Citibank 2008 Annual Report Download - page 210

Own-Credit Valuation Adjustment
The fair value of liabilities for which the fair-value option was elected (other
than non-recourse and similar liabilities) was impacted by the widening of
the Company’s credit spread. The estimated change in the fair value of these
liabilities due to such changes in the Company’s own credit risk (or
instrument-specific credit risk) was a gain of $1,982 million and $212
million for the three months ended December 31, 2008 and December 31,
2007, respectively, and a gain of $4,558 million and $888 million for the
years ended December 31, 2008 and December 31, 2007, respectively.
Changes in fair value resulting from changes in instrument-specific credit
risk were estimated by incorporating the Company’s current
observable credit spreads into the relevant valuation technique used to value
each liability as described above.
SFAS 159 The Fair-Value Option for Financial Assets and
Financial Liabilities
Detailed below are the December 31, 2006 carrying values prior to adoption
of SFAS 159, the transition adjustments booked to opening Retained
earnings and the fair values (that is, the carrying values at January 1, 2007
after adoption) for those items that were selected for fair-value option
accounting and that had an impact on Retained earnings:
In millions of dollars
December 31, 2006
(carrying value
prior to adoption)
Cumulative-effect
adjustment to
January 1, 2007
retained earnings–
gain (loss)
January 1, 2007
fair value
(carrying value
after adoption)
Legg Mason convertible preferred equity securities originally classified as available-for-sale(1) $ 797 $(232) $ 797
Selected portfolios of securities purchased under agreements to resell (2) 167,525 25 167,550
Selected portfolios of securities sold under agreements to repurchase (2) 237,788 40 237,748
Selected non-collateralized short-term borrowings 3,284 (7) 3,291
Selected letters of credit hedged by credit default swaps or participation notes — 14 14
Various miscellaneous eligible items (1) 96 3 96
Pretax cumulative effect of adopting fair-value option accounting $(157)
After-tax cumulative effect of adopting fair-value option accounting (99)
(1) The Legg Mason securities as well as several miscellaneous items were previously reported at fair value in available-for-sale securities. The cumulative-effect adjustment represents the reclassification of the related
unrealized gain/loss from Accumulated other comprehensive income (loss) to Retained earnings upon the adoption of the fair value option.
(2) Excludes netting of the amounts due from securities purchased under agreements to resell and the amounts owed under securities sold under agreements to repurchase in accordance with FIN 41.
Additional information regarding each of these items and other fair-value
elections follows.
Legg Mason convertible preferred equity securities
The Legg Mason convertible preferred equity securities (Legg shares) were
acquired in connection with the sale of Citigroup’s Asset Management
business in December 2005.
Prior to the election of fair-value option accounting, the shares were
classified as available-for-sale securities with the unrealized loss of $232
million as of December 31, 2006 included in Accumulated other
comprehensive income (loss). In connection with the Company’s adoption
of SFAS 159, this unrealized loss was recorded as a reduction of January 1,
2007 Retained earnings as part of the cumulative-effect adjustment.
During the first quarter of 2008, the Company sold the remaining
8.4 million Legg shares at a pretax loss of $10.3 million ($6.7 million after-
tax).
Selected portfolios of securities purchased under
agreements to resell, securities borrowed, securities sold
under agreements to repurchase, securities loaned and
certain non-collateralized short-term borrowings
The Company elected the fair-value option retrospectively for our United
States and United Kingdom portfolios of fixed-income securities purchased
under agreements to resell and fixed-income securities sold under
agreements to repurchase (and certain non-collateralized short-term
borrowings). The fair-value option was also elected prospectively in the
second quarter of 2007 for certain portfolios of fixed-income securities
lending and borrowing transactions based in Japan. In each case, the
election was made because the related interest-rate risk is managed on a
portfolio basis, primarily with derivative instruments that are accounted for
at fair value through earnings. Previously, these positions were accounted for
on an accrual basis.
Changes in fair value for transactions in these portfolios are recorded in
Principal transactions. The related interest revenue and interest expense are
measured based on the contractual rates specified in the transactions and are
reported as interest revenue and expense in the Consolidated Statement of
Income.
Selected letters of credit and revolving loans hedged by
credit default swaps or participation notes
The Company has elected the fair-value option for certain letters of credit
that are hedged with derivative instruments or participation notes. Upon
electing the fair-value option, the related portions of the allowance for loan
losses and the allowance for unfunded lending commitments were reversed.
Citigroup elected the fair-value option for these transactions because the risk
is managed on a fair-value basis and to mitigate accounting mismatches.
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