CITIGROUP OFF BALANCE SHEET RISK

Nathan Raduns Aram Kevorkian James Keane

Vincent Pagano
Josiah Cimino

OBS ACTIVITIES
Primarily to obtain liquidity and favorable capital treatment Securitizes financial assets Allows for lower reserve requirements, deposit insurance fees, etc.

(smaller amounts on balance sheet)

Hedging through derivatives to reduce risk (credit risk, interest rate

risk, etc.)
Source of fee income Increases ROA without increasing leverage, which would increase

ROE

OBS RISKS
Loan commitments
Interest rate risk (or basis risk), credit risk, aggregate

funding risk, take-down risk

Letters of Credit
Risk that buyer will be unable to pay

Derivatives
Credit risk of OTC instruments

Loans sold with recourse

Long term credit risk

Settlement risk Affiliate risk

Derivative Contracts by Product ($Billions)

All Commercial Banks
250,000

200,000
98Q4 99Q4 00Q4 150,000 01Q4 02Q4

03Q4
04Q4 05Q4 100,000 06Q4 07Q4 08Q4 09Q1 50,000

0 Futures & Fwrds Swaps Options Credit Derivatives Total

Source: OCC, http://www.occ.gov/topics/capital-markets/financialmarkets/trading/derivatives/dq109.pdfhttp://www.occ.gov/topics/capital-markets/financial-

Total Credit Exposure to Risk Based Capital (%) Top 5 Banks

1200

1000

800

01Q4 02Q4 03Q4 04Q4

600

05Q4 06Q4 07Q4 08Q4

400

09Q1

200

0 JPMORGAN CHASE GOLDMAN BofA CITIBANK HSBC AVG %

Source: OCC, http://www.occ.gov/topics/capital-markets/financialmarkets/trading/derivatives/dq109.pdfhttp://www.occ.gov/topics/capital-markets/financial-

SECURITIZATION ENTITIES
Citi primarily securitizes credit card receivables

and mortgages Generally Accepted Accounting Principles (GAAP) determine transfer as a sale or a financing activity Types of Special Purpose Entities (SPEs) Qualifying Special Purpose Entities (QSPEs) - generally no-recourse Variable Interest Entity (VIEs) - primary beneficiary must consolidate

STRESS TESTING CITIGROUPS OBS RISK

Analyze Citigroups exposure to off balance sheet risk at various deltas.
1) Break OBS exposure down into components 2) Determine recovery rates
Every Asset has a Liability Every Liability has an Asset

3) Determine Capital Weighting 4) Calculate Changes in Equity and Capital Adequacy at a given

Delta.

STRESS TESTING CITIGROUPS OBS RISK

Average 85% Recovery Rate where not available Asset Risk Weighting according to FDIC Regulatory Capital

Worksheet

DELTAS IMPACT ON EQUITY

Basic Balance Sheet Assets Loans Trading account Assets Fed Funds Sold Investments Other Total assets Liabilities Deposits Fed Funds Purchased Short & Long term Debt Trading Account Liabilities Other Total Liabilities Equity TSE & Liabilities Current 555 343 222 306 431 1857 Change 55 5% 610 343 222 435 431 2041

129

836 154 433 138 141 1702 155 1857

55 142

-13

836 209 575 138 141 1899 142 2041

DELTAS IMPACT ON EQUITY

Basic Balance Sheet Assets Loans Trading account Assets Fed Funds Sold Investments Other Total assets Liabilities Deposits Fed Funds Purchased Short & Long term Debt Trading Account Liabilities Other Total Liabilities Equity TSE & Liabilities Current 555 343 222 306 431 1857 5% 610 343 222 435 431 2041 7.50% 692 343 222 629 431 2316 10% 801 343 222 887 431 2684 12.50% 937 343 222 1210 431 3143 15% 1101 343 222 1597 431 3695

836 154 433 138 141 1702 155 1857

836 209 575 138 141 1899 142 2041

836 291 789 138 141 2194 122 2316

836 400 1074 138 141 2588 96 2684

836 536 1430 138 141 3081 62 3143

836 700 1857 138 141 3672 23 3695

DELTAS IMPACT ON CAPITAL ADEQUACY

Capital Adequacy Change in Equity Teir 1 Capital Risk Weighted Assets Adequecy Ratio

Current 127 1089 11.67%

5% -13 114 1134 10.04%

7.50% -20 94 1203 7.82%

10% -26 68 1294 5.22%

12.50% -34 34 1408 2.45%

15% -39 -5 1545 -0.33%

Breakeven Delta for Capital Adequacy ratio of 8%:

6.8%

BANK OF AMERICA
Basic Balance Sheet Assets Loans Trading account Assets Fed Funds Sold Investments Other 900 182 190 311 640 945 182 190 459 640 1011 182 190 680 640 1100 182 190 976 640 1212 182 190 1345 640 1345 182 190 1789 640 Current 5% 7.50% 10% 12.50% 15%

Total assets
Liabilities Deposits Fed Funds Purchased Short & Long term Debt Trading Account Liabilities Other Total Liabilities Equity TSE & Liabilities

2223

2416

2703

3088

3569

4146

992 255 508 65 172 1992 231 2223

992 300 672 65 172 2201 215 2416

992 366 919 65 172 2514 189 2703

992 455 1248 65 172 2932 156 3088

992 567 1659 65 172 3455 114 3569

992 700 2153 65 172 4082 64 4146

BANK OF AMERICA

Capital Adequecy Change in Equity Tier 1 Capital Risk Weighted Assets Adequacy Ratio

Current

5% -16

7.50% -26 118 1207 9.79%

10% -33 85 1302 6.51%

12.50% -42 43 1421 3.02%

15% -50 -7 1563 -0.47%

160 1088.5 14.70%

143 1136 12.61%

Increase in Tier 1 Capital to assets shows increased adequacy ratio.

CITI & B OF A COMPARISON

16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 1 -2.00% 2 3 4 5 6

B of A Citi

CITIGROUP RESTRUCTURING AND EFFECTS OF REDUCING OBS RISK

OBS activities caused massive Citi losses due to inaccurate

models and assumptions

Split into Citicorp and Citi Holdings
Citi Holdings receives Special Asset Pool

Special Asset Pool includes the most toxic mortgages and bonds
These OBS items become Assets and Liabilities when brought on-balance-

sheet

Example: Sub-prime CDOs, Alt-A mortgages, Highly-leveraged

financing
Goal is an economically rational run off the portfolio as loans are

repaid and securities are sold

Pressure from the government

 Citi undertaking actions to scale down toxic assets, realize OBS

losses and focus on core business, for example

Selling off Student Loan Corporation (STU) stake to Discover and others

As credit and housing conditions improve, Citi hopes to sell off

securitized loans strategically to reduce exposure (current 46% unrealized loss on portfolio)
Possible spin-off of Citi Holdings would maximize shareholder value
Sum of parts value > current combined entity value Most recent

quarter: Citicorp earned $3.5 billion, Citi Holdings lost $1.1

billion

LITIGATION RISK
Being named as a defendant in various legal proceedings
Past: fined almost $5 billion for involvement in Enron and WorldCom

Many current cases connected to housing crisis and mortgage

underwriting processes
Forced mortgage repurchasing Fee generation through packaged loans Ex. Schwab and others concerning RMBS mistakes

OBS connection example : CDSs on struggling CDO portfolio

Purchased from bond-insurer Ambac Recent Ambac bankruptcy filing would cause these to be worthless Outcome of case will affect loss in CDS values

AFFILIATE RISK
Risk of a holding company attributed to the potential failure of one

of its affiliate companies

Largest is Citi Holdings Banamex, second largest Mexican bank Banco Custcatlan, El Salvadors biggest bank Banco Uno, Central Americas largest credit card bank Bank Handlowy Warszawie, oldest bank in Poland Egg Banking, worlds largest internet bank Other Citi brands, such as Citi Alternative Investments