Citibank 2008 Annual Report Download - page 51

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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