7.3 billion - Citigroup

investors in the form of funded notes or purchased creditprotection through derivative instruments. Any cash raised frominvestors is invested in a portfolio of collateral securities orinvestment contracts. The collateral is then used to support theobligations of the CDO on the credit default swaps written tocounterparties.A securitized collateralized loan obligation (CLO) issubstantially similar to the CDO transactions described above,except that the assets owned by the SPE (either cash instrumentsor synthetic exposures through derivative instruments) arecorporate loans and to a lesser extent corporate bonds, ratherthan asset-backed debt securities.A third-party asset manager is typically retained by theCDO/CLO to select the pool of assets and manage those assetsover the term of the SPE. The Company is the manager for alimited number of CLO transactions.The Company earns fees for warehousing assets prior to thecreation of a ―cash flow‖ or ―market value‖ CDO/CLO,structuring CDOs/CLOs and placing debt securities withinvestors. In addition, the Company has retained interests inmany of the CDOs/CLOs it has structured and makes a marketin the issued notes.The Company‘s continuing involvement in syntheticCDOs/CLOs generally includes purchasing credit protectionthrough credit default swaps with the CDO/CLO, owning aportion of the capital structure of the CDO/CLO in the form ofboth unfunded derivative positions (primarily super-seniorexposures discussed below) and funded notes, entering intointerest-rate swap and total-return swap transactions with theCDO/CLO, lending to the CDO/CLO, and making a market inthe funded notes.Where a CDO/CLO entity issues preferred shares (orsubordinated notes that are the equivalent form), the preferredshares generally represent an insufficient amount of equity (lessthan 10%) and create the presumption that preferred shares areinsufficient to finance the entity‘s activities withoutsubordinated financial support. In addition, although thepreferred shareholders generally have full exposure to expectedlosses on the collateral and uncapped potential to receiveexpected residual returns, they generally do not have the abilityto make decisions about the entity that have a significant effecton the entity‘s financial results because of their limited role inmaking day-to-day decisions and their limited ability to removethe asset manager. Because one or both of the above conditionswill generally be met, the Company has concluded that, evenwhere a CDO/CLO entity issued preferred shares, the entityshould be classified as a VIE.In general, the asset manager, through its ability to purchaseand sell assets or—where the reinvestment period of aCDO/CLO has expired—the ability to sell assets, will have thepower to direct the activities of the entity that most significantlyimpact the economic performance of the CDO/ CLO. However,where a CDO/CLO has experienced an event of default or anoptional redemption period has gone into effect, the activities ofthe asset manager may be curtailed and/or certain additionalrights will generally be provided to the investors in a CDO/CLOentity, including the right to direct the liquidation of theCDO/CLO entity.The Company has retained significant portions of the―super-senior‖ positions issued by certain CDOs. Thesepositions are referred to as ―super-senior‖ because theyrepresent the most senior positions in the CDO and, at the timeof structuring, were senior to tranches rated AAA byindependent rating agencies. The positions have includedfacilities structured in the form of short-term commercial paper,where the Company wrote put options (liquidity puts) to certainCDOs. Under the terms of the liquidity puts, if the CDO wasunable to issue commercial paper at a rate below a specifiedmaximum (generally LIBOR + 35 bps to LIBOR + 40 bps), theCompany was obligated to fund the senior tranche of the CDOat a specified interest rate. As of March 31, 2012, the Companyno longer had exposure to this commercial paper as all of theunderlying CDOs had been liquidated.The Company does not generally have the power to directthe activities of the entity that most significantly impacts theeconomic performance of the CDOs/CLOs as this power isgenerally held by a third-party asset manager of the CDO/CLO.As such, those CDOs/CLOs are not consolidated. The Companymay consolidate the CDO/CLO when: (i) the Company is theasset manager and no other single investor has the unilateralability to remove the Company or unilaterally cause theliquidation of the CDO/CLO, or the Company is not the assetmanager but has a unilateral right to remove the third-party assetmanager or unilaterally liquidate the CDO/CLO and receive theunderlying assets, and (ii) the Company has economic exposureto the entity that could be potentially significant to the entity.The Company continues to monitor its involvement inunconsolidated CDOs/CLOs to assess future consolidation risk.For example, if the Company were to acquire additionalinterests in these entities and obtain the right, due to an event ofdefault trigger being met, to unilaterally liquidate or direct theactivities of a CDO/CLO, the Company may be required toconsolidate the asset entity. For cash CDOs/CLOs, the net resultof such consolidation would be to gross up the Company‘sbalance sheet by the current fair value of the securities held bythird parties and assets held by the CDO/CLO, which amountsare not considered material. For synthetic CDOs/CLOs, the netresult of such consolidation may reduce the Company‘s balancesheet, because intercompany derivative receivables and payableswould be eliminated in consolidation, and other assets held bythe CDO/CLO and the securities held by third parties would berecognized at their current fair values.146CITIGROUP – 2012 FIRST QUARTER 10-Q