Citibank 2009 Annual Report Download - page 253

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and tax indemnifications are essential components of many contractual
relationships, they do not represent the underlying business purpose for the
transactions. The indemnification clauses are often standard contractual
terms related to the Company’s own performance under the terms of a
contract and are entered into in the normal course of business based on an
assessment that the risk of loss is remote. Often these clauses are intended
to ensure that terms of a contract are met at inception (for example, that
loans transferred to a counterparty in a sales transaction did in fact meet the
conditions specified in the contract at the transfer date). No compensation
is received for these standard representations and warranties, and it is not
possible to determine their fair value because they rarely, if ever, result in a
payment. In many cases, there are no stated or notional amounts included
in the indemnification clauses and the contingencies potentially triggering
the obligation to indemnify have not occurred and are not expected to occur.
These indemnifications are not included in the table above.
In addition, the Company is a member of or shareholder in hundreds
of value-transfer networks (VTNs) (payment clearing and settlement
systems as well as securities exchanges) around the world. As a condition
of membership, many of these VTNs require that members stand ready to
backstop the net effect on the VTNs of a member’s default on its obligations.
The Company’s potential obligations as a shareholder or member of VTN
associations are excluded from the scope of FIN 45, since the shareholders
and members represent subordinated classes of investors in the VTNs.
Accordingly, the Company’s participation in VTNs is not reported in the table
and there are no amounts reflected on the Consolidated Balance Sheet as of
December 31, 2009 or December 31, 2008 for potential obligations that could
arise from the Company’s involvement with VTN associations.
In the sale of an insurance subsidiary, the Company provided an
indemnification to an insurance company for policyholder claims and
other liabilities relating to a book of long-term care (LTC) business (for the
entire term of the LTC policies) that is fully reinsured by another insurance
company. The reinsurer has funded two trusts with securities whose fair
value (approximately $3.3 billion at December 31, 2009) is designed to
cover the insurance company’s statutory liabilities for the LTC policies.
The assets in these trusts are evaluated and adjusted periodically to ensure
that the fair value of the assets continues to cover the estimated statutory
liabilities related to the LTC policies, as those statutory liabilities change
over time. If the reinsurer fails to perform under the reinsurance agreement
for any reason, including insolvency, and the assets in the two trusts are
insufficient or unavailable to the ceding insurance company, then Citigroup
must indemnify the ceding insurance company for any losses actually
incurred in connection with the LTC policies. Since both events would have
to occur before Citi would become responsible for any payment to the ceding
insurance company pursuant to its indemnification obligation and the
likelihood of such events occurring is currently not probable, there is no
liability reflected in the Consolidated Balance Sheet as of December 31, 2009
related to this indemnification.
At December 31, 2009 and December 31, 2008, the total carrying amounts
of the liabilities related to the guarantees and indemnifications included
in the table amounted to approximately $1.2 billion and $1.8 billion,
respectively. The carrying value of derivative instruments is included in
either Trading liabilities or Other liabilities, depending upon whether
the derivative was entered into for trading or non-trading purposes. The
carrying value of financial and performance guarantees is included in
Other liabilities. For loans sold with recourse, the carrying value of the
liability is included in Other liabilities. In addition, at December 31, 2009
and December 31, 2008, Other liabilities on the Consolidated Balance Sheet
include an allowance for credit losses of $1,157 million and $887 million
relating to letters of credit and unfunded lending commitments, respectively.
Collateral
Cash collateral available to the Company to reimburse losses realized under
these guarantees and indemnifications amounted to $31 billion and $33
billion at December 31, 2009 and December 31, 2008, respectively. Securities
and other marketable assets held as collateral amounted to $43 billion and
$27 billion, respectively, the majority of which collateral is held to reimburse
losses realized under securities lending indemnifications. Additionally, letters
of credit in favor of the Company held as collateral amounted to $1.4 billion
and $0.5 billion at December 31, 2009 and December 31, 2008, respectively.
Other property may also be available to the Company to cover losses under
certain guarantees and indemnifications; however, the value of such property
has not been determined.
Performance risk
Citigroup evaluates the performance risk of its guarantees based on the
assigned referenced counterparty internal or external ratings. Where external
ratings are used, investment-grade ratings are considered to be Baa/BBB
and above, while anything below is considered non-investment grade.
The Citigroup internal ratings are in line with the related external rating
system. On certain underlying referenced credits or entities, ratings are not
available. Such referenced credits are included in the not rated category. The
maximum potential amount of the future payments related to guarantees
and credit derivatives sold is determined to be the notional amount of these
contracts, which is the par amount of the assets guaranteed.