Q4 2007 Citigroup Inc. Earnings Conference Call on Jan. 15 ...online.wsj.com/public/resources/documents/transcript-c-20080115.pdf · 15.01.2008 · the right people in the right

F I N A L T R A N S C R I P T

C - Q4 2007 Citigroup Inc. Earnings Conference Call

Event Date/Time: Jan. 15. 2008 / 8:30AM ET

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C O R P O R A T E P A R T I C I P A N T S

Art TildesleyCitigroup Inc. - IR

Vikram PanditCitigroup Inc. - CEO

Gary CrittendenCitigroup Inc. - CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Guy MoszkowskiMerrill Lynch - Analyst

Betsy GraseckMorgan Stanley - Analyst

William TanonaGoldman Sachs - Analyst

Mike MayoDeutsche Bank - Analyst

Meredith WhitneyOppenheimer - Analyst

Glenn SchorrUBS - Analyst

Richard BovePunk, Ziegel - Analyst

David HilderBear Stearns - Analyst

P R E S E N T A T I O N

Operator

Good morning, ladies and gentlemen and welcome to Citi's fourth-quarter and full-year 2007 earnings review featuring CitiChief Executive Officer, Vikram Pandit and Chief Financial Officer, Gary Crittenden. Today's call will be hosted by Art Tildesley.We ask that you hold all questions until the completion of the formal remarks at which time you will be given instructions forthe question and answer session. Also, as a reminder, this conference is being recorded today. If you have any objections, pleasedisconnect at this time. Mr. Tildesley, you may begin.

Art Tildesley - Citigroup Inc. - IR

Thank you very much, operator and thank you all for joining us this morning. Welcome to our fourth-quarter 2007 earningspresentation. The presentation that we will be walking through is available on our website, so you will want to download thatnow if you haven't already done so. The format we will follow is Vikram will begin the call. Gary will take you through thepresentation. Vikram will have some concluding remarks, then we'd be happy to take any questions -- or questions that youmay have.

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Jan. 15. 2008 / 8:30AM, C - Q4 2007 Citigroup Inc. Earnings Conference Call


Before we get started, I'd like to remind you that today's presentation may contain forward-looking statements. Citigroup'sfinancial results may differ materially from these statements, so please refer to our SEC filings for a description of the factorsthat could cause our actual results to differ from expectations. With that said, let me turn it over to Vikram.

Vikram Pandit - Citigroup Inc. - CEO

Thank you, Art. Good morning, everyone and thanks for joining us today. Going forward, Gary will host these quarterly conferencecalls, but I thought it was important for me in my first few weeks to share with you some comments on our performance andalso on the changes we are making at the Company.

Let me start though first by stating very clearly that Citi's fourth-quarter results are unacceptable; the subprime marketdeterioration has been unprecedented; other credit metrics such as consumer credit have weakened as well. Even so, we needto do better and we will do better.

As you know by now, we took over $18 billion in write-downs and losses on our subprime exposures. We increased our reservesand had losses in our US consumer business, up over $4 billion, and these numbers completely overwhelmed record performancein many, many of our other large businesses, as well as strong performance in a number of our other businesses.

These are obviously complicated times in the market and we want to be transparent with you on the risks we have and theirimpact on our results. We will be very candid with you today and also in the future so that you can fully understand the decisionswe make.

In my five weeks as CEO of Citi, I have had an opportunity to meet a number of our people, our clients, our investors andregulators and I plan to continue to do that. And I have not yet finished the analysis of the work I said I would to position ourbusinesses for the future. And I am continuing to do that and I will report to you on that when I am done.

But the actions we are taking today should not wait for that comprehensive review. They are completely consistent with mydirection and what I believe must be done now. We have terrific people at Citi and we have great, great support from our clientsas well.

The areas that need immediate attention and actions are our balance sheet, risk management and expenses. Let me go throughthese one by one. Starting with the balance sheet, we have taken actions to significantly strengthen our capital base. Thismorning, we announced a comprehensive set of actions that will position us well and allow us to refocus on earnings andearnings growth for the future.

First, we raised $12.5 billion from sophisticated long-term investors and we are very pleased with the support and the vote ofconfidence. We are also planning a public offering of our securities to all other shareholders. This capital not only positions uswell against our [books] and the economy, but also creates significant flexibility to serve our clients and to take advantage ofmarket opportunities that can be very beneficial to our franchise.

Second, the Board has reset the dividend to a level that is aligned with our business mix and aligned with the growth opportunitieswe see for each of our businesses. And Gary will take you through our thinking on that.

Third, we will continue to divest non-core assets that are misaligned or do not adequately support our growth strategies. Weare in the process of divesting some of them now and this is a part of the broader review of our businesses that I'm conducting.

And lastly, we are completely focused on recycling our balance sheet to take capital away from low or nonproducing assets.We have had great success over the last few weeks and I believe we can redeploy significant amounts more profitably.






In summary, we have taken a comprehensive and necessary set of actions to significantly strengthen our balance sheet. Whilethe environment continues to be uncertain and the results will definitely be influenced by the economy, these actions allowus to be on our front foot focused on opportunities to drive our earnings and earnings growth.

When you look at the major secular growth trends in financial services, many of our large businesses are positioned squarelyagainst this growth and hence, the strong numbers this year in a number of businesses. In particular, we had record results inwealth management, international consumer, Asia Pacific, Latin America and global transaction services.

Let me turn to risk, which is our second key priority. As some of you know, I have had some experience in this area and amactively involved in enhancing and reshaping our risk philosophy, along with the goal of having the best risk management inthe business. The first priority on risk has been to make sure that our legacy portfolio of assets to subprime and mortgage areasare separated and managed to be optimized and we have done that. We have also made sure they are well-capitalized.

Going forward, we are enhancing our risk culture and involving new talents. I have asked Jamie Forese to chair the markets andbanking risk committee. In addition, I will sit on this committee and be an active hands-on participant. We are also strengtheningindependent risk management and over time, risk management will become a key competitive advantage for us, drivingbottom-line results.

Let me turn to the third area that we are critically focused on which is expense management. Under Gary's leadership, ourreengineering plan for 2008 is well underway. In the fourth quarter, we have already reserved for significant headcount reductionsin markets and banking and we continue to make plans for further productivity improvements. You can interpret this currentquarter's $539 million charge as a down payment on the productivity efforts we are working on.

The other business reviews are in process with the goal of increasing productivity and right-sizing our staffing levels. And whilewe have a clear idea of where we are headed, I will not do anything without the right diligence.

Let me spend a minute on our people, our most important assets. As I have been talking to them and meeting them aroundthe world and across all our businesses, we have attracted some of the best talent in the world. We are going to manage thistalent more effectively by incentivizing people through a system of meritocracy where we pay for performance and by puttingthe right people in the right places.

Let me just highlight a few critical actions we have already taken. I have asked Michael Schlein and Jamie Forese to run themarkets and banking area. I have asked Hamid Biglari, one of our most talented people, to be Chief Operating Officer of thisbusiness. They will focus on driving productivity and on positioning our businesses for future growth.

Just last week, Gary named Carl Levinson to be the head of productivity improvement and reengineering. Carl has been withCiti for 30 years and has institutional knowledge to track down and find inefficiencies. You will find him to be impatient and[not] to do this quickly and to drive bottom-line results. Bill Beckman will lead the effort to integrate our mortgage businessesin an end-to-end model. This is the right model to serve our clients and also the right model to manage our risk and execution.And finally, yesterday, we appointed Paul McKinnon, formerly head of Human Resources at Dell, as head of talent management.Paul will make sure, working with all of us, that we have the right people in the right seats across the organization.

So these are my initial thoughts. Let me turn it over to Gary and I will conclude the call with some comments before we takeyour questions.






Gary Crittenden - Citigroup Inc. - CFO

Thank you, Vikram and good morning to everybody. Thank you for joining us and let me apologize in advance for the lengthof my prepared comments. There is a lot to cover today. I am going to turn to the slides that are now available to you on thewebsite.

Slide 1 shows you the consolidated results that we have for the quarter. To summarize our fourth-quarter results, net revenuesdeclined 70%, primarily on $17.4 billion in write-downs in fixed income on our direct subprime exposures, partially offset bycontinuing underlying growth in many of our other businesses. Expenses were up 18%. I will provide some detail on this later.

As Vikram mentioned, the reengineering plan for 2008 is underway and we are very focused on impacting expense levels atthe Company. Cost of credit was up 231%, driven primarily by a substantial charge to increased loan-loss reserves and highernet credit losses in our US consumer business. These factors drove a loss of $9.8 billion for the quarter or a loss per share of$1.99. The full-year results, which are heavily affected by the fourth quarter, net revenues were down 9%, expenses were up18%, the cost of credit was up 133% with approximately two-thirds of our increase in our US consumer business and our netincome and earnings per share declined by 83%.

Now slide 2 shows the number of items which were significantly affecting results in the quarter. First, $18.1 billion from thewrite-down and credit costs on subprime-related direct exposures in our fixed income markets business. Our net super seniorABS CDO direct exposure was $29.3 billion and our gross direct subprime exposure related to the structuring and lendingbusiness was $8 billion at the end of the quarter.

Second, we had $5.1 billion in credit costs in our US consumer business, driven primarily by higher charges to loan-loss reservesreflecting accelerating delinquencies and losses during the quarter in our US mortgage portfolio and higher current and expectedlosses in our US cards and personal loan portfolio.

Third, a $539 million charge related to the headcount reductions and moves to lower-cost locations. In this first phase of ourproductivity plan this year, we expect to reduce headcount by approximately 4200 people.

Fourth, a $306 million pretax charge for Visa-related litigation exposure. Fifth, we had a $534 million pretax gain on Visa sharesin our international consumer and transaction services business. Finally, a $313 million pretax gain on the sale of an ownershipinterest in Nikko Cordial Simplex Investment Advisors.

Turning to slide 3, this shows a five-quarter trend of some of the key drivers for our business. It is encouraging to see that, thisquarter, drivers have grown at a fairly consistent pace with the second quarter of this year, which was the best quarter in ourfirm's history. Strong momentum continued to cross these drivers, especially in our international franchises. Drivers of netinterest revenue showed strong growth, so average consumer loans were up 10% in the US and 30% internationally.Internationally, organic consumer loan growth was 18%. Average corporate loans were up 24%. Average consumer depositswere up 10% in the US and 21% internationally. Internationally, organic deposit growth was 9%.

Drivers of non-interest revenues also grew nicely. Credit card purchase sales were up 8% in the US and 37% internationally.Internationally, organic card purchase sales growth was 25%. International assets under management were up 24% in internationalconsumer. Client capital under management in CAI was up 26%.

In our global wealth management business, assets under fee-based management grew 27% or 9% organically. In investmentbanking for the full-year 2007, we ranked number one in global debt underwriting, number three in announced and completedM&A and number three in global equity underwriting.

Now slide 4 shows the quarter-over-quarter revenue growth in each of our major businesses on the top half of the chart. Thegraph at the bottom of the page shows the full-year growth for 2007. In looking at the top half of the page, markets and banking






revenues reflect the write-downs and losses that I have mentioned already. Alternative investments revenue decline reflectssharply lower proprietary investment revenues, driven primarily by lower private equity gains and mark-to-market losses fromchanges in the market value of Legg Mason shares this quarter.

Offsetting these results was revenue growth in international consumer and global wealth management, driven by both organicand acquisitions -- organic growth and acquisitions. In addition, US consumer revenues were up 6%. The international revenuedecline reflected about $4.4 billion of subprime related write-downs recorded in Europe and the Middle East. Acquisitionsaccounted for approximately 7% of our year-over-year revenue growth, offset completely by revenue reductions embeddedin our business as usual activities, which declined by 77%.

For the full year, consolidated revenues declined 9% reflecting the severe market dislocation in the third and fourth quarters.We are pleased, however, to see double-digit growth rates in international consumer and global wealth management andmid-single digit growth in US consumer. In total, our international revenues grew 15% and our US revenues declined by 26%.Despite the declines in US revenues, we continue to re-weight Citi towards higher growth opportunities. Excluding the impactof acquisitions, revenues declined by 13%.

The bar graph on slide 5 shows the 11-quarter sequential trend of net interest margin for the Company. This quarter, net interestmargin increased by 15 basis points sequentially and seven basis points over last year. The single largest driver of the increasewas our actions to reduce lower-yielding assets from the balance sheet. In particular, lower-yielding assets -- lower-yieldingpurchase Fed funds and resale asset balances were down almost 15% sequentially with a similar decline in related liabilities.

Trading assets dropped almost 6% sequentially and trading account liabilities dropped 22%. As Vikram has mentioned, withthe continued focus on enhancing asset productivity, we expect our efforts to drive bottom-line results.

Slide 6 shows the trend of our expense growth. Expenses in the quarter grew by 18% versus last year and foreign exchangeaccounted for 3% of the 18% increase. Acquisitions accounted for about half of the growth. Nikko was the main driver. Withthe remaining 9% of organic growth, there are two main components. This quarter, we took a $539 million pretax charge relatedto new headcount reductions, primarily in markets and banking. This charge reflects the execution of the first phase of our 2008reengineering effort.

In addition, we took a $306 million pretax charge for Visa-related litigation exposure. Together, these two items accounted for6% of the expense growth. The remaining 3% organic growth is composed of expenses related to branch buildout and morecollectors in the consumer businesses and higher volume-related growth in businesses such as transaction services and globalwealth management. Sequentially, we had 13% expense growth, of which 1% was from foreign exchange. Acquisitions accountedfor one percentage point of the growth with the remaining 12% driven by organic growth.

Key components of the 12% of organic growth included six percentage points from two charges related to the headcountreductions and the Visa-related litigation exposure and six percentage points primarily related to a change in the accrualadjustment to our full-year compensation levels in our markets and banking business consistent with last year's fourth quarter.This quarter's adjustment reflected strong full-year performance in certain businesses, including equity markets, equityunderwriting, advisory and global transaction services.

Now turning to credit -- I am sorry. As we had said earlier this year, on slide 7 now, a good way to track our progress on expensemanagement would be to track headcount growth and the expense relative to revenues. On slide 7, you can see the trend inour headcount growth. Although the graph indicates significant year-on-year growth, this was driven primarily by acquisitions,which contributed 11 percentage points of the 15% of the year-over-year growth.

Excluding the acquisitions, from the first quarter of 2006 to the first quarter of 2007, our headcount grew by 9%. From thesecond quarter to the third quarter, our headcount grew by 5%. From the third quarter of 2006 to the third quarter of 2007,headcount grew by 5%. This quarter, we had 3% headcount growth, which includes 2% that is caused by de novo branch






openings. The sequential headcount growth rate is 1% with approximately half from acquisitions and half from the businessas usual activities.

Turning to credit now, slide 8 shows the year-over-year growth components in our total cost of credit and the key drivers withineach component. The total cost of credit in this quarter increased by $5.4 billion with $1.6 billion driven by higher net creditlosses and $3.8 billion driven by loan-loss reserve build.

First, the higher net credit losses were driven primarily by our US consumer business where NCLs increased by $689 million.Consumer lending net credit losses were higher by $396 million over last year, primarily driven by losses in the consumermortgage portfolio. In US cards, net credit losses were up by $156 million, reflecting higher write-offs, lower recoveries andhigher average yield balances. While delinquency levels remain relatively stable, the increase in write-offs reflect higherbankruptcy filings and the impact of customers that are delinquent in advancing to write-offs at a higher rate.

Within our bank cards portfolio, approximately two-thirds of the losses occurred in five states -- California, Florida, Illinois,Arizona and Michigan. And the loss rates on customers with mortgages in those states increased by fourfold versus the lossrates in the rest of the country. Finally, in US retail distribution, net credit losses were higher by $142 million, reflecting higherloss rates in the personal loan and sales finance portfolios. Loss rates in the branch-originated mortgage business remainedrelatively stable, where face-to-face interaction with customers and long-standing relationships have historically resulted inlower losses.

The CitiFinancial real estate mortgage portfolio, for example, is comprised primarily of full documentation, fixed-rate loans withlow loan-to-values. Second, the loan-loss reserve build of $3.8 billion was primarily driven by the US consumer reserve build of$3.3 billion. Approximately 73% or $2.4 billion of the US consumer build was in the consumer lending group, reflecting continuedweakness in the mortgage portfolio and a higher expectation for losses in the auto portfolio. The auto portfolio is primarilysubprime with loans sourced directly through dealers. I will discuss the mortgage portfolio in more detail in just a minute.

Approximately 15% of the US consumer build or $493 million was in US cards. While US cards delinquencies remain relativelystable, the build reflects recently observed trends, which point to an expectation of higher losses in the near term. As I mentioned,the rate at which delinquent customers advance to write-offs has increased. This is especially true in certain geographic areaswhere the impact of events in the housing market has been greatest driving higher loss rates. Bankruptcy filings have increasedfrom historically low levels. These trends and other portfolio indicators led to a build in reserves for US cards in the quarter.

In US retail distribution, higher losses in personal loans and sales finance, portfolio growth and a generally weakening creditenvironment led to a $376 million build or 11% of the total US consumer build. Looking ahead, our reserve balances will continueto reflect the types of considerations I have just described.

Markets and banking credit costs increased by $905 million. This increase in net credit losses included $[535] million related toloans with subprime mortgage collateral included in the $18.1 billion figure that I previously mentioned. Credit costs also includea $284 million net charge to increase loan-loss reserves reflecting a slight weakening in overall portfolio credit quality. Theyalso include loan-loss reserves set aside for specific counterparties, including $169 million related to our direct subprimeexposures, which is also included in the $18.1 billion figure.

Now I am turning to page -- slide number 9. The top half of slide 9 shows consumer net credit losses and loan-loss reserves asa percentage of loans in the US consumer business. The bottom graph shows the same data for our international consumerbusiness. The top graph demonstrates that, in US consumer, loan-loss reserves and NCLs as a percentage of the consumer loanportfolio have risen sharply, reflecting the factors I just discussed. The largest contributor to the increase is the US consumermortgage portfolio.

In US consumer, loan-loss reserves as a percentage of loans have trended higher, but have remained below the peak in the firstquarter of 2004. Since that peak, the ratio has consistently declined until the first quarter of this year when we started to see it






pick up. These declines were a reflection of a particularly favorable credit environment over the last couple of years. The increasenow is a reflection of the current environment and the factors I described earlier, all of which warranted and an addition to ourreserve level. With the addition to reserves in our US mortgage business, we are now at a 22-month coincident reserve coverageratio for the entire real estate portfolio. Currently, we are at 20 months and 24 months of coincident reserve coverage in ourfirst and second mortgage portfolios respectively.

As the bottom graph shows, the two credit ratios in international consumer have been fairly stable, excluding the secondquarter. However, we continue to watch credit trends in the international market vigilantly. As a reminder, the second quarter's53 basis point sequential decline in the NCL ratio was driven by a number of acquisitions, primarily Egg, that closed during thequarter. When impaired loans are acquired, they are booked on our balance sheet at their estimated net realizable value, whichresults in lower NCLs in the early months following the close of a transaction.

On slide 10, the two grids, which show the FICO and LTV distribution for the US consumer mortgage portfolio, are listed. Thetwo graphs at the bottom show the 90 plus day delinquencies in each of the first and second mortgage portfolios. In the gridson the top half of the slide, there are two segments which have demonstrated the greatest weaknesses.

In first mortgages, we are experiencing higher losses from the loans which have FICO scores less than 620. This comprisesroughly 15% or $23 billion of the first mortgage portfolio. In second mortgages, we are experiencing higher losses from loanswith origination loan-to-value that are greater or equal to 90%, which comprise 34% or $20 billion of the second mortgageportfolio. We consider these two segments the higher risk segments of the portfolio.

The bottom graph shows that delinquencies have increased substantially, particularly since the beginning of September. Thefirst mortgage delinquency trend shows that current delinquency levels are almost at their early 2003 peak. A further breakoutof the below 620 segment in the yellow box indicates that delinquencies in this segment are three times higher than the overallfirst mortgage portfolio.

By contrast, delinquency rates in our second mortgage portfolio are at historically high levels, particularly in the 90% LTVsegment -- 90% and higher LTV segment as shown in the yellow box. This segment has a delinquency rate twice as high as therate for the overall second mortgage portfolio.

In general, first mortgages have higher delinquencies than second mortgages. This is driven by the fact that first mortgagesinclude government guaranteed loans such as those to low and middle income families, which have sharply higher delinquenciesdue to the guarantee future. There is no equivalent product in the second mortgage portfolio.

On the other hand, second mortgages are much more likely to go directly from delinquency to charge-off without going intoforeclosure, which explains why the loss deterioration in second mortgages has been more significant than for first mortgages.Our reserve actions for our mortgage portfolio primarily reflect this significant deterioration.

Slide 11 shows the decline in assets and moderating loan growth in the mortgage portfolio of the consumer lending grew. Theeffort is part of our program to reduce low-returning assets from the balance sheet. More broadly, it is part of risk mitigationefforts in this business.

As the chart shows, loan growth is at its lowest level in 12 quarters and assets declined by over $50 billion since the end of thefirst quarter 2007. Originations have declined steadily since the second quarter of 2007. We have taken a number of steps inthe mortgage business to proactively address the issues related to our worst performing segments of the portfolio. We continueto take focused action to lower the volume of second mortgage origination through channels that have demonstrated a higherincidence of delinquency such as third-party correspondence.

In the fourth quarter of 2007, we exited the second mortgage correspondent business and reduced the number of brokers withwhom we do business, maintaining relationships with only those brokers who produced strong, high-quality and profitable






volume. The shift in origination mix, along with tightened underwriting criteria, have resulted in an improved quality oforiginations whereby loans originated this quarter had higher FICO scores and lower LTVs on average than those originated ayear ago.

In addition, we are beginning to see the expected improvement in delinquencies for the newer originations as evidenced infirst and early payment defaults. We are also actively working with distressed borrowers to find alternatives to foreclosure.

In addition to changing the mix of sourcing channels, we have eliminated a number of product offerings. For example, we nolonger offer mortgage loans for investment properties on three and four-family homes. We have made numerous policy andprocess changes to mitigate losses. For example, we have reduced loan-to-values by an additional 5% in areas where housingprices have severely depreciated versus our normal criteria, which have also been tightened. We continue to tighten creditrequirements across expanded products through higher FICOs, lower LTVs and increased documentation and verificationrequirements.

In 2007, we added over 1900 collections in our US consumer business, of which over 700 were for mortgages in the US consumerlending business. Organizationally, we have eliminated 500 front, middle and back-office positions in the second mortgagebusiness for the full year, of which 365 were announced in the fourth quarter. The reductions reflect our view of the growthprospects and economic realities of that business.

Finally, we recently announced the formulation of an end-to-end US residential mortgage business that includes organizationalservicing -- it includes origination, servicing and capital market securitization execution under one manager. This structuresupports a comprehensive view of the mortgage business across the firm, will increase both the effectiveness and efficiencywith which the business is managed, enhance risk management and allow us to better serve clients.

In the US cards business, we have taken a number of similar actions to address the increases in losses. We have tightened theunderwriting criteria, raised minimum score requirements and expanded forbearance programs.

Now slide 12 shows the historical trend in a number of our key capital ratios and our return on common equity for the year. Asthe graph shows, all of our capital ratios have declined since the beginning of the year, driven primarily by acquisitions, organicasset growth and negative earnings in the fourth quarter.

Slide 13 provides a third to fourth-quarter progression in our key capital ratios. As we have said before, we target to keep ourTier 1 capital ratio above the 7.5% level and the TCE to risk-weighted managed assets ratio above the 6.5% level and we expectto return to those targeted levels by the end second quarter of 2008.

In the third quarter, we ended with a Tier 1 capital ratio of 7.3% and a TCE ratio of 5.9%. With the results of the quarter, thedividend payment, acquisitions and the SIV consolidation all depleting capital levels, we took several actions in the fourthquarter to build our capital position.

First, we issued $7.5 billion of upper deck equity units to the Abu Dhabi Investment Authority, which increased the Tier 1 ratioby 52 basis points and the TCE ratio by 35 basis points. Second, we issued $4.3 billion of enhanced trust preferred securities,which benefited the Tier 1 and TCE ratios by 34 and 24 basis points respectively. Finally, we continued to remove unproductiveassets from the balance sheet, which added 36 basis points to the Tier 1 ratio and 25 basis points to the TCE ratio. As an example,in the fourth quarter, we sold $6.4 billion in mortgage-backed securities and the portfolio now stands at $19 billion, down fromits $71 billion peak in the first quarter of 2007. Total GAAP assets were lower by $176 billion from September 30.

The actions in the quarter, while helpful, were overwhelmed by the negative impact from earnings. As we have managedthrough this challenging situation, we have carefully balanced our exposures with the opportunities we have to generate capitalwhile maintaining our commitment to the current dividend. However, it has become increasingly clear that our valuation hasbecome negatively affected by the lack of transparency of our capitalization and dividend policy.






As a result, we are addressing this holistically to include the dividend policy, business divestitures, asset reductions and capitalraising. While this is different from what we said last quarter, we believe it is the correct way to position the Company goingforward to take advantage of opportunities or to guard against the risk of a downturn. So we are taking actions designed torestore these ratios to our stated targets.

We announced today that we have commitments to purchase $12.5 billion of convertible preferred stock, which adds anestimated 100 basis points to our Tier 1 ratio and 71 basis points to our TCE ratio. We are using stock as opposed to cash asconsideration for the purchase of the remaining 32% of Nikko in a share-for-share exchange, which will add approximately $4.3billion in common equity. Combined, today's equity issuance and the Nikko-related issuance will add an estimated 104 basispoints to Tier 1 and 94 basis points to the TCE ratios.

In addition, we continue to focus on pursuing a disciplined approach to managing our balance sheet and deploying capital tothe highest growth and return opportunities. You can expect us to continue to pursue divestiture of nonstrategic or low-returningassets. Finally, organic earnings growth and earnings from our acquisitions will continue to generate capital for the Company.Let me note that the accretion or dilution from these equity issuances will depend on your assumptions and whether theproceeds from the capital raising are reinvested at a certain rate of return or used to repay debt obligations.

In addition, we have quantified what we believe the most significant risk exposures are for the Company going forward. Thislist includes risks such as further decline in subprime markets, our outstanding leveraged finance commitments, potentialdowngrades in monoline credit ratings, consumer credit and a number of other items. The exposures to these areas werestress-tested against economic downturn with a variety of severity levels such as multiple recessionary scenarios. We lookedat the impact of quantitative stresses such as substantial spread widening in some cases and in others, we applied a combinationof data and judgment to events such as counterparty rating downgrades and bankruptcies. Taking all of these factors together,we determined the capital shortfall that would result in order to meet our targeted ratios by the end of the second quarter.Today's equity issuance addresses this potential capital shortfall under multiple scenarios.

As it regards to our dividend policy, we have announced today that we are reducing our dividend to $0.32 a share this quarteror approximately a 40% reduction. The dividend reduction reflects the approximate sizing of our dividend relative to our growthopportunities and the volatility of each of our businesses. After a careful analysis of our businesses, given the normal risk thatwe have on an ongoing basis, we were faced with two choices -- either increase the excess capital that we carried permanentlyto reflect the ongoing exposures of the Company or better align our payout ratio so as to be able to restore our targeted capitalratios in a reasonable timeframe after a capital-reducing event. We recommended a dividend policy change to the Boardalongside the capital raise and they approved this change yesterday. When the Company returns to a more normalized levelof earnings generation and capital ratios, we have the flexibility to supplement the dividend with share repurchases.

Now slide 14 shows the summary of the terms of today's equity issuance. As the terms indicate, today's privately placed equityissuance will generate $12.5 billion in proceeds in the form of a convertible, perpetual preferred stock at a 7% dividend yield,which is not tax deductible. There is a 20% conversion premium and the securities are non-callable for a period of seven years.We have provided a more expanded term sheet with the press release that we issued this morning.

In addition to this offering, we intend to offer public investors approximately $2 billion in newly issued convertible preferredsecurities for which the Company already has substantial commitment. And an additional offering of straight non-convertiblepreferred securities. These offerings respond to investor demand and will provide shareholders the opportunity to purchasesecurities similar to those in the private offering.

Slide 15 shows the pro forma impact of today's equity issuance and the Nikko share exchange for the fourth quarter on our twotarget ratios. The combined impact of these two specific capital rebuilding efforts on the Tier 1 and TCE ratios ahead of ourstated -- put us ahead of our stated targets, putting us in a position of capital strength as we head into 2008.






Now I will briefly take you through the results of each of our business lines. Slide 16 shows the results in our US consumerbusiness. Record revenues were up 6% on continued momentum from our strategic actions. Excluding a $136 million pretaxgain on the sale of MasterCard shares, revenues were up 4%. In US cards, GAAP revenues were flat, driven primarily by theimpact of higher funding costs and higher credit costs flowing through the securitization trust. Higher funding costs are dueto a significant widening of spreads in the asset-backed and commercial paper market. Higher credit costs reflect deteriorationin the consumer credit environment. Managed revenues in US cards increased by 8% on a 4% growth in managed receivables.Our efforts to focus on growing non-promotional balances are making good progress. Purchase sales were up 8%. Both retaildistribution and consumer lending revenues were higher on strong volume growth. Expenses in the US grew by 13%, reflectingthe charge for Visa-related litigation exposure of $292 million. Excluding this, expenses were up 5%. Credit costs increased by$4.1 billion, driven by the factors I discussed earlier. The net loss is reflective of the higher credit costs.

Slide 17 shows the results in our international consumer business. Let me start with the gray zone this quarter. We had a lossin the Japan consumer finance business this quarter of $168 million. The revenues for this quarter include a $188 million chargeto reserve as estimates for losses from refund claims increase. Revenues in the fourth quarter of 2006 included a $580 millioncharge to increase reserves. The fourth-quarter 2006 reserve build was predicated on our assumption that refund levels wouldplateau by the first quarter of 2008.

Currently, leading indicators of refund claims, such as the legal filings for these claims, are volatile and there has not been anobservable leveling off of these claims. The current quarter reserve build of $188 million reflects our -- $168 million -- reflectsour consumption that refund claims will level off sometime in the second half of 2008.

Expenses were lower by 54%, reflecting the absence this quarter of a $60 million restructuring charge taken in last year's fourthquarter. Additionally, since we have last year's fourth quarter, we have closed 84 branches and 279 automated loan machinesand reduced direct staff by 1255. We continue to actively reposition the business to reflect the current environment.

Credit costs increased by 17% on higher NCLs. The Japanese consumer finance business environment remains difficult. Nowlet's put the Japanese consumer finance business aside and look at the results in the middle of the page. As you can see, excludingJapanese consumer finance, international consumer revenues are up 39%. Pretax income is up 76%, and net income is up 52%.Revenues for this quarter include two one-time items. First, a $570 million gain on Visa shares; second, a $313 million gain onthe sale of our ownership in Nikko Cordial Simplex Investment Advisors.

Excluding these items in prior year gains from the Avantel sale, revenues were up 29% reflecting strong organic growth andthe impact of acquisitions. International cards average net receivables grew by 53%. We launched eight new co-brand partnershipsin the quarter, including the airline EasyJet in the UK and a fuel program with Shell in Malaysia. We now have 207 partnershipsin 52 countries and continue to actively expand the partnership program.

Retail banking revenues were up 31%, or 32% excluding this quarter's Simplex, and last year's fourth quarter's Avantel gain,driven by strong loan deposit and investment product sales growth. Net income increased by 17%, reflecting continuedinvestment spending and lower tax benefits this quarter.

Outside of Japan, consumer finance receivables were up 21% and received revenues were up 15%. International consumerexpense growth of 24%, excluding Japan consumer finance, reflected the acquisitions that closed during the year and continuedinvestment in our distribution network and the impact of foreign exchange.

We opened 431 retail branches and 79 consumer finance branches in 2007. Including and excluding Japan, revenues were arecord, and the rate of revenue growth exceeded the rate of expense growth. And excluding the three one-time items fromrevenues, the business had positive operating leverage in the quarter. Outside of Japan, credit costs were up 35%, roughly inline with volume growth. For the total business, net income more than doubled on a reported basis and was up by 28%, excludingJapan consumer finance, the Visa share and Simplex gains and the prior year Avantel gains.






shows our markets and banking business. Revenues were a negative $11.7 billion and we reported a loss of $11 billion.The main driver of the revenue decline was the write-down on subprime-related exposures in our fixed income markets business.Of the $18.1 billion total write-down, $17.4 billion was taken against revenues and $704 million in higher credit costs. As discussedearlier, after taking into account the write-down, our direct subprime exposure was $37 billion at the end of the quarter comparedto $55 billion at the beginning of the quarter.

In leveraged lending, our commitments for highly leveraged transactions totaled $43 billion at the end of the quarter with $22billion in funded and $21 billion in unfunded commitments. This compares to total commitments of $57 billion with $19 billionfunded and $38 billion unfunded at the end of the third quarter. We had a net $135 million pretax write-down on thesecommitments.

Offsetting these declines, several businesses showed strong results in the quarter. In equity markets, the cash business generatedrecord revenues and equity finance had the second-highest revenue quarter in its history. For the full year, equity marketsgenerated record revenues, up 24%.

In our investment banking business, we had record revenue results in advisory and we advised on seven out of the top 10 dealsin 2007. In global transaction services, revenues increased 44% to a record $2.3 billion, driven by higher customer volumes,stable net interest margins and the acquisition of The BISYS Group, which closed in August 2007.

Key revenue drivers continue to grow at strong double-digit rates with each of the three major businesses -- cash, securitiesfund services and trade -- posting record revenues. Expenses increased 20% versus last year. Lower compensation costs insecurities and banking were offset by a $438 million charge related to net headcount reductions and moves to lower-costlocations, higher costs from acquisitions and foreign exchange and higher compensation costs and transaction services.

Record revenues in Latin America and the second-highest quarter in Asia reflected the strength of the franchise in those regionsand the fact that market dislocations in the US, while affecting some markets, did not have widespread impact across the globe.The overall investment banking pipeline decreased during the quarter driven by a drop in leveraged finance activity and lowerM&A pipeline after a record quarter. The equity underwriting and investment-grade pipelines remain strong.

Slide 19 shows the write-downs taken against each category of our direct subprime exposure. The total write-downs, includingthe related higher costs for the fourth quarter, were $18.1 billion, including $2.9 billion taken against the lending and structuringposition of $11.7 billion and $14.3 billion against the net super senior direct exposure of $42.9 billion. The gross exposure was$53.4 billion.

First, on the $42.9 billion of net super senior direct exposures and the associated $14.3 billion write-down, these exposures arenot subject to valuation based on observable transactions and were valued based on a discounted cash flow methodology.The methodology that we used has been refined and the inputs have been modified to reflect ongoing market deterioration.We used a proprietary model to calculate vectors for conditional prepayments to default rates and loss severity. A key factor inthe model is the assumed housing price adjustments. Assumed housing price adjustment has been revised downward sinceour November 4 estimates. The overall level of housing price adjustments used in our valuation methodology is approximately6.5% to 7% downward for each of the next two years.

Our methodology uses a series of factors to derive that adjustment, including projected national HPA, differences betweensubprime and other sectors of the mortgage market and the geographical concentration of the relevant mortgage pool. Wealso use other macroeconomic factors and borrower characteristics and loan features. We have incorporated adjustments tocapture other subprime market factors such as fraud.

Our methodology produces projected cash flows, which we then run through a distribution waterfall for each transaction.Finally, we discount the projected cash flows by a number of factors, including a discount for each level of exposure to reflectfactors such as liquidity premium and the uncertainty associated with structured investments.






In addition, there was an incremental loss of $935 million primarily related to rating downgrades of hedge counterparties withsubprime exposure, primarily monoline insurers. Second, the $11.7 billion of gross lending and structuring exposure was writtendown by $2.9 billion. Of the $2.9 billion, $2.6 billion related to CDO warehouse inventory and unsold tranches of ABS CDOs.

Over and above the technical analysis I have just described, the team has looked at several other factors, including the ABSindex performance and continued rating agency downgrades. The combined effect of this analysis led to a total write-down of$18.1 billion, reducing our $55 billion direct subprime exposure to $37 billion at the end of the third quarter.

Slide 20 provides the vintage breakdown within each of the four major categories of our super senior direct subprime exposure.58% of the portfolio was originated in 2005 or earlier, while 42% was after 2005. Of the ABCP exposure, these structures wereessentially terminated towards the end of 2005, which is indicated in the fact that the vast majority of the collateral is of 2005or earlier vintages. The CDOs, however, have a higher proportion of 2002 -- 2006 and 2007 vintage assets, reflective of theindustry growth and our market participation in those two years.

Slide 21 shows our global wealth management business. Revenues were up 27% driven by strong customer activity, the impactof Nikko and the inclusion of the Quilter acquisition. Excluding Nikko, revenues were up 12% and were a record. Assets underfee-based management were up 27%, 9% excluding Nikko on strong flows in the fee-based business. Expenses were up 26%driven by an increase in compensation costs on higher revenues and the impact of acquisitions. Excluding Nikko, expenseswere up 8%. In including and excluding Nikko, the rate of revenue growth exceeded the rate of expense growth. Strong revenuegrowth, good expense control and the impact of acquisitions drove an increase in net income of 27%.

Slide 22 shows the results in alternative investments and corporate and other. In alternative investments, revenue and netincome declined reflecting lower proprietary investment revenues and mark-to-market losses from changes in the market valueof Legg Mason shares this quarter. Client revenues were up 16% from a strong fourth quarter in 2006.

One point to note, as we announced on December 13, we consolidated the assets and liabilities of the Citi-advised SIVs ontoour balance sheet. At the time of the announcement, the value of the assets and the liabilities was $62 billion with $2.5 billionof junior notes in the liabilities. The value of the assets and liabilities was $59 billion at the end of the fourth quarter, including$2.3 billion of junior notes. Corporate and other income increased slightly as higher funding costs were offset by lower taxesheld at corporate.

Now to wrap up, the fourth-quarter results were driven by two main factors -- $18.1 billion in write-down on our direct subprimeexposures and $5 billion of US consumer credit costs. These two items overwhelmed good progress in many of our businessessuch as international consumer and wealth management and against many of our objectives such as enhancing asset productivity.

Now a few thoughts on 2008 as we closely watch the global economy. To start, let me state something that is obvious. The firsthalf of this year will have a much more difficult comparison than the second half. Let me first address the areas where wecontinue to see risks and potential downside.

Starting with what we see in January, there are promising signs of good volumes in our markets and banking business after aparticularly weak November and December. However, many parts of the fixed income market and many types of investmentvehicles, such as CDOs, have shrunk dramatically and we are not optimistic that they will regain a foothold in the market.

We continue to watch credit very closely and our expectation based on the acceleration in mortgage delinquencies that I havediscussed is that consumer credit in the US will continue to deteriorate. Overall, cost of credit, including NCLs and any incrementalreserve builds, have and will continue to reflect the economic environment, credit performance in our portfolio and portfoliogrowth.

The situation in Japan consumer finance remains difficult and we continue to appraise or evaluate the prospects of that business.We have approximately $3.8 billion of exposure to monoline insurers with a little over one-third of our super senior subprime






CDOs. The remainder is in the form of insurance on municipal bond positions where, to date, the mark-to-market impact hasbeen limited. Finally, we continue to have $43 billion in highly leveraged loan commitments.

On the other hand, there are many strengths that are encouraging as we look towards the rest of the year. Our underlyingbusiness momentum is strong and we are well-positioned in many of the fastest-growing countries. We expect our broadpresence and depth of client relationships to generate results. We expect to continue to expand our international franchiserapidly as many of the emerging markets continue so far to be largely unaffected by the US dislocation and are stable.

Credit conditions outside the US are stable. Domestically, our consumer businesses generated good volume growth with strongexpense discipline as Smith Barney continues to translate its leading market position into strong financial results. We are makingsubstantial progress on asset management. Our 2008 reengineering program is underway. We have executed the first phaseand as we progress during the year, we expect to show discernible results from these actions. We renewed the strength of ourcapital base. We expect to be able to continue this growth momentum and take advantage of many new client and marketopportunities across the franchise. That concludes the financial review of the quarter. Let me now turn it back to Vikram for hisfinal remarks before we open it up to questions and answers.


Thanks, Gary. There is no doubt that we are in the midst of a very challenging environment. Our results in the future will beinfluenced by the economy, as well everybody else's. But we are working as hard as we can to lead with our front foot andcapture opportunities for our shareholders. I am taking a clear-eyed view of our Company. This is a company with great promise.The breadth and depth and quality of our franchise around the world are unique. Citi is a unique company, unmatched in scale,expertise and brand and when you look at the major growth trends in financial services, our businesses are squarely positionedagainst these, especially in the international markets. I am going to have much more to say about that on Citi Day, which weintend to schedule in the near future.

I should not end without saying it is a privilege to work with the Board, Sir Win, Gary and the whole management team to helpCiti regain its momentum and drive towards growth. I'm also looking forward to meeting you, our investors and analysts. I havehad a chance to work with many of you over the years and I welcome your ideas.

Before I turn it over to your questions, let me make two more points. One, I want to thank Art for all he has done in the last fewyears as head of IR. He is considered by many to be the best in the business. After helping with the transition time in IR, Art willmove into one of our businesses in a senior capacity and I look forward to working with Scott Freidenrich as he steps into hisnew role as head of Investor Relations.

Secondly, this has obviously been a very difficult quarter for us and there is no getting around that. However, we are facingforward. Given this environment, I am not going to make any promises. There are risks as outlined by Gary and so I will ask youto measure us on our actions and our performance. Our performance will be driven by a strong risk culture, the elimination ofunproductive expenses, improvement of asset productivity and talent. By focusing on these priorities, we will drive shareholdervalue. Thank you and now Gary and I will be happy to take your questions. We are going to have plenty of time to talk aboutthe strategic and other issues in the future. Obviously, a number of your questions are likely related to the financial results.

Art Tildesley - Citigroup Inc. - IR

Operator, we are ready to begin the question-and-answer session. Before we do, if I may ask that everyone, if they could limittheir questions to one question and one follow-up. We would appreciate that. Thanks. Operator?






Q U E S T I O N S A N D A N S W E R S

Operator

(OPERATOR INSTRUCTIONS). Guy Moszkowski, Merrill Lynch.

Guy Moszkowski - Merrill Lynch - Analyst

Good morning. First of all, just to address the significant deterioration in credit quality in the US, especially in the real estatelending area, can you give us a sense for whether that deterioration accelerated significantly in December or was it pretty muchconsistent over the last three or four months?


Guy, I think it is fair to say that it has accelerated from month to month. You might recall at the end of the third quarter wetalked about an acceleration towards the end of the third quarter and that really has continued. So the quarterly line is whatyou can actually see in the documents that we provided to you, but I think it also advanced as we went through the quarter.


And you talked about how many months of reserves you now have relative to current loss rate, but how should we think aboutthe reserve build that you did in the quarter relative to what the models are telling you that you should be expecting over thenext year?


Well, what we try to do obviously is we try and capture the losses that are inherent in the portfolio and the reserving that wedo. We did a lot of analysis on the portfolio and a relatively small portion of the portfolio is accounting for a large portion of thelosses overall. Using that insight, we obviously have tried to capture what we expect to be losses that will evolve over time inthe portfolio and so we have done what we believe is possible at this point to capture those future losses. Obviously, this is avery strong reserve level. I think on a relative basis and in absolute terms, it is a strong reserve level, but we think that is theappropriate level to be reserved at given the way the environment has deteriorated and the losses that we have observed.


And if I can turn for a moment to the CDO exposure in the investment bank. So you are now carrying these exposures at arounda one-third haircut to where you were carrying them at the end of the last quarter. How does the carrying value though relateto the initial or par value of the portfolio? And then sort of a sidebar question to that is as you described it, you initially said thatthere was really nothing observable that you could use to mark these and yet you did at the end say that you did somehowincorporate the ABX indices. So maybe you can clarify for us a little bit how you did that.


I don't know off the top of my head the exact par value. I do know that we took marks of about $1.9 billion or something likethat in the third quarter. So if you added that onto the position, you would come relatively close to what the beginning parvalue was of these securities. But it was kind of roughly of that order of magnitude I would say.






We -- obviously, I went through a process of describing the cash flow model. When you complete that whole exercise, one ofthe things that you normally do is you take a look at so what kind of a result would this give me against indices that are tradingthat in some way are reflective of securities that have similar types of ratings. There are inherent disadvantages or inherentproblems with the use of the ABX indice as kind of a basis for doing valuation. But it is a useful crosscheck against our cash flowmodel. So that is what we did. After we ran the cash flow model, we checked it against those indices to see if we could uncoverany inconsistencies.


Okay, and then if I can, I would like to ask a final question, which is a way a little bit from the current results, but, Vikram, as youhave spent the last several weeks beginning to review the businesses, what is coming together in your mind as sort of theframework that you will use for thinking about the retention or divestment of businesses or sub-businesses and can we getsome flavor for whether you think there is really scope to simplify the Company materially?


Guy, you know we have got tremendous businesses positioned extremely well against a lot of the growth trends and I am goingthrough a review of all of that. I think it is a little too early to comment on any of that. Suffice it to say that when you look at thefranchises we have got around the world, we have a tremendous information [net] as an organization. We have an ability tomove capital around. When you look at client needs and the complexity in the financial markets is increasing, we have got aunique capability of addressing complexity for our clients as we have the breadth and depth of products and services that theyneed. And when you look at, again, the secular growth trends in the financial services businesses around the world, a lot of ourbusinesses, as I said before, are squarely positioned around that. And so there is a lot of thinking that is going into that, but Ihope to talk a little bit more about that in the future, hopefully on Citi Day.


Okay, thanks very much.

Operator

Betsy Graseck, Morgan Stanley.

Betsy Graseck - Morgan Stanley - Analyst

Vikram, it would also be helpful just to understand how you're thinking about prioritizing the investment opportunities thatyou have. I would think that in meeting with the folks in the field, you are getting lots of ideas for how to reinvest in the businessand to grow from here and it would be helpful to understand how you're thinking about making those decisions.


I think that is a great question. You know where the growth is in financial services, Betsy, and there is nothing that I'm going tosay that is going to come as a surprise to you. We are investing in said growth and whether it is narrow areas in our tradingbusinesses or whether it is broader areas -- it is in emerging markets in the growth we see there -- you will find that we areextremely disciplined in making sure that the investment dollars are going to the right place and we're equally disciplined aswe started the process to make sure that we are looking at businesses that are not growing and/or the returns are not adequate






and those are the businesses we are divesting and/or cutting back on and that process is something we have already begunas well and again a lot more to talk about that in the future.


Okay. And obviously reinvesting in financial institution-related businesses comes, in some cases, with a requirement for capital.And since you are post the capital raising efforts that you announced this morning that you plan to be completed during thisfirst quarter, you will be sitting with capital levels that are above minimal levels that the organization had outlined for itself inprior calls. It would be helpful to understand if, at this stage, post these capital raises, you feel you are in a position of excesscapital such that the delta between your minimum and where you stand post capital raise would be able to get reinvested ina relatively short period of time.


(technical difficulty) our normal exposures in the business and as we have played for these recession scenarios that I talked alittle bit in my prepared remarks, we want to be able to ensure that, in a stress scenario, we have sufficient capital to be able todo what we need to do. And so the way I would think about this is in a downside scenario, we believe we have worked hard tomake sure that the capital formation that we have in place is good. Should that downside not materialize, then we have, justas you said, opportunities to put that capital to work in productive ways in client circumstances that are likely to be quite uniqueover the next couple of quarters. So kind of regardless of the outcome, we feel like it was the right amount of capital and thatit would be put to good use.


I guess I missed the beginning part of your commentary, Gary. Did you indicate that you feel like you are just meeting yourminimums at this stage or that you have some excess?


Well, in the deck, if you go back to the back part of the deck, it shows where we are in terms of our ratios and that would showthat we are above the minimum, but I did go through and talk a little bit about the risk that we see in the environment andobviously there is a possibility of a downturn here and we have to be thoughtful about the prospects for a downturn and so itreally depends. I mean this is obviously going to put us in a position that will allow us to exceed the capital ratios, assuming afairly benign environment, but it also allows us, if the environment is much less friendly, to not have a capital issue down theroad.


Okay, and just to be clear on the capital raise, $12.5 billion of private placement commitments already, $2 billion public offeringin convertible preferred and then you have an additional offering of straight preferred, have you given any indication of thedollar amount associated with that?


We haven't yet. Obviously, it will be dictated in part by the demand in the marketplace.







Okay, thanks.

Operator

William Tanona, Goldman Sachs.

William Tanona - Goldman Sachs - Analyst

Good morning. In terms of the follow-up on the last question, I actually didn't hear you in terms of the response there for theadditional offerings of the straight preferreds.


We haven't sized the amount of the straight preferreds yet. That will be decided at the time we do the offering and will be basedobviously on what we view the capital needs to be and what we think the demand in the marketplace is.


Okay. And then in terms on that capital, as we think about all these capital raises that you have done, how should we thinkabout the impact to earnings? As I think about the fourth quarter, you did the $7.5 billion in DECS obviously at 11%. Some ofthat was tax deductible, some wasn't. You added in the $4.3 billion of the enhanced trust preferreds. Now we have got the $12.5billion in terms of the convertible preferreds at 7%. Is that straight 7% or is some of that tax deductible? And then in terms ofwhat you think the rate might be on the $2 billion of the convertible preferreds you plan to offer to the public. Do you thinkthat is going to be at similar rates to the 7% or the 11%? I am just trying to get a sense as to what the impact is going to be toearnings.


It is a lot of moving parts and we do have a good supplemental disclosure that we have provided around this particular offeringthat we are doing now and I think if you take that in conjunction with what we have already said about the ADIA offering, addedtogether, it gives you a good feel for how these work.

The actual dilution associated with this is dependent on how the money is reinvested. If you assume that the money here isreally used to pay down long-term debt, then obviously that has kind of a negative comparison associated with it because thisis not tax deductible. The 7% is not tax deductible, so relative to our cost of long-term debt on an after-tax basis, it would benegative. If you assume we can deploy this capital at a higher return rate, something that would be reflective of our cost ofcapital or better, then at least some math would show that it is not particularly dilutive and in fact, in some circumstances, itwould actually be accretive and those are estimates that you would actually need to make obviously on your own.

We have obviously considered all of this end to end in the context of the investment opportunities that we have and we thinkwe have made the right trade-offs. As I mentioned in the early part of the call, we think the lack of transparency on our capitalstructure has had an impact on our trading over the last few weeks and this hopefully clarifies the capital structure issue in apretty comprehensive way.







Okay. And then in terms of commercial real estate exposure, can you remind us again in terms of what your overall exposureis to that area, whether it is the overall CMBS portfolio or realistic that you might hold directly and then in terms of the hedgingexposure that you talked on the CDOs, is that all to monolines, that $10 billion?


On the commercial real estate exposure, the part that we have that is held as direct loans is on page 16 of our supplement andat the end of the fourth quarter, it was $20.4 billion. The commercial real estate that we hold at the CMB I honestly don't havein front of me, but generally that is held in a trading account without substantial warehousing associated with it. And so again,I don't think that position in the overall scheme of the Company is a particularly large position. The $10 billion that you refer toin terms of hedged exposure is in part monolines, but not completely monoline. That is split among a number of differentcounterparties, but monolines obviously play a key role in the total.


Okay, thank you.

Operator

Mike Mayo, Deutsche Bank.

Mike Mayo - Deutsche Bank - Analyst

Good morning. Can you talk some about the trade-off between pursuing growth and managing risk and as you pointed out,the credit card losses are up over 100 basis points in three months with unemployment only at 5% and mortgages gettingworse. At the same time, short-term funding costs are higher over the last three months. So does that encourage you to pullback growth at all?


There are two different types of growth, Mike, and I think that's very important. There is growth because markets are growing,the growth as in emerging markets. We are seeing that in wealth management; we are seeing that in our services businesses,Latin America. It is in our international consumer businesses. So there are lots of places where the underlying demand for theseproducts and services that we are offering are actually growing and growing in a way that is -- that reflects great returns on arisk-adjusted basis even if some of that growth may require some capital. That is a different concept versus trying to figure outwhat the growth is in some of the other businesses where you don't have the same top line and there is no intention we haveof doing anything other in those businesses and make sure that we are there correctly on a risk-adjusted basis. And Gary talkedabout a number of things we are doing in some of those businesses. So our focus on growth is to make sure we are squarelythere where the markets are growing and where we have a big opportunity, but we are focused on risk management. It's purelyand clearly there to make sure that we have a simple, well-thought-out approach to making sure the risk-oriented businessesare tightly managed.


Well, specifically, as it relates to US credit cards, the margin was down linked quarter. Is that an area where you might want topull back or increase pricing or neither?







Actually all of the above is happening, Mike. So we are tightening underwriting standards as you might guess. We are evaluatingthe open lines of credit that exist with current customers. We are doing cross reference work between customers where wehave the mortgage position and where we hold the credit card and obviously, we are off of promotional balances essentiallyas we go through this fourth quarter. So this is a time -- as you no doubt have read -- there was a good article in the New YorkTimes a couple of days ago about this. This is no doubt a time where, in the credit card business, you could make some substantialmissteps if you weren't careful in watching the credit because there is some natural growth in outstandings that will take place.There's a bit of a substitution effect between home-equity loans and credit card loans and we are very aware of what thosetrade-offs are. This falls into the second category that Vikram just talked about. There is some growth that's good growth andthere is other growth, which can be dangerous if it is done without the proper kind of risk parameters around it. But I think ourteam is very focused on these issues right now in the card business. Obviously, we have taken a bit of a reserve increase in thecard business in this quarter, but we are very focused on what the risks are around the inherent or natural growth that is goingto happen in that business over the next year.


And then more generally on reengineering, last year, we heard about the reengineering project and I appreciate the changein management. When might we hear about reengineering and what are your plans for restructuring headcount in 2008?


So I think here is the way to think about it. So last year, we announced a large charge in the first quarter and 17,000 headcountreduction and a significant charge associated with it and we set aside a separate line item on the P&L to reflect that. You noticewith this charge that we just took with 4200 heads, it flowed right into the income statement and we took it on a normal lineitem and I think that is reflective of how our view is going to evolve or is evolving around reengineering. This is our job nowand forever. It's never going to change. Every single quarter, we have to get more and more productive. That is the only waythat we free up the P&L dollars that we are going to need to drive the top-line growth of the business.

And so rather than a once-and-done effort, Mike, what I hope you hear over time is a continual stream of efforts that we aremaking to reduce headcounts in nonproductive areas and redeploy some of that benefit in driving the top line into businessand advertising new product development technology, that kind of thing, as well as in margin improvement. And so this reallyis more a shift in tone than anything else and this, as both Vikram and I mentioned, represents the first installment in 2008.

We are very focused on the remaining program, which is an aggressive program, for the remainder of 2008 and obviously wehave to get position for what we need for 2009 by the time we are in about the middle of 2008. So this is an ongoing processwhere I think hopefully you will see steady improvement and I would think about it somewhat akin to what you have seen onthe asset side.

On the asset side, we had years and years, quarter after quarter of growth and now you have seen a bending in that growth ina reduction of $176 billion in assets, in GAAP assets this quarter underlining a more focused effort over time to make our assetsmore productive and we are going to try and apply that same kind of discipline to the way we think about expenses.


All right. Thank you.






Operator

Meredith Whitney, Oppenheimer.

Meredith Whitney - Oppenheimer - Analyst

Good morning, Gary. I have two take quick questions. The first is, I am trying to get my arms around 2008 run rate for sharecount outstanding and I am coming up with about 900 million in additional shares from Nikko, Abu Dhabi, the capital raisetoday. Is that in the ballpark?


We decided not to disclose exactly what the calculation is. You obviously know the total amount of the offerings that we havedone and based on the total amount, you can derive what you think the proper share count is, that that is going to translateinto. It obviously requires a whole series of assumptions in order to get to that number and we thought it best left to thosewho're doing the estimates.


Okay. And then my second question is related to getting back to the CDO marks and just in terms of the logic and the parametersthat you use in analyzing that. And so if I presume that you didn't take any marks prior to the third quarter and then look atwhat would be the marks going into this quarter and I know there are a lot of moving parts here, my biggest question revolvesaround the mezz portion because you, yourself, said that you don't expect a rebound in that market. So it seems as if you yourcarrying value is about $0.43 on the dollar, is above where the strike prices are or if there is a strike price, where the market hasindicated.


So let me not confirm the $0.43 on the dollar. But obviously we have taken the reductions that we think are appropriate and itis heavily a function of what the vintages are in the portfolio itself. So if you go to page 20 in the deck, you see 48% of themezzanine securities that we have are vintages that were before 2005 and 52% is 2006 and 2007. So it is hard to exactly makeequal the positions of each of the major companies.

Now one of the things that we obviously have done in our own processes is after we have taken the marks that we have takenand concluded our values, we have compared those values to those who have recently announced with same types of collateraland I think, at least from our perspective, these appear to be pretty much in the range with others who are doing independentwork on their portfolios. But as I said, the key thing here is the quality of the underlying collateral that really drives the position.I mean at the end of the day, this all gets extremely complex when you start looking at what the proper subprime deflator isfor the housing prices, what the actual geographic ownership is that we have and then the underlying collateral and the qualityof the underlying collateral and when it was actually developed. As you might guess, the model is very, very extensive. It triesto get at what we believe the real, most appropriate answer is.

The way I would think about this is that it is very difficult to forecast exactly where all this is going to go and we certainly couldhave additional risk as we go into the first quarter and the second quarter of next year, but we have tried to be thoughtful aboutthat in terms of the total amount of capital that we have raised and so it is hard for anyone to say exactly where all this is headed,but we have tried to think through various scenarios that go beyond the scenarios that we have taken here and factor that intothe amount of capital that we have put together with this step over the last couple of weeks.







Okay. And one just quick follow-up on your vision of where real estate prices are going nationally. Should we just use youreconomist outlook on that or are you using something separate?


Well, what we did is our economists did an average real estate price reduction for the country and that was kind of the basicnumber that we started with. Then we hired an outside firm with expertise in this area to help us then customize that deflatorfor subprime and then we took the step further of trying to further customize that deflator for the markets in which we haveour individual CDO ownership and that was the thing that resulted in the assumption of between 6.5% and 7% reduction in2008, 6.5% to 7% reduction in 2009. So we have done the best job that we think we possibly could to in terms of making thisdeflator specific for the ownership that we have and that is reflected obviously in the underlying cash flows.


Okay and that matches with the loss assumptions for your own portfolio, your loan portfolio?


Yes, it has -- that is how it was created. So it ties directly to the ownership that we have.


Excellent. Okay. Thanks, Gary.

Operator

Glenn Schorr, UBS.

Glenn Schorr - UBS - Analyst

Hi, Gary. Have you disclosed the size of what your Alt-A portfolio would be? And then could you just tell us what your cumulativeloss assumptions are on both the high LTV firsts and high LTV seconds?


So on the Alt-A, we haven't split that out as a separate category. If it were a category that we anticipated that would be asubstantial risk, I would have put it on the list of risks that I stepped down through at the end of the conversation. So we don't-- given the size of the position and the risk associated

Documents

Q4 2007 Citigroup Inc. Earnings Conference Call on Jan. 15 ...online.wsj.com/public/resources/documents/transcript-c-20080115.pdf · 15.01.2008 · the right people in the right