Citibank 2008 Annual Report Download - page 93

RECLASSIFICATION OF FINANCIAL ASSETS
The Company reviewed portfolios of debt securities and loans throughout the
fourth quarter of 2008 and identified positions where there has been a
change of intent to hold the debt securities or loans for periods of time much
longer than those originally anticipated. The Company believes that the
expected cash flows to be generated from holding the assets significantly
exceed their current fair value which has been significantly adversely
impacted by the reduced liquidity in the global financial markets. As such,
the Company anticipates returns on these assets will be optimized by holding
them for extended periods or until maturity, rather than through an exit
strategy in the short term. During the fourth quarter of 2008, the Company
reclassified certain debt securities and loans into accounting categories with
measurement based on amortized cost to align the accounting treatment
with the revised asset holding periods.
Debt Securities Reclassified to Available for Sale and
Held to Maturity
FASB Statement No. 115, Accounting for Certain Investments in Debt and
Equity Securities (SFAS 115), requires that, at acquisition, an enterprise
classify debt securities into one of three categories: trading, available for sale
(AFS) or held to maturity (HTM). Trading securities are carried at fair value
on the balance sheet with unrealized holding gains and losses recognized in
earnings currently. AFS securities are carried at fair value on the balance
sheet, and unrealized holding gains and losses are excluded from earnings
and recognized as a separate component of equity in Accumulated other
comprehensive income (AOCI). HTM debt securities are measured at
amortized cost. Both AFS and HTM are subject to review for other-than-
temporary impairment (see discussion on page 129).
SFAS 115 states that transfers of securities out of the trading category are
expected to be rare. During the fourth quarter of 2008, Citigroup made a
number of transfers out of the trading category in order to better reflect the
revised intentions of the Company in response to the significant deterioration
in market conditions, which was especially acute during the fourth quarter.
These market conditions were not foreseen at the initial purchase date of the
securities. Most of the debt securities previously classified as trading were
bought and held principally for the purpose of selling them in the short
term, many in the context of Citigroup’s acting as a market maker. At the
date of acquisition, most of these positions were liquid and the Company
expected active and frequent buying and selling with the objective of
generating profits on short-term differences in price. However, subsequent
declines in value of these securities are primarily related to the ongoing
widening of market credit spreads reflecting increased risk and liquidity
premiums that buyers are currently demanding. As market liquidity has
decreased, the primary buyers for these securities have typically demanded a
return on investment that is significantly higher than previously
experienced.
Despite depressed market prices, the Company determined through credit
analysis that the cash recovery levels of these securities is expected to be
significantly higher than current market prices might indicate.
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