Citigroup Inc.

SECURITIZATIONSCitigroup securitizes a number of different asset classes as a means ofstrengthening its balance sheet and accessing competitive financing ratesin the market. Under these securitization programs, assets are transferredinto a trust and used as collateral by the trust to obtain financing. The cashflows from assets in the trust service the corresponding trust securities. Ifthe structure of the trust meets certain accounting guidelines, trust assetsare treated as sold and are no longer reflected as assets of Citi. If theseguidelines are not met, the assets continue to be recorded as Citi’s assets,with the financing activity recorded as liabilities on Citigroup’s ConsolidatedBalance Sheet.Citigroup also assists its clients in securitizing their financial assets andpackages and securitizes financial assets purchased in the financial markets.Citi may also provide administrative, asset management, underwriting,liquidity facilities and/or other services to the resulting securitization entitiesand may continue to service some of these financial assets.Elimination of Qualifying Special Purpose Entities(QSPEs) and Changes in the Consolidation Model for VIEsIn June 2009, the FASB issued SFAS No. 166, Accounting for Transfers ofFinancial Assets, an amendment of FASB Statement No. 140 (SFAS 166,now incorporated into ASC Topic 860) and SFAS No. 167, Amendmentsto FASB Interpretation No. 46(R) (SFAS 167, now incorporated into ASCTopic 810). Citigroup adopted both standards on January 1, 2010. Citigrouphas elected to apply SFAS 166 and SFAS 167 prospectively. Accordingly, priorperiods have not been restated.SFAS 166 eliminates the concept of QSPEs from U.S. GAAP and amendsthe guidance on accounting for tranfers of financial assets. SFAS 167details three key changes to the consolidation model. First, former QSPEsare now included in the scope of SFAS 167. Second, the FASB has changedthe method of analyzing which party to a VIE should consolidate the VIE(known as the primary beneficiary) to a qualitative determination of whichparty to the VIE has “power,” combined with potentially significant benefitsor losses, instead of the previous quantitative risks and rewards model. Theparty that has “power” has the ability to direct the activities of the VIE thatmost significantly impact the VIE’s economic performance. Third, the newstandard requires that the primary beneficiary analysis be re-evaluatedwhenever circumstances change. The previous rules required reconsiderationof the primary beneficiary only when specified reconsiderationevents occurred.As a result of implementing these new accounting standards, Citigroupconsolidated certain of the VIEs and former QSPEs with which it currentlyhas involvement. Further, certain asset transfers, including transfers ofportions of assets, that would have been considered sales under SFAS 140, areconsidered secured borrowings under the new standards.In accordance with SFAS 167, Citigroup employed three approaches fornewly consolidating certain VIEs and former QSPEs as of January 1, 2010.The first approach required initially measuring the assets, liabilities, andnoncontrolling interests of the VIEs and former QSPEs at their carryingvalues (the amounts at which the assets, liabilities, and noncontrollinginterests would have been carried in the Consolidated Financial Statements, ifCitigroup had always consolidated these VIEs and former QSPEs). The secondapproach measures assets at their unpaid principal amount, and was appliedwhere using carrying values was not practicable. The third approach was toelect the fair value option, in which all of the financial assets and liabilitiesof certain designated VIEs and former QSPEs were recorded at fair value uponadoption of SFAS 167 and continue to be marked to market thereafter, withchanges in fair value reported in earnings.Citigroup consolidated all required VIEs and former QSPEs, as ofJanuary 1, 2010, at carrying values or unpaid principal amounts, except forcertain private label residential mortgage and mutual fund deferred salescommissions VIEs, for which the fair value option was elected. The followingtables present the impact of adopting these new accounting standardsapplying these approaches.The incremental impact of these changes on GAAP assets and resultingrisk-weighted assets for those VIEs and former QSPEs that were consolidatedor deconsolidated for accounting purposes as of January 1, 2010 wasas follows:In billions of dollarsGAAPassetsIncrementalRiskweightedassets (1)Impact of consolidationCredit cards $ 86.3 $ 0.8Commercial paper conduits 28.3 13.0Student loans 13.6 3.7Private label consumer mortgages 4.4 1.3Municipal tender option bonds 0.6 0.1Collateralized loan obligations 0.5 0.5Mutual fund deferred sales commissions 0.5 0.5Subtotal $134.2 $19.9Impact of deconsolidationCollateralized debt obligations (2) $ 1.9 $ 3.6Equity-linked notes (3) 1.2 0.5Total $137.3 $24.0(1) The net increase in risk-weighted assets (RWA) was $10 billion, principally reflecting the deductionfrom gross RWA of $13 billion of loan loss reserves (LLR) recognized from the adoption of SFAS166/167, which exceeded the 1.25% limitation on LLRs includable in Tier 2 Capital.(2) The implementation of SFAS 167 resulted in the deconsolidation of certain synthetic and cashcollateralized debt obligation (CDO) VIEs that were previously consolidated under the requirements ofASC 810 (FIN 46(R)). Due to the deconsolidation of these synthetic CDOs, Citigroup’s ConsolidatedBalance Sheet now reflects the recognition of current receivables and payables related to purchasedand written credit default swaps entered into with these VIEs, which had previously been eliminated inconsolidation. The deconsolidation of certain cash CDOs has a minimal impact on GAAP assets, butcauses a sizable increase in risk-weighted assets. The impact on risk-weighted assets results fromreplacing, in Citigroup’s trading account, largely investment grade securities owned by these VIEswhen consolidated, with Citigroup’s holdings of non-investment grade or unrated securities issued bythese VIEs when deconsolidated.(3) Certain equity-linked note client intermediation transactions that had previously been consolidatedunder the requirements of ASC 810 (FIN 46 (R)) because Citigroup had repurchased and held amajority of the notes issued by the VIE were deconsolidated with the implementation of SFAS 167,because Citigroup does not have the power to direct the activities of the VIE that most significantlyimpact the VIE’s economic performance. Upon deconsolidation, Citigroup’s Consolidated BalanceSheet reflects both the equity-linked notes issued by the VIEs and held by Citigroup as trading assets,as well as related trading liabilities in the form of prepaid equity derivatives. These trading assets andtrading liabilities were formerly eliminated in consolidation.136