Citigroup Inc.

While Citigroup has determined that the integrity of its current foreclosureprocess is sound and there are no systemic issues, in the event deficienciesmaterialize, or if there is any adverse industry-wide regulatory or judicialaction taken with respect to mortgage foreclosures, the costs associated withCitigroup’s mortgage operations could increase significantly and Citigroup’sability to continue to implement its current foreclosure processes could beadversely affected.Any increase or backlog in the number of foreclosures in process, whetherrelated to Citi foreclosure process issues or industry-wide efforts to prevent orforestall foreclosure, has broader implications for Citigroup’s U.S. Consumermortgage portfolios. Specifically, to the extent that Citigroup is unable to takepossession of the underlying assets and sell the properties on a timely basis,growth in the number of foreclosures in process could:• inflate the amount of 180+ day delinquencies in Citigroup’s mortgagestatistics;• increase Consumer non-accrual loans (90+ day delinquencies);• create a dampening effect on Citi’s net interest margin as non-accrualassets build on the balance sheet;• negatively impact the amounts ultimately realized for property subject toforeclosure; and• cause additional costs to be incurred in connection with legislative orregulatory investigations.Further, any increase in the time to complete foreclosure sales may resultin an increase in servicing advances and may negatively impact the valueof Citigroup’s MSRs and mortgage-backed securities, in each case due toan adverse change in the expected timing and/or amount of cash flows tobe received.The continued uncertainty relating to the sustainabilityand pace of economic recovery has adversely affected, andmay continue to adversely affect, Citigroup’s businessesand results of operations.The financial services industry and the capital markets have been, and maycontinue to be, adversely affected by the economic recession and continueddisruptions in the global financial markets. This continued uncertaintyand disruption has adversely affected, and may continue to adversely affect,the corporate and sovereign bond markets, equity markets, debt and equityunderwriting and other elements of the financial markets. Volatile financialmarkets and reduced (or only slightly increased) levels of client businessactivity may continue to negatively impact Citigroup’s business, capital,liquidity, financial condition and results of operations, as well as the tradingprice of Citigroup’s common stock, preferred stock and debt securities.In addition, there has recently been increased focus on the potential forsovereign debt defaults and/or significant bank failures in the Eurozone.Despite assistance packages to Greece and Ireland, and the creation inMay 2010 of a joint EU-IMF European Financial Stability Facility, yieldson government bonds of certain Eurozone countries, including Portugaland Spain, have continued to rise. There can be no assurance that themarket disruptions in the Eurozone, including the increased cost of fundingfor certain Eurozone governments, will not spread, nor can there be anyassurance that future assistance packages will be available or sufficientlyrobust to address any further market contagion in the Eurozone or elsewhere.Moreover, market and economic disruptions have affected, and maycontinue to affect, consumer confidence levels and spending, personalbankruptcy rates, levels of incurrence and default on consumer debt(including strategic defaults on home mortgages) and home prices, amongother factors, particularly in Citi’s North America Consumer businesses.Combined with persistently high levels of U.S. unemployment, as wellas any potential future regulatory actions, these factors could result inreduced borrower interaction and participation in Citi’s loss mitigationand modification programs, particularly Citi’s U.S. mortgage modificationprograms, or increase the risk of re-default by borrowers who have completeda modification, either of which could increase Citi’s net credit losses anddelinquency statistics. To date, asset sales and modifications under Citi’smodification programs, including the U.S. Treasury’s Home AffordableModification Program (HAMP), have been the primary drivers of improvedperformance within Citigroup’s U.S. Consumer mortgage portfolios (see“Managing Global Risk—Credit Risk—U.S. Consumer Mortgage Lending”and “Consumer Loan Modification Programs” below). To the extentuncertainty regarding the economic recovery continues to negatively impactconsumer confidence and the consumer credit factors discussed above, Citi’sbusinesses and results of operations could be adversely affected.The maintenance of adequate liquidity depends onnumerous factors outside of Citi’s control, including butnot limited to market disruptions and regulatory andlegislative liquidity requirements, and Citi’s need tomaintain adequate liquidity has negatively impacted,and may continue to negatively impact, its net interestmargin (NIM).Adequate liquidity is essential to Citigroup’s businesses. As seen in recentyears, Citigroup’s liquidity can be, and has been, significantly and negativelyimpacted by factors Citigroup cannot control, such as general disruption ofthe financial markets, negative views about the financial services industryin general, or Citigroup’s short-term or long-term financial prospects orperception that it is experiencing greater liquidity or financial risk. Moreover,Citigroup’s ability to access the capital markets and its cost of obtaininglong-term unsecured funding is directly related to its credit spreads inboth the cash bond and derivatives markets, also outside of its control.Credit spreads are influenced by market and rating agency perceptions ofCitigroup’s creditworthiness and may also be influenced by movements in thecosts to purchasers of credit default swaps referenced to Citigroup’s long-termdebt. Increases in Citigroup’s credit qualifying spreads can, and did duringthe financial crisis, significantly increase the cost of this funding.Further, the prospective regulatory liquidity standards for financialinstitutions are currently subject to rulemaking and change, both in the U.S.and internationally, resulting in uncertainty as to their ultimate scope andeffect. In particular, the Basel Committee has developed two quantitativemeasures intended to strengthen liquidity risk management and supervision:76