Citigroup Inc.

The credit rating agencies continuously review the ratingsof Citigroup and its subsidiaries, and have particularlyfocused on the impact of the Financial Reform Act onthe ratings support assumptions of U.S. bank holdingcompanies, including Citigroup. Reductions in Citigroup’sand its subsidiaries’ credit ratings could have a significantand immediate impact on Citi’s funding and liquiditythrough cash obligations, reduced funding capacity andcollateral triggers.Each of Citigroup’s and Citibank, N.A.’s long-term/senior debt and shortterm/commercialpaper ratings are currently rated investment grade by Fitch,Moody’s and Standard & Poor’s (S&P). The rating agencies continuouslyevaluate Citigroup and its subsidiaries, and their ratings of Citigroup’s andits subsidiaries’ long-term and short-term debt are based on a number offactors, including financial strength, as well as factors not entirely withinthe control of Citigroup and its subsidiaries, such as conditions affecting thefinancial services industry generally.Moreover, each of Fitch, Moody’s and S&P has indicated that they areevaluating the impact of the Financial Reform Act on the rating supportassumptions currently included in their methodologies as related to largeU.S. bank holding companies, including Citigroup. These evaluationsare generally a result of the rating agencies’ belief that the FinancialReform Act, including the establishment and development of the neworderly liquidation regime, increases the uncertainty regarding the U.S.government’s willingness and ability to provide extraordinary support to suchcompanies. Consistent with this belief and to bring Citigroup in line withother large U.S. banks, during 2010, S&P and Moody’s revised their outlookson Citigroup’s supported ratings from stable to negative, and Fitch placedCitigroup’s supported ratings on negative rating watch. The ultimate timingof the completion of the credit rating agencies’ evaluations, as well as theoutcomes, is uncertain.In light of these reviews and the continued focus on the financial servicesindustry generally, Citigroup and its subsidiaries may not be able to maintaintheir current respective ratings. Ratings downgrades by Fitch, Moody’s orS&P could have a significant and immediate impact on Citi’s funding andliquidity through cash obligations, reduced funding capacity and collateraltriggers. A reduction in Citigroup’s or its subsidiaries’ credit ratings could alsowiden Citi’s credit spreads or otherwise increase its borrowing costs and limitits access to the capital markets. For additional information on the potentialimpact of a reduction in Citigroup’s or its subsidiaries’ credit ratings,see “Capital Resources and Liquidity—Funding and Liquidity—CreditRatings” above.The restrictions imposed on proprietary trading and fundsrelatedactivities by the Financial Reform Act and theregulations thereunder will limit Citigroup’s trading forits own account and could also, depending on the scope ofthe final regulations, adversely impact Citigroup’s marketmakingactivities and force Citi to dispose of certain of itsinvestments at less than fair market value.The so-called “Volcker Rule” provisions of the Financial Reform Act restrictthe proprietary trading activities of depository institutions, entities thatown or control depository institutions and their affiliates. The ultimatecontours of the restrictions on proprietary trading will depend on thefinal regulations. The rulemaking must address, among other things, thescope of permissible market-making and hedging activities. The ultimateoutcome of the rulemaking process as to these and other issues is currentlyuncertain and, accordingly, so is the level of compliance and monitoringcosts and the degree to which Citigroup’s trading activities, and the results ofoperations from those activities, will be negatively impacted. In addition, anyrestrictions imposed by final regulations in this area will affect Citigroup’strading activities globally, and thus will likely impact it disproportionatelyin comparison to foreign financial institutions which will not be subject tothe Volcker Rule provisions of the Financial Reform Act with respect to theiractivities outside of the United States.In addition, the Volcker Rule restricts Citigroup’s funds-related activities,including Citi’s ability to sponsor or invest in private equity and/or hedgefunds. Under the Financial Reform Act, bank regulators have the flexibility toprovide firms with extensions allowing them to hold their otherwise restrictedinvestments in private equity and hedge funds for some time beyondthe statutory divestment period. If the regulators elect not to grant suchextensions, Citi could be forced to divest certain of its investments in illiquidfunds in the secondary market on an untimely basis. Based on the illiquidnature of the investments and the prospect that other industry participantssubject to similar requirements would likely be divesting similar assets atthe same time, such sales could be at substantial discounts to their otherwisecurrent fair market value.The establishment of the new Bureau of ConsumerFinancial Protection, as well as other provisions of theFinancial Reform Act and ensuing regulations, could affectCiti’s practices and operations with respect to a number ofits U.S. Consumer businesses and increase its costs.The Financial Reform Act established the Bureau of Consumer FinancialProtection (CFPB), an independent agency within the Federal ReserveBoard. The CFPB was given rulemaking authority over most providers ofconsumer financial services in the U.S. as well as enforcement authorityover the consumer operations of banks with assets over $10 billion, such asCitibank, N.A. The CFPB was also given interpretive authority with respectto numerous existing consumer financial services regulations (such asRegulation Z, Truth in Lending) that were previously interpreted by theFederal Reserve Board. Because this is an entirely new agency, the impacton Citigroup, including its retail banking, mortgages and cards businesses,74