Citigroup is our ‘longshot’, too big, too revered, too old to fail. We find the $25.00 to $30.00 range to be an attractive entry point.

The origins of Citigroup, the world's biggest financial institution, date back to 1812 when Citibank was founded in New York.

Today's group was formed from the merger in 1998 of Citicorp and Travelers Group, which had acquired Salomon Brothers a year before.

Citigroup has 200 million customer accounts in more than 100 countries. It has more than 300,000 employees worldwide and assets of $2.4 trillion.

Its most famous office building is the Citigroup Center, a diagonal-roof skyscraper in Manhattan.

Citigroup Bringing CDO’s onto It’s Balance Sheet

Citigroup has the highest exposure to collateralized debt obligations. The primary advantage for a bank of a collateralized debt obligation is the fact that it does not appear on its balance sheet. This advantage has now soured and become a disadvantage for Citigroup. These collateralized debt obligations will appear, at least in part on their balance sheet.

Citigroup needs to raise additional capital (at least $30 billion), sell assets (at least $100 billion) and cut its dividend if the $80bn Super SIV known as M-LEC is required to come on to its balance sheet. If M-LEC does NOT come on to the balance sheet, if Citigroup skates on this SIV and brings only the seven SIVs valued at $49B onto its balance sheet this could be a good entry point.

At this point Citigroup (December 27, 2007) will bail out its seven SIVs and in the process bring USD49bn of assets onto its USD2.4 trillion dollar balance sheet. The SIVs have USD58bn in senior debt and USD13bn in cash and with this being the largest of similar firesale avoiding actions taken at a number of other banks.
Our recommendation hinges upon not bringing the the $80bn Super SIV known as M-LEC on to its balance sheet in any significant amount.

Citigroup has said the SIVs have no direct holdings of subprime-mortgage assets and indirect exposure to USD51m. The capital impact of its actions will be a 16bps reduction in the T1 ratio which as at 30 September stood at 7.32%. Citigroup believes it can regain capital ratios of 7.5% by 2Q08.

Citigroup made the decision to bring the SIV”s onto its balance sheet after Moody's and S&P indicated they may cut their credit ratings on the SIVs. Moody's immediately lowered Citigroup’s rating from Aa3 from Aa2 and lowered citing the sizable writedowns and weak earnings will prohibit the group restoring its capital ratios, which the group is targeting to be at 7.5% by 2Q08. Despite being on a stable outlook, Moody’s has also warned that failure to restore its capital ratio’s in the medium term would possibly lead to a further downgrade.

What is an SIV?

There are roughly thirty SIV’s in the world. SIVs are investment funds established by banks like Citigroup and sold to investors. They are NOT carried on a bank’s balance sheet. SIVs borrow money by selling short-term debt like term notes and commercial paper, then using the borrowed money to buy bank, mortgage and credit card debt that yield higher returns.

The funds profit off management fees and the spread between how much they collect on the investments and how much it costs them to borrow.

SIVs jumped to the forefront when many of the investments they held, particularly mortgage investments, lost a lot of value as demand for risky debt evaporated.

The viability of a SIV hinges on its ability to continue borrowing short-term money. If it is unable to renew loans, it has to find new sources of cash or liquidate its investments to repay lenders.

Moody's Investors Service and Standard & Poor's -- two of the three major credit-rating agencies -- were considering downgrading the ratings on several of the world's roughly 30 SIVs, including the seven Citigroup created.

Citigroup will bring the SIVs onto its balance sheet in order to protect their credit ratings and give them time to sell their assets.

After Citi's announcement, Moody's downgraded Citigroup's long-term credit rating to "Aa3" from "Aa2," and lowered Citibank's Bank Financial Strength Rating to "B" from "A-," citing the view that Citigroup's capital ratios will remain low.

The company's Tier 1 capital ratio -- its ratio of cash to debt for regulatory purposes -- was about 7.3 percent as of Sept. 30. Citi said adding the SIVs to the company's balance sheet would reduce the ratio by 0.16 percentage point but it still expects to return to its targeted ration of 7.5 percent in the first half of 2008.

The bank said it expects its SIVs to be able to meet their liquidity needs, which total $35 billion (euro24 billion), through the end of next year. Citigroup expects to provide "little or no" financing.

Citigroup’s Five Divisions Still Strong

Citigroup’s principal activities are to provide financial services through five divisions:

We believe this could be an excellent entry point for Citigroup.