Citigroup Inc.

The Company administers one conduit that originates loans to third-partyborrowers and those obligations are fully guaranteed primarily by AAAratedgovernment agencies that support export and development financingprograms. The economic performance of this government-guaranteed loanconduit is most significantly impacted by the performance of its underlyingassets. The guarantors must approve each loan held by the entity and theguarantors have the ability (through establishment of the servicing termsto direct default mitigation and to purchase defaulted loans) to managethe conduit’s loans that become delinquent to improve the economicperformance of the conduit. Because the Company does not have the powerto direct the activities of this government-guaranteed loan conduit that mostsignificantly impact the economic performance of the entity, it was concludedthat the Company should not consolidate the entity. As of December 31, 2010,this unconsolidated government-guaranteed loan conduit held assets ofapproximately $9.6 billion.Prior to January 1, 2010, the Company was required to analyze theexpected variability of the conduits quantitatively to determine whether theCompany is the primary beneficiary of the conduit. The Company performedthis analysis on a quarterly basis. For conduits where the subordinateloss notes or third-party guarantees were sufficient to absorb a majorityof the expected loss of the conduit, the Company did not consolidate. Incircumstances where the subordinate loss notes or third-party guaranteeswere insufficient to absorb a majority of the expected loss, the Companyconsolidated the conduit as its primary beneficiary due to the additionalcredit enhancement provided by the Company. In conducting this analysis,the Company considers three primary sources of variability in the conduit:credit risk, interest rate risk and fee variability.Third-Party Commercial Paper ConduitsThe Company also provides liquidity facilities to single- and multi-sellerconduits sponsored by third parties. These conduits are independently ownedand managed and invest in a variety of asset classes, depending on the natureof the conduit. The facilities provided by the Company typically represent asmall portion of the total liquidity facilities obtained by each conduit, andare collateralized by the assets of each conduit. As of December 31, 2010,the notional amount of these facilities was approximately $965 million, ofwhich $415 million was funded under these facilities. The Company is notthe party that has the power to direct the activities of these conduits thatmost significantly impact their economic performance and thus does notconsolidate them.Collateralized Debt and Loan ObligationsA securitized collateralized debt obligation (CDO) is an SPE that purchasesa pool of assets consisting of asset-backed securities and synthetic exposuresthrough derivatives on asset-backed securities and issues multiple tranchesof equity and notes to investors. A third-party asset manager is typicallyretained by the CDO to select the pool of assets and manage those assets overthe term of the CDO. The Company earns fees for warehousing assets priorto the creation of a CDO, structuring CDOs and placing debt securities withinvestors. In addition, the Company has retained interests in many of theCDOs it has structured and makes a market in those issued notes.A cash CDO, or arbitrage CDO, is a CDO designed to take advantage ofthe difference between the yield on a portfolio of selected assets, typicallyresidential mortgage-backed securities, and the cost of funding the CDOthrough the sale of notes to investors. “Cash flow” CDOs are vehicles inwhich the CDO passes on cash flows from a pool of assets, while “marketvalue” CDOs pay to investors the market value of the pool of assets ownedby the CDO at maturity. Both types of CDOs are typically managed by athird-party asset manager. In these transactions, all of the equity and notesissued by the CDO are funded, as the cash is needed to purchase the debtsecurities. In a typical cash CDO, a third-party investment manager selects aportfolio of assets, which the Company funds through a warehouse financingarrangement prior to the creation of the CDO. The Company then sells thedebt securities to the CDO in exchange for cash raised through the issuanceof notes. The Company’s continuing involvement in cash CDOs is typicallylimited to investing in a portion of the notes or loans issued by the CDO andmaking a market in those securities, and acting as derivative counterparty forinterest rate or foreign currency swaps used in the structuring of the CDO.A synthetic CDO is similar to a cash CDO, except that the CDO obtainsexposure to all or a portion of the referenced assets synthetically throughderivative instruments, such as credit default swaps. Because the CDO doesnot need to raise cash sufficient to purchase the entire referenced portfolio, asubstantial portion of the senior tranches of risk is typically passed on to CDOinvestors in the form of unfunded liabilities or derivative instruments. Thus,the CDO writes credit protection on select referenced debt securities to theCompany or third parties and the risk is then passed on to the CDO investorsin the form of funded notes or purchased credit protection through derivativeinstruments. Any cash raised from investors is invested in a portfolio ofcollateral securities or investment contracts. The collateral is then used tosupport the obligations of the CDO on the credit default swaps written tocounterparties. The Company’s continuing involvement in synthetic CDOsgenerally includes purchasing credit protection through credit default swapswith the CDO, owning a portion of the capital structure of the CDO in theform of both unfunded derivative positions (primarily super-senior exposuresdiscussed below) and funded notes, entering into interest-rate swap and totalreturnswap transactions with the CDO, lending to the CDO, and making amarket in those funded notes.245