

           

Global Cards

  $ (529 )   $ 2,713      $ 3,887      NM     (30 )%

Consumer Banking

    (9,003 )     780        4,002      NM     (81 )

ICG

    (20,471 )     (6,733 )      3,533      NM     NM  

Securities and Banking

    (20,759 )     (6,929 )      3,434      NM     NM  

Transaction Services

    288       196        99      47 %   98  

GWM

    968       1,415        1,209      (32 )   17  

Total North America

  $ (29,035 )   $ (1,825 )    $ 12,631      NM     NM  

EMEA

           

Global Cards

  $ (117 )   $ 232      $ 121      NM     92 %

Consumer Banking

    (606 )     (122 )      5      NM     NM  

ICG

    (1,102 )     (1,900 )      2,010      42 %   NM  

Securities and Banking

    (2,106 )     (2,573 )      1,547      18     NM  

Transaction Services

    1,004       673        463      49     45  

GWM

    84       77        23      9     NM  

Total EMEA

  $ (1,741 )   $ (1,713 )    $ 2,159      (2 )%   NM  

Latin America

           

Global Cards

  $ 491     $ 1,233      $ 652      (60 )%   89 %

Consumer Banking

    (3,822 )     660        1,003      NM     (34 )

ICG

    1,292       1,630        1,112      (21 )   47  

Securities and Banking

    765       1,221        854      (37 )   43  

Transaction Services

    527       409        258      29     59  

GWM

    56       72        48      (22 )   50  

Total Latin America

  $ (1,983 )   $ 3,595      $ 2,815      NM     28 %

Asia

           

Global Cards

  $ 321     $ 496      $ 318      (35 )%   56 %

Consumer Banking

    1,151       839        1,063      37     (21 )

ICG

    164       2,848        1,956      (94 )   46  

Securities and Banking

    (988 )     1,904        1,345      NM     42  

Transaction Services

    1,152       944        611      22     55  

GWM

    (17 )     410        163      NM     NM  

Total Asia

  $ 1,619     $ 4,593      $ 3,500      (65 )%   31 %

Corporate/Other

  $ (954 )   $ (1,661 )    $ (654 )    43 %   NM  

Income (loss) from continuing operations

  $ (32,094 )   $ 2,989      $ 20,451      NM     (85 )%

Income from discontinued operations

    4,410       628        1,087      NM     (42 )

Net income (loss)

  $ (27,684 )   $ 3,617      $ 21,538      NM     (83 )%

 

NM Not meaningful

 

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CITIGROUP REVENUESSEGMENT VIEW

 

In millions of dollars   2008     2007      2006     

% Change

2008 vs. 2007

   

% Change

2007 vs. 2006

 

Global Cards

           

North America

  $ 10,299     $ 13,893      $ 13,905      (26 )%    

EMEA

    2,326       1,955        1,205      19     62 %

Latin America

    5,017       4,803        2,726      4     76  

Asia

    2,565       2,400        1,976      7     21  

Total Global Cards

  $ 20,207     $ 23,051      $ 19,812      (12 )%   16 %

Consumer Banking

           

North America

  $ 16,627     $ 16,991      $ 15,526      (2 )%   9 %

EMEA

    2,596       2,485        2,059      4     21  

Latin America

    3,959       4,185        3,740      (5 )   12  

Asia

    5,470       5,797        5,310      (6 )   9  

Total Consumer Banking

  $ 28,652     $ 29,458      $ 26,635      (3 )%   11 %

ICG

           

North America

  $ (22,477 )   $ (3,040 )    $ 13,032      NM     NM  

EMEA

    5,592       4,235        8,758      32 %   (52 )%

Latin America

    3,812       4,206        3,091      (9 )   36  

Asia

    5,256       8,339        5,766      (37 )   45  

Total ICG

  $ (7,817 )   $ 13,740      $ 30,647      NM     (55 )%

GWM

           

North America

  $ 9,295     $ 9,790      $ 8,790      (5 )%   11 %

EMEA

    604       543        331      11     64  

Latin America

    357       373        318      (4 )   17  

Asia

    2,345       2,292        738      2     NM  

Total GWM

  $ 12,601     $ 12,998      $ 10,177      (3 )%   28 %

Corporate/Other

  $ (850 )   $ (752 )    $ (944 )    (13 )%   20 %

Total net revenues

  $ 52,793     $ 78,495      $ 86,327      (33 )%   (9 )%

 

NM Not meaningful

 

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CITIGROUP REVENUESREGIONAL VIEW

 

In millions of dollars   2008     2007      2006     

% Change

2008 vs. 2007

   

% Change

2007 vs. 2006

 

North America

           

Global Cards

  $ 10,299     $ 13,893      $ 13,905      (26 )%    

Consumer Banking

    16,627       16,991        15,526      (2 )   9 %

ICG

    (22,477 )     (3,040 )      13,032      NM     NM  

Securities and Banking

    (24,585 )     (4,663 )      11,742      NM     NM  

Transaction Services

    2,108       1,623        1,290      30     26  

GWM

    9,295       9,790        8,790      (5 )   11  

Total North America

  $ 13,744     $ 37,634      $ 51,253      (63 )%   (27 )%

EMEA

           

Global Cards

  $ 2,326     $ 1,955      $ 1,205      19 %   62 %

Consumer Banking

    2,596       2,485        2,059      4     21  

ICG

    5,592       4,235        8,758      32     (52 )

Securities and Banking

    2,222       1,454        6,611      53     (78 )

Transaction Services

    3,370       2,781        2,147      21     30  

GWM

    604       543        331      11     64  

Total EMEA

  $ 11,118     $ 9,218      $ 12,353      21 %   (25 )%

Latin America

           

Global Cards

  $ 5,017     $ 4,803      $ 2,726      4 %   76 %

Consumer Banking

    3,959       4,185        3,740      (5 )   12  

ICG

    3,812       4,206        3,091      (9 )   36  

Securities and Banking

    2,411       3,078        2,251      (22 )   37  

Transaction Services

    1,401       1,128        840      24     34  

GWM

    357       373        318      (4 )   17  

Total Latin America

  $ 13,145     $ 13,567      $ 9,875      (3 )%   37 %

Asia

           

Global Cards

  $ 2,565     $ 2,400      $ 1,976      7 %   21 %

Consumer Banking

    5,470       5,797        5,310      (6 )   9  

ICG

    5,256       8,339        5,766      (37 )   45  

Securities and Banking

    2,515       6,006        4,047      (58 )   48  

Transaction Services

    2,741       2,333        1,719      17     36  

GWM

    2,345       2,292        738      2     NM  

Total Asia

  $ 15,636     $ 18,828      $ 13,790      (17 )%   37 %

Corporate/Other

  $ (850 )   $ (752 )    $ (944 )    (13 )%   20 %

Total net revenue

  $ 52,793     $ 78,495      $ 86,327      (33 )%   (9 )%

 

NM Not meaningful

 

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Table of Contents

GLOBAL CARDS

 

In millions of dollars   2008     2007     2006    

% Change

2008 vs. 2007

   

% Change

2007 vs. 2006

 

Net interest revenue

  $ 11,267     $ 10,682     $ 8,725     5 %   22 %

Non-interest revenue

    8,940       12,369       11,087     (28 )   12  

Revenues, net of interest expense

  $ 20,207     $ 23,051     $ 19,812     (12 )%   16 %

Operating expenses

    10,556       10,571       9,324         13  

Provisions for loan losses and for benefits and claims

    9,556       5,517       3,152     73     75  

Income before taxes and minority interest

  $ 95     $ 6,963     $ 7,336     (99 )%   (5 )%

Income taxes

    (84 )     2,278       2,355     NM     (3 )

Minority interest, net of taxes

    13       11       3     18     NM  

Net income

  $ 166     $ 4,674     $ 4,978     (96 )%   (6 )%

Revenues, net of interest expense, by region:

         

North America

  $ 10,299     $ 13,893     $ 13,905     (26 )%    

EMEA

    2,326       1,955       1,205     19     62 %

Latin America

    5,017       4,803       2,726     4     76  

Asia

    2,565       2,400       1,976     7     21  

Total revenues

  $ 20,207     $ 23,051     $ 19,812     (12 )%   16 %

Net income (loss) by region:

         

North America

  $ (529 )   $ 2,713     $ 3,887     NM     (30 )%

EMEA

    (117 )     232       121     NM     92  

Latin America

    491       1,233       652     (60 )%   89  

Asia

    321       496       318     (35 )   56  

Total net income

  $ 166     $ 4,674     $ 4,978     (96 )%   (6 )%

Average assets (in billions of dollars)

  $ 119     $ 112     $ 98     6 %   14 %

Return on assets

    0.14 %     4.17 %     5.08 %    

Key indicators (in billions of dollars)

         

Average loans

  $ 90.0     $ 82.3     $ 73.6     9     12  

Purchase sales

    436.0       434.9       389.0         12  

Open accounts

    175.5       188.6       186.1     (7 )   1  

 

NM Not meaningful.

 

2008 vs. 2007

Global Cards revenue decreased 12%. Net interest revenue was 5% higher than the prior year primarily driven by growth in average loans of 9%. Purchase sales were flat. Non-interest revenue decreased by 28% primarily due to lower securitization results in North America. Results were also impacted by the following pretax gains: sale of MasterCard shares of $466 million (2007), sales of Redecard shares of $729 million (2007) and $663 million (2008), reorganization, initial public offering and subsequent sales of Visa shares of $447 million (2007) and $523 million (2008), Upromise Cards portfolio sale of $201 million (2008) and DCI sale of $111 million (2008).

In North America, a 26% revenue decline was driven by lower securitization revenues, which reflected the impact of higher credit losses in the securitization trusts. Lower securitization revenue was also driven by a write-down of $1.6 billion in the residual interest in securitized balances. The residual interest was primarily affected by deterioration in the projected credit loss assumption used to value the asset. The change in revenue was also impacted by the absence of a $393 million prior-year gain on the sale of MasterCard shares, which was more than partially offset by a current period gain from the initial public offering of Visa shares, the Upromise Cards portfolio sale, and the DCI sale resulting in pre-tax gains of $349 million, $201 million and $29 million, respectively. Average loans were lower by 1% due to lower purchase sales (4%) and balance transfers, partially offset by a decline in payment rates across all portfolios.

 

Outside of North America, revenues increased by 19%, 4% and 7% in EMEA, Latin America and Asia, respectively. These increases were driven by double-digit growth in purchase sales and average loans in all regions. The pretax gain on the sale of DCI in 2008 impacted EMEA, Latin America and Asia by $34 million, $17 million and $31 million, respectively. Current-year revenues were also impacted by a lower pretax gain on the sale of Visa shares: EMEA was favorably impacted by $18 million, while Latin America and Asia were unfavorably impacted by $147 million and $103 million, respectively. Current-year revenues were also unfavorably impacted by a $66 million pretax lower gain on sales of Redecard shares in Latin America and the absence of the prior-year pretax gain on the sale of MasterCard shares of $7 million, $37 million and $21 million for EMEA, Latin America and Asia, respectively. Results include the impact of foreign currency translation gains related to the strengthening of local currencies (generally referred to hereinafter as “FX translation”), as well as the acquisitions of Egg, Grupo Financiero Uno, Grupo Cuscatlán, and Bank of Overseas Chinese.

Operating expenses were flat as the impact of higher credit management costs, acquisitions, repositioning/restructuring charges of $184 million and FX translation were offset by a $292 million pretax Visa litigation-related charge in 2007, a $159 million pretax Visa litigation-related release and a $36 million pretax legal vehicle restructuring in Mexico in 2008.


 

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Provisions for credit losses and for benefits and claims increased $4.0 billion reflecting an increase of $2.0 billion in net credit losses and $2.0 billion in loan loss reserve builds. In North America, credit costs increased $1.9 billion, driven by higher net credit losses, up $916 million or 44%, and a higher loan loss reserve build, up $936 million. Higher credit costs reflected a weakening of leading credit indicators, trends in the macro-economic environment, including the housing market downturn, rising unemployment trends, higher bankruptcy filings, and the continued acceleration in the rate at which delinquent customers advanced to write-off. A net charge to increase loan loss reserves related to an increase in reported receivables as maturing securitizations resulted in on-balance sheet funding, and also higher business volumes.

Outside of North America, credit costs increased by $605 million, $1,240 million and $322 million in EMEA, Latin America and Asia, respectively. These increases were driven by higher net credit losses, which were up $324 million, $657 million and $144 million in EMEA, Latin America and Asia, respectively. Higher net credit losses were driven by Mexico, Brazil and India, as well as the impact of acquisitions. Also contributing to the increase were higher loan loss reserve builds, which were up $281 million, $583 million and $178 million in EMEA, Latin America and Asia, respectively, and higher business volumes.

2007 vs. 2006

Total Global Cards revenue increased 16%. Net interest revenue was 22% higher than the prior year primarily driven by growth of 12% in both average loans and purchase sales. Non-interest revenue increased by 12% primarily due to a $729 million pretax gain on Redecard shares, a pretax gain on the sale of Visa International Inc. shares of $447 million and a pretax gain on the sale of MasterCard shares of $458 million in 2007. This increase was partially offset by lower securitization revenues primarily reflecting the net impact of higher funding costs and higher credit losses in the securitization trusts.

In North America, revenues were flat reflecting a pretax gain on the sale of MasterCard shares of $393 million in 2007, offset by lower securitization revenues. Purchase sales were up 6% and average loans were down 7%.

Outside of North America, revenues increased by 62%, 76% and 21% in EMEA, Latin America and Asia, respectively. These increases include the impact of pretax gains of $729 million on the sale of Redecard shares, $447 million on the sale of Visa International Inc. shares and $65 million on the sale of MasterCard shares. Purchase sales and average loans were up 33% and 46%, respectively. Results also include the impact of FX translation and acquisitions.

Operating expenses were up 13% driven by a Visa litigation-related pretax charge of $292 million, higher business volumes, credit management costs, the impact of acquisitions, the integration of the CrediCard portfolio, and repositioning charges. Expense growth in 2007 was favorably impacted by the absence of the charge related to the initial adoption of SFAS 123(R) in 2006. Results also include the impact of FX translation.

Provisions for credit losses and for benefits and claims increased $2.4 billion reflecting an increase of $0.7 billion in net credit losses and $1.7 billion in loan loss reserve builds primarily reflecting a weakening of leading credit indicators, a downturn in other economic trends including unemployment and GDP affecting all other portfolios, and a change in

estimate of loan losses inherent in the portfolio but not yet visible in delinquency statistics. In North America, credit costs increased $1.4 billion, driven by a higher loan loss reserve build, up $1.3 billion, and higher net credit losses, up $0.1 billion. The increase in provision for loan losses also reflects the absence of loan loss reserve releases recorded in the prior year, as well as an increase in bankruptcy filings in 2007 versus unusually low filing levels experienced in 2006.

Outside of North America, credit costs increased by $203 million, $616 million and $121 million in EMEA, Latin America and Asia, respectively. These increases were driven by higher business volumes, as well as higher net credit losses, which were up $34 million, $473 million and $32 million in EMEA, Latin America and Asia, respectively. Also contributing to the increase were higher loan loss reserve builds, which were up $168 million, $143 million and $89 million in EMEA, Latin America and Asia, respectively. Provisions for loan losses and for benefits and claims increased substantially, including a change in estimate of loan losses inherent in the loan portfolio but not yet visible in delinquency statistics, along with volume growth and credit deterioration in certain countries. Higher past-due accounts in Mexico cards and the integration of the CrediCard portfolio also contributed to the increase.

Net income was also affected by the absence of a prior-year $153 million tax benefit resulting from the resolution of a federal tax audit.

OUTLOOK FOR 2009

During 2009, Citigroup’s credit card businesses are expected to experience continued challenging economic and credit conditions. The weak global economy, coupled with higher unemployment and bankruptcy filings, is expected to have an adverse effect on credit quality with increases expected in both delinquencies and credit losses. See “Outlook for 2009” on page 7 and “Risk Factors” on page 47.

During 2009, Citigroup intends to continue to focus on offering credit and payment solutions to consumers and small businesses globally by leveraging its global distribution network locally. Citigroup is also taking appropriate repricing actions that reflect the changing credit situation. In addition, Citigroup’s management and reporting realignment will result in the restructuring of these businesses, effective for reporting purposes in the second quarter of 2009, to enable the Company to focus on driving the performance of its core cards business (branded cards) and realize value from the non-core cards businesses (private label cards).

The Company also anticipates deploying TARP funds received from the U.S. government to offer special credit card programs that include expanded eligibility for balance-consolidation offers, targeted increases in credit lines and targeted new account originations. See “TARP and Other Regulatory Programs – Implementation and Management of TARP Programs” on page 44.


 

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CONSUMER BANKING

 

In millions of dollars   2008     2007     2006    

% Change

2008 vs. 2007

   

% Change

2007 vs. 2006

 

Net interest revenue

  $ 21,932     $ 20,741     $ 18,986     6 %   9 %

Non-interest revenue

    6,720       8,717       7,649     (23 )   14  

Revenues, net of interest expense

  $ 28,652     $ 29,458     $ 26,635     (3 )%   11 %

Operating expenses

    26,653       16,316       14,540     63     12  

Provisions for loan losses and for benefits and claims

    19,622       10,761       3,825     82     NM  

Income (loss) before taxes and minority interest

  $ (17,623 )   $ 2,381     $ 8,270     NM     (71 )%

Income taxes

    (5,354 )     181       2,136     NM     (92 )

Minority interest, net of taxes

    11       43       61     (74 )%   (30 )

Net income (loss)

  $ (12,280 )   $ 2,157     $ 6,073     NM     (64 )%

Revenues, net of interest expense, by region:

         

North America

  $ 16,627     $ 16,991     $ 15,526     (2 )%   9 %

EMEA

    2,596       2,485       2,059     4     21  

Latin America

    3,959       4,185       3,740     (5 )   12  

Asia

    5,470       5,797       5,310     (6 )   9  

Total revenues

  $ 28,652     $ 29,458     $ 26,635     (3 )%   11 %

Net income (loss) by region:

         

North America

  $ (9,003 )   $ 780     $ 4,002     NM     (81 )%

EMEA

    (606 )     (122 )     5     NM     NM  

Latin America

    (3,822 )     660       1,003     NM     (34 )

Asia

    1,151       839       1,063     37 %   (21 )

Total net income (loss)

  $ (12,280 )   $ 2,157     $ 6,073     NM     (64 )%

Consumer Finance Japan (CFJ)—NIR

  $ 726     $ 1,135     $ 1,566     (36 )%   (28 )%

Consumer Banking, excluding CFJ—NIR

    21,206       19,606       17,420     8     13  

CFJ—operating expenses

  $ 371     $ 576     $ 713     (36 )%   (19 )%

Consumer Banking, excluding CFJ—operating expenses

    26,282       15,740       13,827     67     14  

CFJ—provision for loan losses and for benefits and claims

  $ 1,336     $ 1,421     $ 1,118     (6 )%   27 %

Consumer Banking, excluding CFJ—

    provision for loan losses and for benefits and claims

    18,286       9,340       2,707     96     NM  

CFJ—net income (loss)

  $ 146     $ (520 )   $ (133 )   NM     NM  

Consumer Banking, excluding CFJ—net income (loss)

    (12,426 )     2,677       6,206     NM     (57 )%

Average assets (in billions of dollars)

  $ 547     $ 572     $ 467     (4 )%   22 %

Return on assets

    (2.24 )%     0.38 %     1.30 %    

Key indicators (in billions of dollars)

         

Average loans

  $ 395.3     $ 380.0     $ 330.1     4     15  

Average deposits

  $ 287.7     $ 276.4     $ 236.7     4     17  

Accounts (in millions)

    78.5       79.5       69.7     (1 )   14  

Branches

    7,730       8,247       7,826     (6 )   5  

 

NM Not meaningful

2008 vs. 2007

Consumer Banking revenue declined 3%. Net interest revenue was 6% higher than the prior year, as growth of 4% in average loans and 4% in deposits was partially offset by a Net interest revenue decline in Japan Consumer Finance (CFJ). Non-interest revenue declined 23%, primarily due to a 27% decline in investment sales and a loss from the mark-to-market on the MSR asset and related hedge in North America.

In North America, total revenues decreased 2%. Net interest revenue was 9% higher than the prior year, primarily due to increased average loans and deposits, up 3% and 2%, respectively, and a shift towards higher yielding products. Non-interest revenue declined 29%, mainly due to lower mortgage servicing revenue. Excluding the impact from the mortgage servicing revenue, total revenues increased 4%. Revenues in EMEA increased by 4%, driven by growth in average loans and deposits, improved net interest margin and the impact of the Egg acquisition. Revenues in Latin America

were down 5%, mainly due to spread compression and lower revenues from the Chile divestiture not being fully offset by average loan and deposit growth of 14% and 4%, respectively. Asia revenues decreased 6%, as growth in average loans and deposits of 5% and 4%, respectively, was offset by a 36% total revenue decline in CFJ and lower investment product sales. Excluding CFJ, revenues increased 2%.

Operating expenses growth of 63% was primarily driven by a $9.568 billion goodwill impairment charge, higher business volumes, increased credit management costs, an $877 million repositioning/restructuring charge and prior-year acquisitions, partially offset by a $221 million benefit related to a legal vehicle repositioning in Mexico, lower incentive compensation expenses and the absence of a prior-year write-down of customer intangibles and fixed assets in CFJ.


 

 

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Expenses were up 70% in North America, primarily driven by a $5.107 billion goodwill impairment charge, a $530 million repositioning/restructuring charge, higher collection and credit-related expenses and acquisitions. Excluding the goodwill impairment charge and the repositioning/restructuring charge, expenses increased 1%. EMEA expenses were up 21% primarily due to the impact of a $203 million goodwill impairment charge, repositioning/restructuring charges in 2008, partially offset by a decline in incentive compensation and the benefits from re-engineering efforts. Expenses increased $4.166 billion in Latin America primarily driven by a $4.258 billion goodwill impairment charge, prior-year acquisitions, volume growth and repositioning/restructuring charges in 2008. Partially offsetting the increase was a $221 million benefit related to a legal vehicle repositioning in Mexico. The 1% growth in Asia was primarily driven by the acquisition of the Bank of Overseas Chinese and higher volumes, partially offset by lower expenses in CFJ.

Provisions for credit losses and for benefits and claims increased $8.9 billion, reflecting significantly higher net credit losses in North America, Mexico and India, as well as a $2.6 billion incremental pretax charge to increase loan loss reserves, primarily in North America. The growth of the loan portfolio also contributed to the increase in credit costs.

Credit costs in North America increased by $7.3 billion, due to a $5.1 billion increase in net credit losses and a $2.2 billion increase in loan loss reserve builds across all portfolios. Higher credit costs reflected a weakening of leading credit indicators, including higher delinquencies in first and second mortgages, auto and unsecured personal loans, as well as trends in the macro-economic environment, including the housing market downturn. The net credit loss ratio increased 168 bps to 2.72%. EMEA credit costs increased 33% reflecting deterioration in Western European countries as well as net credit losses from the Egg acquisition. The net credit loss ratio increased 57 bps to 2.93%. In Latin America, credit costs increased $394 million, primarily due to higher net credit losses in Mexico. Credit costs in Asia increased 27% primarily driven by a $234 million incremental pretax charge to increase loan loss reserves, increased credit costs especially in India, and portfolio growth.

Asia results include a tax benefit of $850 million in the fourth quarter of 2008, mainly due to the restructuring of legal vehicles in Japan.

2007 vs. 2006

Net interest revenue was 9% higher than the prior year as growth in average loans and deposits of 15% and 17% respectively, as well as the impact of acquisitions, was partially offset by a decrease in net interest margin. Non-interest revenue increased 14%, primarily due to a 17% increase in investment product sales and the impact of foreign currency translation.

In North America, total revenues increased 9%. Net interest revenue was 9% higher than the prior year, as growth in average loans and deposits, up 14% and 16%, respectively, was partially offset by a decrease in net interest margin. Net interest margin declined mainly due to an increase in the cost of funding driven by a shift to higher cost Direct Bank and time deposits. Non-interest revenue increased 10%, mainly due to the impact of the acquisition of ABN AMRO in the first quarter of 2007, higher gains on sales of mortgage loans and growth in net servicing revenues. This increase was partially offset by the absence of $163 million pretax gain from the sale of upstate New York branches in the prior-year period. In EMEA, revenues increased by 21% to $2.5 billion, driven by strong growth in average loans and deposits and improved net interest margin and the impact of the Egg

acquisition. Revenues in Latin America increased 12% versus the prior year driven by growth in average loans and deposits of 29% and 14%, respectively, partially offset by the absence of a prior-year gain on the sale of Avantel of $234 million. Asia revenues increased 9%, as growth in average loans and deposits of 13% and 8%, respectively, and higher investment product sales were offset by a 27% total revenue decline in CFJ. Results in 2007 include a $261 million pretax charge in CFJ to increase reserves for estimated losses due to customer settlements.

Consumer Banking Operating expenses increased 12%, reflecting the impact of acquisitions, volume growth across all regions, and increased investment spending due to new branch openings. During 2007, 712 Retail Banking and Consumer Finance branches were opened or acquired. Expenses also included a $152 million write-down of customer intangibles and fixed assets in CFJ recorded in the third quarter of 2007. The increase in expenses was partially offset by savings from the structural expense initiatives announced in April 2007 and the absence of the charge related to the initial adoption of SFAS 123(R) in the first quarter of 2006.

North America expenses were up 12%, primarily driven by the ABN AMRO integration, higher collection costs, higher volume-related expenses, and increased investment spending due to 202 new branch openings in 2007 (110 in CitiFinancial and 92 in Citibank, N.A.). Expense growth in 2007 was favorably affected by the absence of the charge related to the initial adoption of SFAS 123(R) in the prior-year period. EMEA expenses were up 20% primarily due to business growth, acquisitions and FX translation. Expenses in Latin America increased 11%, primarily driven by higher business volumes and the impact of acquisitions. Asia expenses increased 9%, primarily due to increased investment spending including expansion of the branch network, partially offset by savings from the structural expense initiatives.

Provisions for credit losses and for benefits and claims increased $6.9 billion reflecting a $5.1 billion incremental pretax charge to increase loan loss reserves, primarily in North America, and significantly higher net credit losses of $1.8 billion. The increase in loan loss reserves reflects a change in estimate of loan losses inherent in the loan portfolio but not yet visible in delinquency statistics.

Credit costs in North America increased by $5.6 billion, due to $1.2 billion higher net credit losses and $4.4 billion higher loan loss reserve build. Higher credit costs reflected a weakening of leading credit indicators including delinquencies in first and second mortgages and deterioration in the housing market, a downturn in other economic trends including unemployment and GDP affecting all other portfolios and a change in estimate of loan losses inherent in the portfolio but not yet visible in delinquency statistics. The increase in Provision for loan losses also reflects the absence of loan loss reserve releases recorded in the prior year. The net credit loss ratio increased 32 bps to 1.04%. Higher credit costs in EMEA were due to an increase in net credit losses, up 56%, and an $174 million incremental net charge to increase loan loss reserves. The net credit loss ratio increased 28 bps to 2.36%. Credit costs in Latin America increased substantially driven by a $151 million incremental net charge to increase loan loss reserves and higher net credit losses. The net credit loss ratio increased 46 bps to 1.90%. Credit costs in Asia increased 55% primarily driven by higher net credit losses, primarily in CFJ, and a $317 million incremental pretax charge to increase loan loss reserves, as well as increased credit costs especially in India.


 

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OUTLOOK FOR 2009

During 2009, Citigroup’s global consumer business is expected to operate in a continued challenging economic and credit environment. Revenues will likely continue to be negatively affected by the significant U.S. and global economic downturn that has impacted customer demand and credit performance. See “Outlook for 2009” on page 7 and “Risk Factors” on page 47.

In North America, the continuing deterioration in the U.S. housing market could continue to adversely impact the cost of credit in the first mortgage and second mortgage portfolios. With higher levels of unemployment and bankruptcy filings in 2009, net credit losses, delinquencies and defaults are expected to continue to increase. In EMEA, loan volumes are expected to decline as is consistent with tighter origination standards in view of the weak credit environment and exits in specific consumer finance businesses. Investment sales and assets under management are expected to be lower due to weak capital markets and lower client confidence. In Latin America, revenues, credit costs and business drivers are expected to be affected by global economic conditions, including the impact of foreign currency translation, unemployment rates and political and regulatory developments in the region. In Japan, the Company will continue to actively monitor developments in customer refund claims and defaults, political developments and the way courts view grey zone claims, refunds and defaults, the outcome of which cannot be predicted.

Citigroup’s management and reporting realignment will result in the restructuring of these businesses, effective for reporting purposes in the second quarter of 2009, resulting in a focus on the Company’s core assets within the regional consumer and commercial banking businesses. The realignment will also allow the Company to seek to realize value from its other local consumer finance businesses. The Company also anticipates deploying TARP funds received from the U.S. government by making mortgage loans directly to homebuyers and supporting the housing market through the purchase of prime residential mortgages and mortgage-backed securities in the secondary market, and providing loans to consumers and businesses facing liquidity problems. See “TARP and Other Regulatory Programs – Implementation and Management of TARP Programs” on page 44.

 


 

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INSTITUTIONAL CLIENTS GROUP (ICG)

 

In millions of dollars   2008     2007      2006   

% Change

2008 vs. 2007

   

% Change

2007 vs. 2006

 

Net interest revenue

  $ 19,159     $ 12,242      $ 9,653    57 %   27 %

Non-interest revenue

    (26,976 )     1,498        20,994    NM     (93 )

Revenues, net of interest expense

  $ (7,817 )   $ 13,740      $ 30,647    NM     (55 )%

Operating expenses

    22,851       21,236        18,229    8 %   16  

Provision for credit losses and benefits and claims

    5,234       1,540        532    NM     NM  

Income (loss) before taxes and minority interest

  $ (35,902 )   $ (9,036 )    $ 11,886    NM     NM  

Income taxes (benefits)

    (15,405 )     (5,054 )      3,052    NM     NM  

Minority interest, net of taxes

    (380 )     173        223    NM     (22 )%

Net income (loss)

  $ (20,117 )   $ (4,155 )    $ 8,611    NM     NM  

Revenues, net of interest expense, by region:

           

North America

  $ (22,477 )   $ (3,040 )    $ 13,032    NM     NM  

EMEA

    5,592       4,235        8,758    32 %   (52 )%

Latin America

    3,812       4,206        3,091    (9 )   36  

Asia

    5,256       8,339        5,766    (37 )   45  

Total revenues

  $ (7,817 )   $ 13,740      $ 30,647    NM     (55 )%

Total revenues, net of interest expense by product:

           

Securities and Banking

  $ (17,437 )   $ 5,875      $ 24,651    NM     (76 )%

Transaction Services

    9,620       7,865        5,996    22 %   31  

Total revenues

  $ (7,817 )   $ 13,740      $ 30,647    NM     (55 )%

Net income (loss) by region:

           

North America

  $ (20,471 )   $ (6,733 )    $ 3,533    NM     NM  

EMEA

    (1,102 )     (1,900 )      2,010    42 %   NM  

Latin America

    1,292       1,630        1,112    (21 )   47 %

Asia

    164       2,848        1,956    (94 )   46  

Total net income (loss)

  $ (20,117 )   $ (4,155 )    $ 8,611    NM     NM  

Net income (loss) by product:

           

Securities and Banking

  $ (23,088 )   $ (6,377 )    $ 7,180    NM     NM  

Transaction Services

    2,971       2,222        1,431    34 %   55 %

Total net income (loss)

  $ (20,117 )   $ (4,155 )    $ 8,611    NM     NM  

 

NM Not meaningful.

 

2008 vs. 2007

Revenues, net of interest expense were negative due to substantial losses related to the fixed income and credit markets. Securities and Banking revenues included $14.3 billion of write-downs on subprime-related direct exposure, $5.7 billion of downward credit market value adjustments related to exposure to Monoline insurers, $4.9 billion of write-downs (net of underwriting fees) on funded and unfunded highly leveraged finance commitments, $4.4 billion of downward credit valuation adjustments on derivative positions, excluding Monolines, $3.8 billion of write-downs on Alt-A mortgage securities, net of hedges, $3.3 billion of write-downs on SIV assets, $2.6 billion of write-downs on commercial real estate positions, $2.5 billion of losses in private equity and equity investments in the fourth quarter, $1.7 billion of write-downs on ARS inventory, due to failed auctions predominately in the first quarter of 2008 and deterioration in the credit markets, and write-downs of $413 million related to the ARS settlement.

Negative Fixed Income Markets revenues were partially offset by a $4.6 billion gain related to the inclusion of Citi’s credit spreads in the determination of the market value of those liabilities for which the fair- value option was elected. Equity Markets also suffered a decrease in revenues, particularly in derivatives and convertibles, driven by the volatility and sharp declines in the global equity indices. Offsetting the negative revenues in Fixed Income and decline in Equities is the increase in Lending revenues of $1.6 billion to $4.1 billion, primarily driven by gains on CDS hedges. Transaction Services revenues grew 22% driven by new business wins and implementations, growth in customer liability balances, increased transaction volumes and the impact of acquisitions.

Operating expenses increased 4% in Securities and Banking reflecting $1,242 million of repositioning/restructuring charges, a $937 million Nikko Asset Management intangible asset impairment charge, and an Old Lane intangible asset impairment charge of $202 million, whereas 2007 expenses


 

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included $370 million of repositioning/restructuring charges, partially offset by a $300 million release of litigation reserves. Expenses increased 11% in Transaction Services due to higher expenses driven by organic business growth, higher variable expenses related to sales and revenue growth, and the Bisys Group acquisition.

Provisions for credit losses and for benefits and claims in Securities and Banking increased, primarily from an incremental net charge to increase loan loss reserves of $2.5 billion, reflecting loan loss reserves for specific counterparties, as well as a weakening in credit quality in the corporate credit environment and a $1.1 billion increase in net credit losses mainly associated with loan sales. Transaction Services credit costs increased, primarily due to a charge to increase loan loss reserves, mainly from the commercial banking portfolio in the emerging markets.

2007 vs. 2006

Revenues, net of interest expense decreased 55% driven by $20.7 billion of pretax write-downs and losses related to deterioration in the mortgage-backed and credit markets. The losses consisted primarily of approximately $18.3 billion related to direct subprime-related exposures and write-downs of approximately $1.5 billion pretax, net of underwriting fees, on funded and unfunded highly leveraged finance commitments. Of this amount, approximately $1.3 billion of impairment was recognized for transactions that had been funded as of December 31, 2007, and $0.2 billion of impairment was recognized on transactions that were unfunded as of December 31, 2007. Securities and Banking’s remaining $37.3 billion in U.S. subprime net direct exposure as of December 31, 2007 consisted of (a) approximately $8.0 billion of subprime-related exposures in its lending and structuring business and (b) approximately $29.3 billion of net exposures to the super senior tranches of CDOs which are collateralized by asset-backed securities, derivatives on asset-backed securities, or both. The decreases were offset partially by increased revenues in Equity Markets from cash trading and strong growth in equity finance, in Advisory from strong deal volumes, in Equity Underwriting and in Lending. Transaction Services revenues increased 31% reflecting growth in liability balances, transaction volumes and assets under custody mainly in Cash Management and Securities and Funds Services. Average liability balances grew 30% to $247 billion in 2007 as compared to 2006 due to growth across all regions, reflecting positive flow from new and existing customers.

Operating expenses increased 16% due to higher business volumes, higher non-incentive compensation staff expenses and increased costs driven by the Bisys Group, Nikko Cordial, Grupo Cuscatlán, Old Lane and ATD acquisitions. Operating expenses also increased driven by the implementation of a headcount reduction plan to reduce ongoing expenses. This resulted in a $438 million pretax charge to compensation and benefits in connection with headcount reductions. Expense growth in 2007 was favorably affected by the absence of a $354 million charge related to the initial adoption of SFAS 123(R) in 2006 and a $300 million pretax release of litigation reserves in 2007.

Provisions for credit losses and for benefits and claims increased approximately $1.0 billion, driven by higher net credit losses, mainly from loans with subprime-related direct exposure, and a higher net charge to increase loan loss and unfunded lending commitment reserves reflecting a slight weakening in overall portfolio credit quality, as well as loan loss reserves for specific counterparties. Subprime-related loans accounted for

approximately $860 million of credit costs in 2007, of which $704 million was recorded in the fourth quarter.

OUTLOOK FOR 2009

During 2009, the Company’s Securities and Banking businesses will continue to be significantly affected by the levels of and volatility in the global capital markets and economic and political developments, in the U.S. and globally. Default rates are expected to be at historic highs by the end of 2009 and could negatively impact the cost of credit. Growth in the transaction services business could be offset by lower interest rates and continued potential pressure on asset values. See “Outlook for 2009” on page 7 and “Risk Factors” on page 47.

The Company intends to continue to manage down legacy positions that have proven illiquid to reduce future losses. The Company’s global Transaction Services business will continue to focus on generating earnings growth, leveraging its strong global platform and its ability to innovatively serve large multinational clients seeking to optimize their working capital.

In addition, Citigroup’s management and reporting realignment will result in the restructuring of the Securities and Banking businesses, effective for reporting purposes in the second quarter of 2009, resulting in a focus on the Company’s core assets, such as its global Transaction Services and investment banking business, and managing and maximizing the value of its other legacy assets.


 

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GLOBAL WEALTH MANAGEMENT

 

In millions of dollars   2008     2007    2006   

% Change

2008 vs. 2007

   

% Change

2007 vs. 2006

 

Net interest revenue

  $ 2,622     $ 2,174    $ 1,922    21 %   13 %

Non-interest revenue

    9,979       10,824      8,255    (8 )   31  

Revenues, net of interest expense

  $ 12,601     $ 12,998    $ 10,177    (3 )%   28 %

Operating expenses

    10,548       9,849      8,006    7     23  

Provision for loan losses

    301       101      24    NM     NM  

Income before taxes and minority interest

  $ 1,752     $ 3,048    $ 2,147    (43 )%   42 %

Income taxes

    652       1,019      703    (36 )   45  

Minority interest, net of taxes

    9       55         (84 )    

Net income

  $ 1,091     $ 1,974    $ 1,444    (45 )%   37 %

Revenues, net of interest expense by region:

           

North America

  $ 9,295     $ 9,790    $ 8,790    (5 )%   11 %

EMEA

    604       543      331    11     64  

Latin America

    357       373      318    (4 )   17  

Asia

    2,345       2,292      738    2     NM  

Total revenues

  $ 12,601     $ 12,998    $ 10,177    (3 )%   28 %

Net income (loss) by region:

           

North America

  $ 968     $ 1,415    $ 1,209    (32 )%   17 %

EMEA

    84       77      23    9     NM  

Latin America

    56       72      48    (22 )   50  

Asia

    (17 )     410      163    NM     NM  

Total net income

  $ 1,091     $ 1,974    $ 1,443    (45 )%   37 %

Key indicators: (in billions of dollars)

           

Total assets under fee-based management

  $ 332     $ 507    $ 399    (35 )%   27 %

Total client assets

    1,320       1,784      1,438    (26 )   24  

Net client asset flows

    (25 )     15      14    NM     7  

Financial advisors (FA) / bankers (actual number)

    13,765       15,454      13,694    (11 )   13  

Annualized revenue per FA / banker (in thousands of dollars)

    849       880      740    (4 )   19  

Average deposits and other customer liability balances

    126       117      107    8     9  

Average loans

    63       54      42    17     29  

NM Not meaningful.

 

2008 vs. 2007

Revenues, net of interest expense decreased 3% primarily due to the fall in investment revenues across regions and lower capital markets revenue in Asia and North America, partially offset by the impact of the Nikko Cordial acquisition, an increase in lending revenues across all regions and an increase in banking revenues in North America and EMEA. The consolidated revenue also includes the gain on sale of CitiStreet and charges related to the ARS settlement.

Total client assets, including assets under fee-based management, decreased $464 billion, or 26%, mainly reflecting the impact of market declines over the past year. Net flows were $(25) billion. GWM had 13,765 financial advisors/bankers as of December 31, 2008, compared with 15,454 as of December 31, 2007, driven by attrition in North America and Asia, as well as the elimination of low performing bankers and advisors.

Operating expenses increased 7% primarily due to higher repositioning/restructuring charges of $298 million, the impact of acquisitions, a reserve of $250 million in the first quarter of 2008 related to an offer to facilitate the liquidation of investments in a Citi-managed fund for its clients, and GWM’s share of the ARS settlement penalty of $50 million in the third

quarter. These increases were partially offset by the impact of lower compensation costs and continued expense management.

Provision for loan losses increased by $200 million, reflecting higher reserve builds of $149 million and increased write-downs of $51 million. The reserve builds and write-offs in 2008 reflect the impact on clients of deteriorating financial and real estate markets. Loans were downgraded, classified and written-down as clients experienced liquidity depletion from failed markets and financial institutions. The increase in reserve builds was primarily in North America, while the increase in write-offs were evenly split between North America and Asia.

2007 vs. 2006

Revenues, net of interest expense increased 28% primarily due to the impact of acquisitions, an increase in fee-based revenues in line with the growth in fee-based assets, an increase in international revenues driven by strong capital markets activity in Asia and growth in investment revenue in EMEA, as well as strong U.S. branch transactional revenue and syndicate sales.


 

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Total client assets, including assets under fee-based management, increased $346 billion, or 24%, reflecting the inclusion of client assets from the Nikko Cordial and Quilter acquisitions, as well as organic growth. Net flows increased slightly compared to the prior year. Global Wealth Management had 15,454 financial advisors/bankers as of December 31, 2007, compared with 13,694 as of December 31, 2006, driven by the Nikko Cordial and Quilter acquisitions, as well as hiring in the Private Bank.

Operating expenses increased 23% primarily due to the impact of acquisitions, higher variable compensation associated with the increase in revenues, increased customer activity and charges related to headcount reductions. Expense growth in 2007 was favorably affected by the absence of the charge related to the initial adoption of SFAS 123(R) in the first quarter of 2006.

Provision for loan losses increased $77 million in 2007, primarily driven by portfolio growth and a reserve for specific non-performing loans in the Private Bank.

Net income growth also reflected a $65 million APB 23 benefit in the Private Bank in 2007 and the absence of a $47 million tax benefit resulting from the resolution of 2006 Tax Audits.

OUTLOOK FOR 2009

During 2009, Citigroup’s businesses will continue to be negatively affected by the levels of and volatility in the capital markets, the disruption in the economic environment generally and credit costs, including the level of interest rates, the credit environment and unemployment rates. See “Outlook for 2009” on page 7 and “Risk Factors” on page 47.

As previously announced, the completion of the Morgan Stanley Smith Barney joint venture is anticipated to occur in the third quarter of 2009. After the expected completion of the joint venture transaction, which is subject to and contingent upon regulatory approvals, a significant portion of the earnings in the joint venture, of which Citigroup will share 49%, will be derived from the profitability of the joint venture. Joint venture profitability will be impacted by the ability of Smith Barney and Morgan Stanley to execute the planned integration, as well as the overall market and economic conditions, including further declines in client asset values.

In addition, Citigroup’s management and reporting realignment will result in the restructuring of these businesses, effective for reporting purposes in the second quarter of 2009, resulting in a focus on the Company’s core assets within the businesses, such as the Private Bank, and continued efforts to maximize the value of other assets, including Citi’s 49% stake in the Morgan Stanley Smith Barney Joint Venture and the Company’s Nikko Asset Management business.

 

 

 

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CORPORATE/OTHER

 

Corporate/Other includes Treasury results, unallocated corporate expenses, offsets to certain line-item reclassifications reported in the business segments (inter-segment eliminations), the results of discontinued operations and unallocated taxes.

 

In millions of dollars   2008     2007      2006  

Net interest revenue

  $ (1,288 )   $ (461 )    $ (345 )

Non-interest revenue

    438       (291 )      (599 )

Revenues, net of interest expense

  $ (850 )   $ (752 )    $ (944 )

Operating expenses

    526       1,830        202  

Provisions for loan losses and for benefits and claims

    1       (2 )      4  

Loss from continuing operations before taxes and minority interest

  $ (1,377 )   $ (2,580 )    $ (1,150 )

Income tax benefits

    (421 )     (922 )      (498 )

Minority interest, net of taxes

    (2 )     3        2  

Loss from continuing operations

  $ (954 )   $ (1,661 )    $ (654 )

Income from discontinued operations

    4,410       628        1,087  

Net income (loss)

  $ 3,456     $ (1,033 )    $ 433  

2008 vs. 2007

Revenues, net of interest expense declined primarily due to the gain in 2007 on the sale of certain corporate-owned assets and higher inter-segment eliminations partially offset by improved Treasury hedging activities.

Operating expenses declined primarily due to lower restructuring charges in the current year as well as reductions in incentive compensation and benefits expense.

Discontinued operations represent the sale of Citigroup’s German Retail Banking Operations and CitiCapital. See Note 3 to the Consolidated Financial Statements on page 136 for a more detailed discussion.

 

2007 vs. 2006

Revenues, net of interest expense improved primarily due to improved Treasury results and a gain on the sale of certain corporate-owned assets, partially offset by higher inter-segment eliminations.

Operating expenses increased primarily due to restructuring charges, increased staffing, technology and other unallocated expenses, partially offset by higher inter-segment eliminations.

Income tax benefits increased due to a higher pretax loss in 2007, offset by a prior-year tax reserve release of $69 million relating to the resolution of the 2006 Tax Audits.

Discontinued operations represent the operations in the Sale of the Asset Management Business and the Sale of the Life Insurance and Annuities Business. For 2006, Income from discontinued operations included gains and tax benefits relating to the final settlement of the Life Insurance and Annuities and Asset Management Sale Transactions and a gain from the Sale of the Asset Management Business in Poland, as well as a tax reserve release of $76 million relating to the resolution of the 2006 Tax Audits.


 

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REGIONAL DISCUSSIONS

 

The following are the four regions in which Citigroup operates. The regional results are fully reflected in the previous segment discussions.

NORTH AMERICA

 

In millions of dollars   2008     2007     2006    

% Change

2008 vs. 2007

   

% Change

2007 vs. 2006

 

Net interest revenue

  $ 28,713     $ 23,333     $ 20,557     23 %   14 %

Non-interest revenue

    (14,969 )     14,301       30,696     NM     (53 )

Revenues, net of interest expense

  $ 13,744     $ 37,634     $ 51,253     (63 )%   (27 )%

Operating expenses

    36,407       30,186       28,380     21     6  

Provisions for loan losses and for benefits and claims

    23,842       11,838       4,080     NM     NM  

Income (loss) before taxes and minority interest

  $ (46,505 )   $ (4,390 )   $ 18,793     NM     NM  

Income taxes

    (17,046 )     (2,667 )     5,920     NM     NM  

Minority interest, net of taxes

    (424 )     102       242     NM     (58 )%

Net income (loss)

  $ (29,035 )   $ (1,825 )   $ 12,631     NM     NM  

Average assets (in billions of dollars)

  $ 1,188     $ 1,222     $ 971     (3 )%   26 %

Return on assets

    (2.44 )%     (0.15 )%     1.30 %            

Key indicators (in billions of dollars, except in branches)

         

Average loans

  $ 429.7     $ 405.2     $ 363.1     6 %   12 %

Average Consumer Banking loans

    298.2       289.8       255.0     3     14  

Average deposits (and other consumer liability balances)

    261.6       245.1       218.1     7     12  

Branches/offices

    3,989       4,227       4,084     (6 )   4  

NM Not meaningful.

 

2008 vs. 2007

Revenues, net of interest expense declined 63% from 2007, driven by significantly higher losses related to fixed income and credit markets in S&B, which are more fully described on page 10. These losses resulted in a decline in S&B revenue of $19.9 billion from 2007. Cards revenue declined 26%, due to lower securitization revenues, reflecting the impact of higher funding costs and higher credit losses in the securitization trusts, and the write-down of $1.6 billion in the residual interest in securitized balances. Cards results also include higher gains on portfolio sales, which in aggregate added $548 million to 2008 revenue vs. $393 million in 2007. Consumer Banking revenue decreased 2%, as higher interest revenue was more than offset by lower mortgage servicing. Global Wealth Management revenue declined 5% reflecting lower investment revenues and the ARS settlement, which were partially offset by the gain on the sale of CitiStreet and higher lending revenues.

Operating expenses increased 21%, with increases in ICG and Consumer Banking, reflecting a $5.107 billion goodwill impairment charge, higher restructuring and repositioning charges, partially offset by a reduction in Cards. Global Wealth Management expenses were flat year over year. Total restructuring/repositioning charges were approximately $2.0 billion for the full year.

Provisions for loan losses and for benefits and claims increased $12.0 billion. Consumer Banking credit costs increased $7.3 billion, due to a $5.1 billion increase in net credit losses and a $2.2 billion increase in loan loss reserve builds (see page 11 and 32 for further discussion). Cards credit costs increased $1.9 billion, due to an increase of $916 million in net credit losses and an increase in reserve builds of $936 million (see page 11 and 30 for further discussion). ICG increased $2.2 billion, reflecting loan losses reserves for specific counterparties, a weakening in credit quality in the corporate credit environment and an increase in net credit losses associated with loan sales.

 

2007 vs. 2006

Revenues, net of interest expense declined 27% from 2006, primarily driven by pretax write-downs and losses related to deterioration in the mortgage-backed and credit markets in S&B, which are more fully described on page 34. These losses resulted in a decline in S&B revenue of $16.4 billion from 2007. In Global Cards, revenues were flat, reflecting a pretax gain on the sale of MasterCard shares of $393 million in 2007, offset by lower securitization revenues. Purchase sales were up 6% and average loans were down 7%. In Consumer Banking, total revenues increased 9%. Net interest revenue was 9% higher than the prior year, as growth in average loans and deposits, up 14% and 16%, respectively, was partially offset by a decrease in net interest margin. Net interest margin declined mainly due to an increase in the cost of funding driven by a shift to higher cost Direct Bank and time deposits. Non-interest revenue increased 10%, mainly due to the impact of the acquisition of ABN AMRO in the first quarter of 2007, higher gains on sales of mortgage loans and growth in net servicing revenues. This increase was partially offset by the absence of $163 million pretax gain from the sale of upstate New York branches in the prior-year period.

Operating expenses growth of 6% was primarily driven by the VISA litigation-related pretax charge of $292 million, the ABN AMRO integration, higher collection costs, higher volume-related expenses, and increased investment spending due to 202 new branch openings in 2007 (110 in CitiFinancial and 92 in Citibank). Additionally, expenses increased due to higher non-incentive compensation staff expenses and acquisitions. Expense growth in 2007 was favorably affected by the absence of the charge related to the initial adoption of SFAS 123(R) in the first quarter of 2006.

Provisions for loan losses and for benefits and claims increased $7.8 billion. Credit costs in Consumer Banking increased by $5.6 billion, due to $1.2 billion higher net credit losses and $4.4 billion higher loan loss reserve build (see page 32 for further discussion). In Global Cards, credit costs increased $1.4 billion, driven by a higher loan loss reserve build, up $1.3 billion, and higher net credit losses, up $0.1 billion (see page 30 for further discussion). In ICG credit costs increased $940 million (see page 35 for further discussion).

Net income in 2007 also reflected the absence of a $229 million tax benefit resulting from the resolution of the 2006 Tax Audits.


 

 

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EMEA

 

In millions of dollars   2008     2007     2006    

% Change

2008 vs. 2007

   

% Change

2007 vs. 2006

 

Net interest revenue

  $ 8,618     $ 7,067     $ 5,222     22 %   35 %

Non-interest revenue

    2,500       2,151       7,131     16     (70 )

Revenues, net of interest expense

  $ 11,118     $ 9,218     $ 12,353     21 %   (25 )%

Operating expenses

    11,051       10,864       8,778     2     24  

Provisions for loan losses and for benefits and claims

    3,572       1,818       770     96     NM  

Income (loss) before taxes and minority interest

  $ (3,505 )   $ (3,464 )   $ 2,805     (1 )%   NM  

Income taxes

    (1,847 )     (1,836 )     604     (1 )   NM  

Minority interest, net of taxes

    83       85       42     (2 )   NM  

Net income (loss)

  $ (1,741 )   $ (1,713 )   $ 2,159     (2 )%   NM  

Average assets (in billions of dollars)

  $ 373     $ 406     $ 290     (8 )%   40 %

Return on assets

    (0.47 )%     (0.42 )%     0.74 %   NM     NM  

Key indicators (in billions of dollars, except in branches)

         

Average loans

  $ 115.5     $ 117.5     $ 87.2     (2 )%   35 %

Average Consumer Banking loans

    24.5       22.2       16.1     10     38  

Average deposits (and other consumer liability balances)

    159.0       140.3       99.6     13     41  

Branches/offices

    778       801       800     (3 )    

NM Not meaningful.

 

2008 vs. 2007

Revenues increased 21% largely driven by Securities and Banking and Transaction Services. In Global Cards, revenues increased by 19% to $2.3 billion, driven by higher purchase sales and average loans. Consumer Banking revenues were up 4% to $2.6 billion as growth in average loans was partially offset by impairment of the U.K. held-for-sale loan portfolio and softening wealth management revenues due to market volatility. Current and historical Germany retail banking financials have been reclassified as discontinued operations and are excluded from Global Cards and Consumer Banking results.

In ICG, S&B revenues were up 53% from 2007 mainly due to write-downs on subprime-related direct exposures included in 2009. Subprime-related direct exposures are now managed primarily in North America and have been transferred from EMEA to North America with effect from the second quarter of 2008. 2008 also included write-downs on subprime-related exposures in the first quarter of 2008 and in commercial real estate positions and highly leveraged finance commitments. Revenues also reflected strong results in local markets sales and trading and G10 Rates and Currencies. Transaction Services revenues increased 21% to $3.4 billion with continued growth in customer liability balances and deposits. Revenues in GWM grew by 11% to $0.6 billion primarily driven by an increase in Banking, Capital Markets and Lending products.

Operating expenses were up 2% due to a $203 million goodwill impairment charge and the impact of further repositioning and restructuring charges in 2008. Partially offsetting the increase was a decline in incentive compensation and the benefits of reengineering efforts.

Provisions for loan losses and for benefits and claims increased 96%. The increase was primarily driven by the deterioration in the Consumer and Corporate credit environment, higher loan loss reserve builds and losses associated with Corporate loan sales.

 

2007 vs. 2006

Revenues were down 25% due to write-downs in Securities and Banking, partially offset by double-digit growth across all other segments.

Global Cards revenues increased by 62% to $2.0 billion, driven by double-digit growth in purchase sales and average loans and the impact of the Egg acquisition. Revenues in Consumer Banking increased by 21% to $2.5 billion, driven by strong growth in average loans and deposits and improved net interest margin and the impact of the Egg acquisition.

S&B revenue of $1.5 billion was down from the prior year due to write-downs on subprime-related direct exposures and in funded and unfunded highly-leveraged loan commitments in the second half of 2007. Revenues in S&B also included a strong performance in Equities, Advisory and local markets sales and trading. Transaction Services revenues increased by 30% to $2.8 billion driven by increased customer volumes and deposit growth. Revenues in GWM grew by 64% to $0.5 billion primarily driven by an increase in annuity revenues and the impact of the acquisition of Quilter.

Operating expenses were up 24% due to the impact of business growth, acquisitions, FX translation and organizational and repositioning charges in 2007.

Provisions for loan losses and for benefits and claims increased $1.0 billion primarily due to an increase in net credit losses and an incremental net charge to loan loss reserves.


 

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LATIN AMERICA

 

In millions of dollars   2008     2007     2006    

% Change

2008 vs. 2007

   

% Change

2007 vs. 2006

 

Net interest revenue

  $ 8,001     $ 7,151     $ 5,053     12 %   42 %

Non-interest revenue

    5,144       6,416       4,822     (20 )   33  

Revenues, net of interest expense

  $ 13,145     $ 13,567     $ 9,875     (3 )%   37 %

Operating expenses

    11,103       6,777       5,513     64     23  

Provisions for loan losses and for benefits and claims

    3,670       1,867       1,043     97     79  

Income before taxes and minority interest

  $ (1,628 )   $ 4,923     $ 3,319     NM     48 %

Income taxes

    351       1,326       503     (74 )%   NM  

Minority interest, net of taxes

    4       2       1     100     100  

Net income (loss)

  $ (1,983 )   $ 3,595     $ 2,815     NM     28 %

Average assets (in billions of dollars)

  $ 153     $ 145     $ 116     6 %   25 %

Return on assets

    (1.30 )%     2.48 %     2.43 %            

Key indicators (in billions of dollars, except in branches)

         

Average loans

  $ 59.0     $ 55.5     $ 40.8     6 %   36 %

Average Consumer Banking loans

    15.1       13.2       10.3     14     28  

Average deposits (and other consumer liability balances)

    67.0       62.2       49.3     8     26  

Branches/offices

    2,571       2,747       2,404     (6 )   14  

NM Not meaningful.

 

2008 vs. 2007

Revenues, net of interest expense were 3% lower than the prior year, as growth of 6% in average loans and 8% in total customer deposits was more than offset by FX translation. Global Cards grew 4% on higher volumes and a $661 million gain on Redecard shares. Consumer Banking decreased 5% mainly due to FX translation and the divestiture of the Chile consumer banking operation in January 2008. S&B revenue decreased 22% due to write-downs and losses related to fixed income and equities. Transaction Services revenues increased 24%, mainly from the custody business as average deposits grew rapidly in the second half of 2007 and have remained at those levels.

Operating expenses growth of 64% was primarily driven by a $4.258 billion goodwill impairment charge, acquisitions and volume growth, higher collection costs, legal costs and reserves, and repositioning charges, partially offset by a $282 million benefit related to a legal vehicle repositioning in Mexico in the first quarter of 2008. Certain poorly performing branches were closed, mainly in Brazil and Mexico, partially offset by openings in Mexico, due to repositioning and realignment in both retail and consumer finance.

Provisions for loan losses and for benefits and claims increased 97% as the credit environment, mainly in Mexico, Brazil and Colombia, worsened, primarily reflected by a $1.2 billion increase in net credit losses and an increase in loan loss reserve builds.

 

2007 vs. 2006

Revenues, net of interest expense were 37% higher than the prior year, associated with higher volumes, the Cuscatlan and GFU acquisitions, the integration of CrediCard in Brazil, as well as gains on non-core assets including a $729 million pretax gain on Redecard shares, a $235 million pretax gain on Visa shares and a pretax gain of $78 million from the MasterCard initial public offering. These gains were partially offset by the gain on sale of Avantel of $234 million in 2006.

Operating expenses growth of 23% was primarily driven by the Cuscatlan and GFU acquisitions and the Brazil expansion strategy.

Provisions for loan losses and for benefits and claims increased 79% primarily reflecting market conditions and portfolio growth (mainly Global Cards), as well as the impact of acquisitions.


 

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ASIA

 

In millions of dollars   2008     2007     2006    

% Change

2008 vs. 2007

   

% Change

2007 vs. 2006

 

Net interest revenue

  $ 9,648     $ 8,290     $ 7,441     16 %   11 %

Non-interest revenue

    5,988       10,538       6,349     (43 )   66  

Revenues, net of interest expense

  $ 15,636     $ 18,828     $ 13,790     (17 )%   37 %

Operating expenses

    12,047       10,145       7,428     19     37  

Provisions for loan losses and for benefits and claims

    3,627       2,396       1,640     51     46  

Income before taxes and minority interest

  $ (38 )   $ 6,287     $ 4,722     (101 )%   33 %

Income taxes

    (1,646 )     1,601       1,220     NM     31  

Minority interest, net of taxes

    (11 )     93       2     NM     NM  

Net income

  $ 1,619     $ 4,593     $ 3,500     (65 )%   31 %

Average assets (in billions of dollars)

  $ 354     $ 321     $ 227     10 %   41 %

Return on assets

    0.46 %     1.43 %     1.54 %            

Consumer Finance Japan (CFJ)—NIR

  $ 726     $ 1,135     $ 1,566     (36 )%   (28 )%

Asia excluding CFJ—NIR

    8,922       7,155       5,875     25     22  

CFJ—operating expenses

  $ 371     $ 576     $ 713     (36 )%   (19 )%

Asia excluding CFJ—operating expenses

    11,676       9,596       6,715     22     43  

CFJ—provision for loan losses and for benefits and claims

  $ 1,336     $ 1,421     $ 1,118     (6 )%   27 %

Asia excluding CFJ—provision for loan losses and for benefits and claims

    2,291       975       522     NM     87  

CFJ—net income (loss)

  $ 146     $ (520 )   $ (133 )   NM     NM  

Asia excluding CFJ—net income

    1,473       5,113       3,633     (71 )%   41 %

Key indicators (in billions of dollars, except in branches)

         

Average loans

  $ 128.7     $ 125.8     $ 108.4     2 %   16 %

Average Consumer Banking loans

(excluding CFJ)

    49.2       46.2       38.9     6     19  

Average deposits (and other consumer liability balances)

    207.2       193.4       167.7     7     15  

Branches/offices

    1,192       1,333       1,235     (11 )   8  

NM Not meaningful.

 

2008 vs. 2007

Net interest revenue increased 16%. Global Cards growth of 13% was driven by 12% growth in purchase sales and 18% growth in average loans. Consumer Banking, excluding Consumer Finance Japan (CFJ), grew by 10%, driven by growth of 6% in average loans and 4% growth in deposits. Transaction Services exhibited strong growth across all products resulting in 19% growth. S&B grew 90%, or $966 million, reflecting better spreads during the year and higher dividend revenue. Growth was also positively impacted by FX translation, acquisitions and portfolio purchases.

Non-interest revenue decreased 43% as S&B continued to be impacted by market volatility and declining valuations. Outside of S&B, non-interest revenue decreased 2% due to the absence of gain on Visa shares compared to the prior year, in Transaction Services and Global Cards. Excluding this, revenue was flat with strong growth in Global Cards, Transaction Services and GWM, offset by lower Investment Sales in Consumer Banking and GWM. Results included a $31 million gain on the sale of DCI, partially offset by a $21 million gain on the sale of MasterCard shares in the prior year. Growth was also negatively impacted by foreign exchange, acquisitions and portfolio purchases.

Operating expenses increased 19% reflecting the impact of acquisitions, a $937 million Nikko Asset Management intangible impairment charge, the

impact of the strengthening of local currencies and restructuring/ repositioning charges, partially offset by the benefits of reengineering efforts.

Provisions for loan losses and for benefits and claims increased 51% primarily driven by a $574 million incremental pretax charge to increase loan loss reserves, increased credit costs in India, acquisitions and portfolio growth.

Taxes included a $994 million tax benefit related to the legal vehicle restructuring of the CFJ operations.

Asia Excluding CFJ

As disclosed in the table above, NIR excluding CFJ increased 25% during 2008. Operating expenses excluding CFJ increased 22% during 2008 and Net Income excluding CFJ decreased 71%.

2007 vs. 2006

Net interest revenue increased 11%. Global Cards growth of 24% was driven by 12% growth in purchase sales and 19% growth in average loans. Consumer Banking excluding CFJ grew by 20%, driven by growth of 19% in average loans and 8% growth in deposits. Transaction Services exhibited


 

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strong growth across all products resulting in 35% growth. S&B grew 17% driven by 19% growth in loans. Growth was also negatively impacted by foreign exchange, acquisitions and portfolio purchases.

Non-interest revenue increased 66% as S&B benefited from favorable market conditions. Outside of S&B, non-interest revenue increased 69% due to the $245 million gain on Visa shares in 2007 and Investment Sales in Consumer Banking and GWM. Growth was also positively impacted by foreign exchange, acquisitions and portfolio purchases.

Operating expenses increased 37% primarily driven by the impact of acquisitions, strengthening local currencies and repositioning charges, partially offset by the benefits of reengineering.

Provisions for loan losses and for benefits and claims increased 46% primarily driven by a $410 million incremental pretax charge to increase loan loss reserves including a change in estimate of loan losses inherent in the loan portfolio but not yet visible in delinquency statistics, along with portfolio growth, increased credit costs in India, acquisitions, and the increase in net credit losses in CFJ due to the adverse operating environment and the impact of Japan consumer lending laws passed in the fourth quarter of 2006.

 


 

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TARP AND OTHER REGULATORY PROGRAMS

 

Issuance of $25 Billion of Perpetual Preferred Stock and a Warrant to Purchase Common Stock under TARP

On October 28, 2008, Citigroup raised $25 billion through the sale of non-voting perpetual, cumulative preferred stock and a warrant to purchase common stock to the U.S. Department of the Treasury (UST) as part of the UST’s Troubled Asset Relief Program (TARP) Capital Purchase Program. All of the proceeds were treated as Tier 1 Capital for regulatory capital purposes. Proceeds from the sale were allocated to the preferred stock and warrant on a relative fair value basis.

The preferred stock has an aggregate liquidation preference of $25 billion and an annual dividend rate of 5% for the first five years and 9% thereafter. Dividends are cumulative and payable quarterly in cash. Of the $25 billion in cash proceeds, $23.7 billion was allocated to preferred stock and $1.3 billion to the warrant on a relative fair value basis. The discount on the preferred stock will be accreted and recognized as a preferred dividend (reduction of Retained earnings) over a period of five years. The warrant has a term of ten years, an exercise price of $17.85 per share and is exercisable for approximately 210.1 million shares of common stock, which would be reduced by one-half if Citigroup raises an additional $25 billion through the issuance of Tier 1-qualifying perpetual preferred or common stock by December 31, 2009. The value ascribed to the warrant will be recorded in our stockholders equity and result in an increase in additional paid in capital.

Additional Issuance of $20 Billion of Perpetual Preferred Stock and a Warrant to Purchase Common Stock under TARP

On December 31, 2008, Citigroup raised an additional $20 billion through the sale of non-voting perpetual, cumulative preferred stock and a warrant to purchase common stock to the UST as part of TARP. All of the proceeds were treated as Tier 1 Capital for regulatory capital purposes. Proceeds from the sale were allocated to the preferred stock and warrant on a relative fair value basis.

The preferred stock has an aggregate liquidation preference of $20 billion and an annual dividend rate of 8.0%. Dividends are cumulative and payable quarterly in cash. Of the $20 billion in cash proceeds, $19.5 billion was allocated to preferred stock and $0.5 billion to the warrant on a relative value basis. The discount on the preferred stock will not be accreted and will only be recognized as a preferred dividend (reduction of Retained earnings) at the time of redemption. The warrant has a term of 10 years, an exercise price of $10.61 per share and is exercisable for approximately 188.5 million common shares. The value ascribed to the warrant will be recorded in our stockholders’ equity and will result in an increase in additional paid in capital.

The issuance of the warrants in October and December 2008, as well as other common stock issuances, resulted in a conversion price reset of the $12.5 billion of 7% convertible preferred stock sold in private offerings in January 2008. See “Events in 2008” on page 9, “Capital Resources” beginning on page 94 and Note 21 to the Consolidated Financial Statements on page 172 for a further discussion.

 

FDIC’s Temporary Liquidity Guarantee Program

Under the terms of the FDIC’s Temporary Liquidity Guarantee Program (TLGP), the FDIC will guarantee, until the earlier of its maturity or June 30, 2012, certain qualifying senior unsecured debt issued by certain Citigroup entities between October 14, 2008 and June 30, 2009 (proposed to be extended to October 30, 2009), in amounts up to 125% of the qualifying debt for each qualifying entity. The FDIC will charge Citigroup a fee ranging from 50 to 100 basis points in accordance with a prescribed fee schedule for any new qualifying debt issued with the FDIC guarantee. At December 31, 2008, Citigroup had issued $5.75 billion of long-term debt that is covered under the FDIC guarantee, with $1.25 billion maturing in 2010 and $4.5 billion maturing in 2011. In January and February 2009, Citigroup and its affiliates issued an additional $14.9 billion in senior unsecured debt under this program.

In addition, Citigroup, through its subsidiaries, also had $26.0 billion in commercial paper and interbank deposits backed by the FDIC outstanding as of December 31, 2008. FDIC guarantees of commercial paper and interbank deposits cease to be available after June 30, 2009 (proposed to be extended to October 30, 2009), and the FDIC charges a fee ranging from 50 to 100 basis points in connection with the issuance of those instruments.

FDIC Increased Deposit Insurance

On October 4, 2008, as a part of TARP, the FDIC increased the insurance it provides on U.S. deposits in most banks and savings associations located in the United States, including Citibank, N.A., from $100,000 to $250,000 per depositor, per insured bank.

U.S. Government Loss-Sharing Agreement

On January 15, 2009, Citigroup entered into a definitive agreement with the UST, FDIC and the Federal Reserve Bank of New York (collectively, the USG) on losses arising on a $301 billion portfolio of Citigroup assets (valued as of November 21, 2008). As consideration for the loss-sharing agreement, Citigroup issued non-voting perpetual, cumulative preferred stock and a warrant to the UST and FDIC.

The preferred stock issued to the UST and FDIC has an aggregate liquidation preference of $7.3 billion and an annual dividend rate of 8%. The warrant has a term of 10 years, an exercise price of $10.61 per share and is exercisable for approximately 66.5 million common shares. Citigroup received no additional cash proceeds for their issuance. Of the issuance, $3.5 billion of the consideration for the preferred stock, representing the fair value of the issued shares and warrant, will be treated as Tier 1 Capital for regulatory purposes, and it is expected to add approximately 30 basis points to the Tier 1 Capital ratio, on a pro forma basis, during the first quarter of 2009. The value of the premium ($3.5 billion) will be amortized and recognized as an expense over the life of the loss-sharing agreement.

The loss-sharing program extends for 10 years for residential assets and five years for non-residential assets. Under the agreement, a “loss” on a portfolio asset is defined to include a charge-off or a realized loss upon collection, through a permitted disposition or exchange, or upon a foreclosure or short-sale loss, but not through a change in Citigroup’s mark-to-market accounting for the asset or the creation or increase of a


 

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related loss reserve. Once a loss is recognized under the agreement, the aggregate amount of qualifying losses across the portfolio in a particular period is netted against all recoveries and gains across the portfolio, all on a pretax basis. The resulting net loss amount on the portfolio is the basis of the loss-sharing arrangements between Citigroup and the USG. Citigroup will bear the first $39.5 billion of such net losses, which amount was determined using (i) an agreed-upon $29 billion of first losses, (ii) Citigroup’s then-existing reserve with respect to the portfolio of approximately $9.5 billion, and (iii) an additional $1.0 billion as an agreed-upon amount in exchange for excluding the effects of certain hedge positions from the portfolio. Net losses, if any, on the portfolio after Citigroup’s first-loss position will be borne 90% by the USG and 10% by Citigroup in the following manner:

 

 

first, until the UST has paid $5 billion in aggregate, 90% by the UST and 10% by Citigroup;

 

second, until the FDIC has paid $10 billion in aggregate, 90% by the FDIC and 10% by Citigroup; and

 

third, by the Federal Reserve Bank of New York.

The Company recognized approximately $900 million of qualifying losses related to the portfolio (excluding replacement assets, as discussed in the note to the table below) from November 21, 2008 through December 31, 2008. These losses will count towards Citi’s $39.5 billion first-loss position.

The Federal Reserve Bank of New York will implement its loss-sharing obligations under the agreement by making a loan, after Citigroup’s first-loss position and the obligations of the UST and FDIC have been exhausted, in an amount equal to the then aggregate value of the remaining covered asset pool (after reductions for charge-offs, pay-downs and realized losses) as determined in accordance with the agreement. Following the loan, as losses are incurred on the remaining covered asset pool, Citigroup will be required to immediately repay 10% of such losses to the Federal Reserve Bank of New York. The loan is non-recourse to Citigroup, other than with respect to the repayment obligation in the preceding sentence and interest on the loan. The loan is recourse only to the remaining covered asset pool, which is the sole collateral to secure the loan. The loan will bear interest at the overnight index swap rate plus 300 basis points.

The covered asset pool includes U.S.-based exposures and transactions that were originated prior to March 14, 2008. Pursuant to the terms of the agreement, the composition of the covered asset pool, amount of Citigroup’s first-loss position and premium paid for loss coverage are subject to final confirmation by the USG of, among other things, the qualification of assets under the asset eligibility criteria, expected losses and reserves. This confirmation process is to be completed no later than April 15, 2009.

The agreement includes guidelines for governance and asset management with respect to the covered asset pool, including reporting requirements and notice and approval rights of the USG at certain thresholds. If covered losses exceed $27 billion, the USG has the right to change the asset manager for the covered asset pool.

The covered assets are risk-weighted at 20% for purposes of calculating the Tier 1 Capital ratio at December 31, 2008. This lower risk weighting added approximately 150 basis points to Citigroup’s Tier 1 Capital ratio at December 31, 2008.

The following table summarizes the assets that were part of the covered asset pool agreed to between Citigroup and the USG as of January 15, 2009, with their values as of November 21, 2008:

 

Assets (1)

 
In billions of dollars   November 21,
2008
Loans:    

First mortgages

  $ 98.9

Second mortgages

    55.2

Retail auto loans

    16.2

Other consumer loans

    21.3

Total consumer loans

  $ 191.6

CRE loans

  $ 12.4

Leveraged finance loans

    2.3

Other corporate loans

    11.1

Total corporate loans

  $ 25.8

Securities:

 

Alt-A

  $ 11.4

SIVs

    6.4

CRE

    2.1

Other

    12.0

Total securities

  $ 31.9

Unfunded Lending Commitments (ULC)

 

Second mortgages

  $ 22.4

Other consumer loans

    5.2

Leveraged finance

    0.2

CRE

    5.4

Other commitments

    18.3

Total ULC

  $ 51.5

Total covered assets

  $ 300.8

 

(1) As a result of the initial confirmation process (conducted between November 21, 2008 and January 15, 2009), the covered asset pool includes approximately $96 billion of assets considered “replacement” assets (assets that were added to the pool to replace assets that were in the pool as of November 21, 2008 but were later determined not to qualify). Loss-sharing on qualifying losses incurred on these replacement assets was effective beginning January 15, 2009, instead of November 21, 2008.

Exchange Offer and U.S. Government Exchange

On February 27, 2009, the Company announced an exchange offer of its common stock for up to $27.5 billion of its existing preferred securities and trust preferred securities at a conversion price of $3.25 per share. The U.S. government will match this exchange up to a maximum of $25 billion of its preferred stock at the same conversion price. See “Outlook for 2009” on page 7.


 

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Implementation and Management of TARP Programs

After Citigroup received the TARP capital, it established a Special TARP Committee composed of senior executives to approve, monitor and track how the funds are utilized. The TARP securities purchase agreements stipulate that Citi will adhere to the following objectives as a condition of the UST’s capital investment:

 

 

Expand the flow of credit to U.S. consumers and businesses on competitive terms to promote the sustained growth and vitality of the U.S. economy.

 

Work diligently, under existing programs, to modify the terms of residential mortgages as appropriate to strengthen the health of the U.S. housing market.

The Committee has established specific guidelines, which are consistent with the objectives and spirit of the program. Pursuant to these guidelines, Citi will use TARP capital only for those purposes expressly approved by the Committee. TARP capital will not be used for compensation and bonuses, dividend payments, lobbying or government relations activities, or any activities related to marketing, advertising and corporate sponsorship. TARP capital will be used exclusively to support assets and not for expenses.

Committee approval is the final stage in a four-step review process to evaluate proposals from Citi businesses for the use of TARP capital, risk and the potential financial impact and returns.

On February 3, 2009 Citi published a public report summarizing its TARP spending initiatives for the 2008 fourth quarter and made this report available at www. citigroup.com. The report indicated that the Committee had authorized $36.5 billion in initiatives backed by TARP capital, spanning five major areas, as follows:

 

 

U.S. residential mortgage activities—$25.7 billion

    Citigroup is making mortgage loans directly to homebuyers and supporting the housing market through the purchase of prime residential mortgages and mortgage-backed securities in the secondary market.
 

Personal and business loans—$2.5 billion

    This includes $1.5 billion of consumer lending and $1.0 billion for tailored loans to people and businesses facing liquidity problems.
 

Student loans—$1 billion

    Citigroup is originating student loans through the Federal Family Education Loan Program.
 

Credit card lending—$5.8 billion

    Citigroup is offering special credit card programs that include expanded eligibility for balance-consolidation offers, targeted increases in credit lines and targeted new account originations.
 

Corporate loan activity—$1.5 billion

    The Company is investing $1.5 billion in commercial loan securitizations, which will inject liquidity into the U.S. corporate loan market.

Separately from the Company’s initiatives under TARP, the report also describes Citigroup’s other efforts to help U.S. homeowners remain in their homes, assist distressed borrowers and support U.S consumers and businesses.

Citi will update this TARP report each quarter following its quarterly earnings announcement and will make the report publicly available. In addition, Citi is committed to meeting all reporting requirements associated with TARP.


 

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RISK FACTORS

 

Disruptions in the global financial markets have affected, and may continue to adversely affect, Citigroup’s business and results of operations.

Dramatic declines in the housing market during 2008, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivatives, have caused many financial institutions to seek additional capital and to merge with other financial institutions. Disruptions in the global financial markets have also adversely affected the corporate bond markets, debt and equity underwriting and other elements of the financial markets.

Reflecting concern about the stability of the financial markets generally and the strength of counterparties, some lenders and institutional investors have reduced and, in some cases, ceased to provide funding to certain borrowers, including other financial institutions. The impact on available credit (even where Citigroup and other TARP participants are making credit available), increased volatility in the financial markets and reduced business activity has adversely affected, and may continue to adversely affect, Citigroup’s businesses, capital, liquidity or other financial condition and results of operations, access to credit and the trading price of Citigroup common stock, preferred stock or debt securities.

Market disruptions may increase the risk of customer or counterparty delinquency or default.

The current market and economic disruptions have affected, and may continue to affect, consumer confidence levels, consumer spending, personal bankruptcy rates and home prices, among other factors, which provide a greater likelihood that more of Citigroup’s customers or counterparties could use credit cards less frequently or become delinquent in their loans or other obligations to Citigroup. This, in turn, could result in a higher level of charge-offs and provision for credit losses, all of which could adversely affect Citigroup’s earnings. Policies of the Federal Reserve Board or other governmental institutions can also adversely affect Citigroup’s customers or counterparties, potentially increasing the risk that they may fail to repay their loans. Additionally, Citigroup may incur significant credit risk exposure which may arise, for example, from entering into swap or other derivative contracts under which counterparties have long-term obligations to make payments to the Company. Recent market conditions, including decreased liquidity and pricing transparency along with increased market volatility, have negatively impacted Citigroup’s credit risk exposure. Although Citigroup regularly reviews its credit exposures, default risk may arise from events or circumstances that are difficult to detect or foresee.

Citigroup may experience further write-downs of its financial instruments and other losses related to volatile and illiquid market conditions.

Market volatility, illiquid market conditions and disruptions in the credit markets have made it extremely difficult to value certain of Citigroup’s assets. Subsequent valuations, in light of factors then prevailing, may result in significant changes in the values of these assets in future periods. In addition, at the time of any sales of these assets, the price Citigroup ultimately realizes will depend on the demand and liquidity in the market at that time and may be materially lower than their current fair value. Any of

these factors could require Citigroup to take further write-downs in respect of

these assets, which may have an adverse effect on the Company’s results of operations and financial condition in future periods.

In addition, Citigroup finances and acquires principal positions in a number of real estate and real estate-related products for its own account, for investment vehicles managed by affiliates in which it also may have a significant investment, for separate accounts managed by affiliates and for major participants in the commercial and residential real estate markets, and originates loans secured by commercial and residential properties. Citigroup also securitizes and trades in a wide range of commercial and residential real estate and real estate-related whole loans, mortgages and other real estate and commercial assets and products, including residential and commercial mortgage-backed securities. These businesses have been, and may continue to be, adversely affected by the downturn in the real estate sector.

Furthermore, in the past, Citigroup has provided financial support to certain of its investment products and vehicles in difficult market conditions and, Citigroup may decide to do so again in the future for contractual reasons or, at its discretion, for reputational or business reasons, including through equity investments or cash infusions.

Liquidity is essential to Citigroup’s businesses, and Citigroup relies on external sources, including governmental agencies, to finance a significant portion of its operations.

Adequate liquidity is essential to Citigroup’s businesses. The Company’s liquidity could be materially adversely affected by factors Citigroup cannot control, such as the continued general disruption of the financial markets or negative views about the financial services industry in general. In addition, Citigroup’s ability to raise funding could be impaired if lenders develop a negative perception of the Company’s short-term or long-term financial prospects, or a perception that the Company is experiencing greater liquidity risk. Recent regulatory measures, such as the FDIC’s temporary guarantee of the newly issued senior debt as well as deposits in non-interest bearing deposit transaction accounts, and the commercial paper funding facility of the Federal Reserve Board, are designed to stabilize the financial markets and the liquidity position of financial institutions such as Citigroup. While much of Citigroup’s recent long-term unsecured funding has been issued pursuant to these government-sponsored funding programs implemented, it is unclear whether, or for how long, these facilities will be extended and what impact termination of any of these facilities could have on Citigroup’s ability to access funding in the future. It is also unclear when Citigroup will be able to regain access to the public long-term unsecured debt markets on historically customary terms.

Further, Citigroup’s cost of obtaining long-term unsecured funding is directly related to its credit spreads in both the cash bond and derivatives markets. Increases in Citigroup’s credit qualifying spreads can significantly increase the cost of this funding. Credit spreads are influenced by market perceptions of Citigroup’s creditworthiness and may be influenced by movements in the costs to purchasers of credit default swaps referenced to Citigroup’s long-term debt.

Citigroup’s credit ratings are also important to its liquidity. A reduction in Citigroup’s credit ratings could adversely affect its liquidity, widen its credit spreads or otherwise increase its borrowing costs, limit its access to the


 

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capital markets or trigger obligations under certain bilateral provisions in some of the Company’s trading and collateralized financing contracts. In addition, under these provisions, counterparties could be permitted to terminate certain contracts with Citigroup or require the Company to post additional collateral. Termination of the Company’s trading and collateralized financing contracts could cause Citigroup to sustain losses and impair its liquidity by requiring Citigroup to find other sources of financing or to make significant cash payments or securities transfers.

Recently enacted legislation authorizing the U.S. government to take direct action within the financial services industry, and other legislation and regulation currently under consideration, may not stabilize the U.S. financial system in the near term.

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (EESA) was signed into law. In addition, on February 17, 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) was signed by President Obama. The purpose of these U.S. government actions is to stabilize and provide liquidity to the U.S. financial markets and jumpstart the U.S. economy. The U.S. government is currently considering, and may consider in the future, additional legislation and regulations with similar purposes. The EESA, ARRA and other governmental programs may not have their intended impact of stabilizing, providing liquidity to or restoring confidence in the financial markets. Further, the discontinuation and/or expiration of these or other governmental programs could result in a worsening of current market conditions.

Citigroup may fail to realize all of the anticipated benefits of the proposed realignment of its businesses.

On January 16, 2009, Citigroup announced that it would realign into two businesses, Citicorp and Citi Holdings, for management and reporting purposes, effective second quarter of 2009. The realignment is part of Citigroup’s strategy to focus on its core businesses, reduce its balance sheet and simplify its assets. Citigroup believes this structure will allow it to enhance the capabilities and performance of Citigroup’s core assets, through Citicorp, as well as realize value from its non-core assets, through Citi Holdings. Citi Holdings will also include Citigroup’s 49% interest in the recently announced Morgan Stanley Smith Barney joint venture, a transaction which is also intended to simplify and streamline the Company on a going-forward basis. Despite these efforts, given the rapidly changing and uncertain financial environment, there can be no assurance that the realignment of Citigroup’s businesses will achieve the Company’s desired objectives or benefits.

Future issuance of Citigroup common stock and preferred stock may reduce any earnings available to common stockholders and the return on the Company’s equity.

During 2008, Citigroup raised a total of approximately $77.3 billion in private and public offerings of preferred and common stock and warrants to purchase common stock, including issuances to the U.S. government under TARP. While this additional capital provides further funding to Citigroup’s businesses and has improved the Company’s financial position, it has increased the Company’s equity and the number of actual and diluted shares of Citigroup common stock. On February 27, 2009, Citigroup announced an exchange offer of its common stock for up to $27.5 billion of its existing preferred securities and trust preferred securities. The U.S. government will

match this exchange up to a maximum of $25 billion of its preferred stock. These transactions will significantly dilute the existing common stockholders of the Company. In addition, such increases in the outstanding shares of common stock reduce the Company’s earnings per share and the return on the Company’s equity, unless the Company’s earnings increase correspondingly. Further, any additional future U.S. governmental requirements or programs could result in or require additional equity issuances, which further dilute the existing common stockholders and any earnings available to the common stockholders.

The elimination of QSPEs from the guidance in SFAS 140 and changes in FIN 46(R) may significantly impact

Citigroup’s consolidated financial statements.

The FASB has issued an Exposure Draft of a proposed standard that would eliminate qualified SPEs (QSPEs) from the guidance in SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and a separate Exposure Draft of a proposed standard that proposes three key changes to the consolidation model in FIN 46(R). Such changes include the following: (i) former QSPEs would be included in the scope of FIN 46(R); (ii) FIN 46(R) would be amended to change the method of analyzing which party to a variable interest entity (VIE) should consolidate the VIE to a qualitative determination of power combined with benefits and losses; and (iii) the analysis of primary beneficiaries would have to be reevaluated whenever circumstances change.

While these proposed standards have not been finalized, they may have a significant impact on Citigroup’s consolidated financial statements as the Company may lose sales treatment for assets previously sold to a QSPE, as well as for future sales, and for transfers of a portion of an asset, and the Company will be required to bring a portion of assets that are not currently on its balance sheet onto its balance sheet. For a further discussion on SFAS 140, see “Significant Accounting Policies and Significant Estimates” on page 18 and “Capital Resources and Liquidity—Off-Balance Sheet Arrangements—Elimination of QSPEs and Changes in the FIN 46(R) Consolidation Model” on page 104.

Citigroup’s financial statements are based in part on assumptions and estimates, which, if wrong, could cause unexpected losses in the future.

Pursuant to U.S. GAAP, Citigroup is required to use certain assumptions and estimates in preparing its financial statements, including in determining credit loss reserves, reserves related to litigations and the fair value of certain assets and liabilities, among other items. If assumptions or estimates underlying Citigroup’s financial statements are incorrect, Citigroup may experience material losses. For example, Citigroup makes judgments in connection with its consolidation analysis of its SPEs. If it is later determined that non-consolidated SPEs should be consolidated, this could adversely affect Citigroup’s consolidated balance sheet, related funding requirements and capital ratios, and, if the SPE assets include unrealized losses, could require Citigroup to recognize those losses see “Significant Accounting Policies and Significant Estimates” on page 18.

Changes in accounting standards can be difficult to predict and can materially impact how Citigroup records and reports its financial condition and results of operations.

Citigroup’s accounting policies and methods are fundamental to how it records and reports its financial condition and results of operations. From


 

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time to time, the FASB changes the financial accounting and reporting standards that govern the preparation of the Company’s financial statements (e.g., see for example “The elimination of QSPEs from the guidance in SFAS 140 and changes in FIN 46(R) may significantly impact Citigroup’s Consolidated Financial Statements” on page 48). These changes can be hard to predict and can materially impact how Citigroup records and reports its financial condition and results of operations.

Defaults by another large financial institution could adversely affect Citigroup and the financial markets generally.

The commercial soundness of many financial institutions may be closely interrelated as a result of credit, trading, clearing or other relationships between institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. This is sometimes referred to as “systemic risk” and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with which Citigroup interacts on a daily basis and, therefore, could adversely affect the Company.

Citigroup may incur significant losses as a result of ineffective risk management processes and strategies and concentration of risk increases the potential for such losses.

Citigroup seeks to monitor and control its risk exposure through a risk and control framework encompassing a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems, internal controls, management review processes and other mechanisms. While Citigroup employs a broad and diversified set of risk monitoring and risk mitigation techniques (see “Managing Global Risk” on page 51), those techniques and the judgments that accompany their application cannot anticipate every economic and financial outcome in all market environments or the specifics and timing of such outcomes. Recent market conditions, particularly during the latter part of 2007 and 2008, have involved unprecedented dislocations and highlight the limitations inherent in using historical data to manage risk.

These market movements can, and have, limited the effectiveness of Citigroup’s hedging strategies and have caused the Company to incur significant losses, and they may do so again in the future. In addition, concentration of risk increases the potential for significant losses in certain of Citigroup’s businesses. For example, Citigroup extends large commitments as part of its credit origination activities. Citigroup’s inability to reduce its credit risk by selling, syndicating or securitizing these positions, including during periods of market dislocation, could negatively affect its results of operations due to a decrease in the fair value of the positions, as well as the loss of revenues associated with selling such securities or loans.

In addition, the Company routinely executes a high volume of transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks and investment funds. This has resulted in significant credit concentration with respect to this industry.

Citigroup’s businesses are subject to extensive and pervasive regulation around the world.

As a participant in the financial services industry, Citigroup is subject to extensive regulation, including fiscal and monetary policies, in jurisdictions

around the world. For example, the actions of the Federal Reserve Board and international central banking authorities directly impact Citigroup’s cost of funds for lending, capital raising and investment activities and may impact the value of financial instruments the Company holds. This level of regulation is expected to increase significantly in all jurisdictions in which the Company conducts business in response to the current financial crisis. Among other things, Citigroup could be fined, prohibited from engaging in some of its business activities or subject to limitations or conditions on its business activities, including increased capital or liquidity requirements, each of which could lead to reputational harm.

The financial services industry faces substantial legal liability and regulatory risks, and Citigroup may face damage to its reputation and legal liability.

Citigroup faces significant legal risks in its businesses, and the volume of

claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high. Citigroup’s experience has been that legal claims by customers and clients increase in a market downturn. In addition, employment-related claims typically increase in periods when Citigroup has reduced the total number of employees, such as during the last fiscal year.

In addition, there have been a number of highly publicized cases involving fraud or other misconduct by employees in the financial services industry in recent years, and Citigroup runs the risk that employee misconduct could occur. It is not always possible to deter or prevent employee misconduct and the extensive precautions Citigroup takes to prevent and detect this activity may not be effective in all cases.

Citigroup’s businesses may be materially adversely affected if it is unable to hire and retain qualified employees.

Citigroup’s performance is largely dependent on the talents and efforts of highly skilled individuals. The Company’s continued ability to compete effectively in its businesses, to manage its businesses effectively and to expand into new businesses and geographic regions depends on the Company’s ability to attract new employees and to retain and motivate its existing employees. Competition from within the financial services industry and from businesses outside of the financial services industry for qualified employees has often been intense. This is particularly the case in emerging markets, where Citigroup is often competing for qualified employees with entities that have a significantly greater presence or more extensive experience in the region. In addition, in 2008 the market price of Citigroup common stock declined significantly during the year. A substantial portion of the Company’s annual bonus compensation paid to its senior employees has been paid in the form of equity, meaning that such awards are not as valuable from a compensatory or retention perspective.

Moreover, Citigroup is subject to certain significant compensation restrictions applicable to a broad group of its senior management as a result of its receipt of TARP funding in December 2008 as well as other recently-adopted governmental programs and legislation. Such restrictions include restricted executive incentives, deferral of some executive compensation, equity awards with performance-vesting features, “clawback” provisions and elimination or restriction of severance pay to senior executives.


 

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These restrictions, alone or in combination with the other factors described above, could adversely affect Citigroup’s ability to hire and retain qualified employees.

A failure in Citigroup’s operational systems or infrastructure, or those of third parties, could impair the Company’s liquidity, disrupt its businesses, result in the disclosure of confidential information, damage Citigroup’s reputation and cause losses.

Citigroup’s businesses are highly dependent on its ability to process and monitor, on a daily basis, a very large number of transactions, many of which are highly complex, across numerous and diverse markets in many currencies. These transactions, as well as the information technology services Citigroup provides to clients, often must adhere to client-specific guidelines, as well as legal and regulatory standards. Due to the breadth of Citigroup’s client base and its geographical reach, developing and maintaining the Company’s operational systems and infrastructure has become increasingly challenging. Citigroup’s financial, account, data processing or other operating systems and facilities may fail to operate properly or become disabled as a result of events that are wholly or partially beyond the Company’s control, such as a spike in transaction volume or unforeseen catastrophic events, adversely affecting the Company’s ability to process these transactions or provide these services.

Citigroup also faces the risk of operational failure, termination or capacity constraints of any of the clearing agents, exchanges, clearing houses or other financial intermediaries Citigroup uses to facilitate its transactions, and as Citigroup’s interconnectivity with its clients grows, the Company increasingly faces the risk of operational failure with respect to its clients’ systems. Implementation of the Morgan Stanley Smith Barney joint venture may, at least temporarily, exacerbate these risks insofar as the activities of the joint venture are concerned.

In addition, Citigroup’s operations rely on the secure processing, storage and transmission of confidential and other information in its computer systems and networks. Although Citigroup takes protective measures and endeavors to modify them as circumstances warrant, its computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code, and other events that could have a security impact. Given the high volume of transactions at Citigroup, certain errors may be repeated or compounded before they are discovered and rectified. If one or more of such events occurs, this could potentially jeopardize Citigroup’s, its clients’, counterparties’ or third parties’ confidential and other information processed and stored in, and transmitted through, the Company’s computer systems and networks, or otherwise cause interruptions or malfunctions in Citigroup’s, its clients’, its counterparties’ or third parties’ operations, which could result in significant losses or reputational damage.


 

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MANAGING GLOBAL RISK

 

RISK MANAGEMENT

The Company believes that effective risk management is of primary importance to its success. Accordingly, the Company has a comprehensive risk management process to monitor, evaluate and manage the principal risks it assumes in conducting its activities. These risks include credit, market liquidity and operational, including legal and reputational exposures.

Citigroup’s risk management framework is designed to balance corporate oversight with well-defined independent risk management functions.

Enhancements were made to the risk management framework throughout 2008 based on guiding principles established by the Chief Risk Officer:

 

 

a common Risk Capital model to evaluate risks;

 

a defined risk appetite, aligned with business strategy;

 

accountability through a common framework to manage risks;

 

risk decisions based on transparent, accurate and rigorous analytics;

 

expertise, stature, authority and independence of Risk Managers; and

 

empowering Risk Managers to make decisions and escalate issues.

Significant focus has been placed on fostering a risk culture based on a policy of “Taking Intelligent Risk with Shared Responsibility, without forsaking Individual Accountability.”

 

 

“Taking intelligent risk” means that Citi must carefully identify, measure and aggregate risks, and must fully understand downside risks.

 

“Shared responsibility” means that individuals own and influence business outcomes, including risk controls.

 

“Individual accountability” means individuals held ourselves accountable to actively manage risk.

The Chief Risk Officer, working closely with the Citi CEO, established management committees, Citi’s Audit and Risk Management Committee and Citi’s Board of Directors, is responsible for:

 

 

establishing core standards for the management, measurement and reporting of risk;

 

identifying, assessing, communicating and monitoring risks on a company-wide basis;

 

engaging with senior management and the Board of Directors on a frequent basis on material matters with respect to risk-taking activities in the businesses and related risk management processes; and

 

ensuring that the risk function has adequate independence, authority, expertise, staffing, technology and resources.

Changes were made to the risk management organization in 2008 to facilitate the management of risk across three dimensions: businesses, regions and critical products.

Each of the major business groups has a Business Chief Risk Officer who is the focal point for risk decisions (such as setting risk limits or approving transactions) in the business.

There are also Regional Chief Risk Officers, accountable for the risks in their geographic area, and who are the primary risk contact for the regional business heads and local regulators.

In addition, the position of Product Chief Risk Officers was created for those areas of critical importance to Citigroup such as real estate, structured credit products and fundamental credit. The Product Risk Officers are accountable for the risks within their specialty and they focus on problem areas across businesses and regions. The Product Risk Officers serve as a resource to the Chief Risk Officer, as well as to the Business and Regional Chief Risk Officers, to better enable the Business and Regional Chief Risk Officers to focus on the day-to-day management of risks and responsiveness to business flow.

In addition to changing the risk management organization to facilitate the management of risk across these three dimensions, the risk organization also includes the newly-created Business Management team to ensure that the risk organization has the appropriate infrastructure, processes and management reporting. This team includes:

 

 

the risk capital group, which continues to enhance the risk capital model and ensure that it is consistent across all our business activities;

 

the risk architecture group, which ensures we have integrated systems and common metrics, and thereby allows us to aggregate and stress test exposures across the institution;

 

the infrastructure risk group, which focuses on improving our operational processes across businesses and regions; and

 

the office of the Chief Administrative Officer, which focuses on re-engineering risk communications and relationships, including our critical regulatory relationships.

RISK AGGREGATION AND STRESS TESTING

While the major risk areas are described individually on the following pages, these risks often need to be reviewed and managed in conjunction with one another and across the various businesses.

The Chief Risk Officer, as noted above, monitors and controls major risk exposures and concentrations across the organization. This means aggregating risks, within and across businesses, as well as subjecting those risks to alternative stress scenarios in order to assess the potential economic impact they may have on the Company.

During 2008, comprehensive stress tests were implemented across Citi for mark-to-market, available-for-sale, and accrual portfolios. These firm-wide stress reports measure the potential impact to the Company and its component businesses of very large changes in various types of key risk factors (e.g., interest rates, credit spreads), as well as the potential impact of a number of historical and hypothetical forward-looking systemic stress scenarios.

Supplementing the stress testing described above, Risk Management, working with input from the businesses and Finance, provides enhanced periodic updates to senior management and the Board of Directors on significant potential exposures across Citigroup arising from risk concentrations (e.g., residential real estate), financial market participants


 

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(e.g., monoline insurers), and other systemic issues (e.g., commercial paper markets). These risk assessments are forward-looking exercises, intended to inform senior management and the Board of Directors about the potential economic impacts to Citi that may occur, directly or indirectly, as a result of hypothetical scenarios, based on judgmental analysis from independent risk managers.

The stress testing and risk assessment exercises are a supplement to the standard limit-setting and risk capital exercises described later in this section, as these processes incorporate events in the marketplace and within Citi that impact our outlook on the form, magnitude, correlation and timing of identified risks that may arise. In addition to enhancing awareness and understanding of potential exposures, the results of these processes then serve as the starting point for developing risk management and mitigation strategies.

RISK CAPITAL

Risk capital is defined as the amount of capital required to absorb potential unexpected economic losses, resulting from extremely severe events over a one-year time period.

 

 

“Economic losses” include losses that appear on the income statement and fair value adjustments to the financial statements, as well as any further declines in value not captured on the income statement.

 

“Unexpected losses” are the difference between potential extremely severe losses and Citigroup’s expected (average) loss over a one-year time period.

 

“Extremely severe” is defined as potential loss at a 99.97% confidence level, based on the distribution of observed events and scenario analysis.

The drivers of “economic losses” are risks, which can be broadly categorized as credit risk (including cross-border risk), market risk (including liquidity) and operational risk (including legal and regulatory):

 

 

Credit risk losses primarily result from a borrower’s or counterparty’s inability to meet its obligations.

 

Market risk losses arise from fluctuations in the market value of trading and non-trading positions, including the treatment changes in value resulting from fluctuations in rates.

 

Operational risk losses result from inadequate or failed internal processes, systems or human factors or from external events.

These risks are measured and aggregated within businesses and across Citigroup to facilitate the understanding of our exposure to extreme downside events.

In light of market developments, the risk capital framework is being reviewed and enhanced. Certain enhancements were introduced in January 2009, including the treatment of operational risk and proprietary investments. Other enhancements are scheduled to be completed over the course of the year, primarily focused on market risk.

 

CREDIT RISK MANAGEMENT PROCESS

Credit risk is the potential for financial loss resulting from the failure of a borrower or counterparty to honor its financial or contractual obligations. Credit risk arises in many of Citigroup’s business activities, including:

 

 

lending;

 

sales and trading;

 

derivatives;

 

securities transactions;

 

settlement; and

 

when Citigroup acts as an intermediary on behalf of its clients and other third parties.


 

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LOANS OUTSTANDING

 

In millions of dollars at year end   2008     2007 (2)     2006 (2)     2005 (2)     2004 (2)  

Consumer loans

         

In U.S. offices:

         

Mortgage and real estate (1)

  $ 229,565     $ 251,927     $ 225,900     $ 192,045     $ 161,755  

Installment, revolving credit, and other

    130,826