Citibank 2011 Annual Report Download - page 252

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The Company serves as remarketing agent to the trusts, placing the
Floaters with third-party investors at inception, facilitating the periodic reset
of the variable rate of interest on the Floaters and remarketing any tendered
Floaters. If Floaters are tendered and the Company (in its role as remarketing
agent) is unable to find a new investor within a specified period of time, it
can declare a failed remarketing, in which case the trust is unwound. The
Company may, but is not obligated to, buy the Floaters into its own inventory.
The level of the Company’s inventory of Floaters fluctuates over time. As of
December 31, 2011, the Company held $120 million of Floaters related to
both customer and non-customer TOB trusts.
For certain non-customer trusts, the Company also provides credit
enhancement. Approximately $240 million of the municipal bonds owned by
TOB trusts have a credit guarantee provided by the Company.
The Company provides liquidity to many of the outstanding trusts. If
a trust is unwound early due to an event other than a credit event on the
underlying municipal bond, the underlying municipal bonds are sold in the
market. If there is a shortfall in the trust’s cash flows between the redemption
price of the tendered Floaters and the proceeds from the sale of the
underlying municipal bonds, the trust draws on a liquidity agreement in an
amount equal to the shortfall. For customer TOBs where the Residual is less
than 25% of the trust’s capital structure, the Company has a reimbursement
agreement with the Residual holder under which the Residual holder
reimburses the Company for any payment made under the liquidity
arrangement. Through this reimbursement agreement, the Residual holder
remains economically exposed to fluctuations in value of the underlying
municipal bonds. These reimbursement agreements are generally subject
to daily margining based on changes in value of the underlying municipal
bond. In cases where a third party provides liquidity to a non-customer TOB
trust, a similar reimbursement arrangement is made whereby the Company
(or a consolidated subsidiary of the Company) as Residual holder absorbs
any losses incurred by the liquidity provider.
As of December 31, 2011, liquidity agreements provided with respect to
customer TOB trusts totaled $5.4 billion of which $4.0 billion was offset
by reimbursement agreements. The remaining exposure related to TOB
transactions where the Residual owned by the customer was at least 25% of
the bond value at the inception of the transaction and no reimbursement
agreement was executed. The Company also provides other liquidity
agreements or letters of credit to customer-sponsored municipal investment
funds, that are not variable interest entities, and municipality-related issuers
that totaled $11.7 billion as of December 31, 2011. These liquidity agreements
and letters of credit are offset by reimbursement agreements with various
term-out provisions. In addition, as of December 31, 2011 the Company has
provided liquidity arrangements with a notional amount of $20 million for
other non-consolidated non-customer TOB trusts described below.
The Company considers the customer and non-customer TOB trusts to
be VIEs. Customer TOB trusts are not consolidated by the Company. The
Company has concluded that the power to direct the activities that most
significantly impact the economic performance of the customer TOB trusts is
primarily held by the customer Residual holder, who may unilaterally cause
the sale of the trust’s bonds.
Non-customer TOB trusts generally are consolidated. Similar to customer
TOB trusts, the Company has concluded that the power over the non-
customer TOB trusts is primarily held by the Residual holder, which may
unilaterally cause the sale of the trust’s bonds. Because the Company holds
the Residual interest, and thus has the power to direct the activities that most
significantly impact the trust’s economic performance, it consolidates the
non-customer TOB trusts.
Total assets in non-customer TOB trusts also include $22 million of
assets where the Residuals are held by hedge funds that are consolidated
and managed by the Company. The assets and the associated liabilities of
these TOB trusts are not consolidated by the hedge funds (and, thus, are not
consolidated by the Company) under the application of ASC 946, Financial
Services—Investment Companies, which precludes consolidation of
owned investments. The Company consolidates the hedge funds, because
the Company holds controlling financial interests in the hedge funds.
Certain of the Company’s equity investments in the hedge funds are hedged
with derivatives transactions executed by the Company with third parties
referencing the returns of the hedge fund.
Municipal Investments
Municipal investment transactions include debt and equity interests in
partnerships that finance the construction and rehabilitation of low-income
housing, facilitate lending in new or underserved markets, or finance
the construction or operation of renewable municipal energy facilities.
The Company generally invests in these partnerships as a limited partner
and earns a return primarily through the receipt of tax credits and grants
earned from the investments made by the partnership. The Company may
also provide construction loans or permanent loans to the development or
continuation of real estate properties held by partnerships. These entities are
generally considered VIEs. The power to direct the activities of these entities
is typically held by the general partner. Accordingly, these entities are not
consolidated by the Company.