花旗銀行 (C) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Citi's third-quarter 2007 earnings review featuring Citi Chairman and Chief Executive Officer, Charles Prince, and Chief Financial Officer, Gary Crittenden.

Today's call will be hosted by Art Tildesley, Director of Investor Relations.

We ask that you hold all questions until the completion of the formal remarks, at which time you will be given instructions for the question-and-answer session.

Also, as a reminder, this conference is being recorded today.

If you have any objections, please disconnect at this time.

Mr.

Tildesley, you may begin.

Thank you very much, operator, and thank you all for joining us today for our third-quarter 2007 earnings presentation.

We are going to walk you through a presentation.

That presentation is available on our website now, so if you haven't downloaded that, you want to do that now.

The format we will follow will be Chuck will start the call, Gary will take you through our presentation, and then we would be happy to answer any questions you may have.

Before we get started, I would like to remind you that today's presentation may contain forward-looking statements.

Citigroup's financial results may differ materially from these statements, so please refer to our SEC filings for a description of the factors that could cause our actual results to differ from expectations.

With that said, let me turn it over to Chuck.

Art, thanks very much, and good morning to everybody.

Thanks for joining our call this morning.

As Art indicated, I'm going to start with a few minutes of discussion on our performance this quarter, both the core performance in certain of our businesses that we preannounced a couple weeks ago, as well as the very good performance in some of our businesses.

Then I'm going to turn it over to Gary to take you through the detailed presentation.

Then as always, we will be happy to answer questions.

Before I get started, I would like to comment briefly on our Thursday organizational announcement.

I hope all of you saw that we are forming a new business segment.

-- we're going to call it the Institutional Clients Group -- by combining our Markets & Banking business and our Alternative Investments business under one leadership team.

We have asked Vikram Pandit to lead this new group.

I believe everybody knows Vikram pretty well and his background, his very significant accomplishments.

In this newly formed group, we will continue to have Michael Klein doing his good job as Chairman and co-CEO of Markets & Banking.

We have promoted Jamie Forese, who has done a very good job running equities the last few years and has a long history in fixed income, to be co-CEO of Markets & Banking with Michael.

John Havens will be the President and Chief Executive Officer of Citi Alternative Investments.

I think these changes are going to be very positive for us.

There are obvious overlaps between these two businesses, and this new structure will enhance our ability to serve institutional clients both across the entire capital market spectrum and around the world.

So we are looking forward to real progress in moving capital between these two businesses, and in growing and retaining our clients, and attracting good talent on the Street.

With that said, let me turn to the quarter's results.

As we preannounced two weeks ago, the write-downs and losses in our fixed income business and the higher credit costs in our Global Consumer business drove a significant earnings decline.

Some of the write-downs and losses in fixed income were because we have been one of the largest providers of leveraged financing and mortgage-related structured products to clients around the world.

When those markets severely dislocated, we obviously suffered losses.

However, some of our losses and structured credit and credit trading were greater than would have been expected from that market dislocation and simply reflect poor performance.

In the context of our strong track record in these businesses, going back over many, many, many years, I would say this quarter's performance was well below our expectations and, frankly, surprising.

We are focused on improving these areas.

We are working very hard on making sure that our return to strong performance is something we can be confident in, in these traditional areas.

And Gary will discuss some of the actions we are taking.

I do you want to say a word about risk management in this context.

We have a very strong risk management infrastructure at Citi, and the losses this quarter in fixed income were within the range of potential outcomes.

But obviously at the very far end of that range, as they relate to our risk limits.

We look at these risk practices all the time, and we are going to incorporate this summer's experience into that as we go forward.

Let me just switch to consumer credit for a second.

As we said on our second-quarter earnings call, the consumer credit environment is a challenging one, especially here in the US; and we expect meaningful increases in credit costs.

This quarter that played out.

Credit costs in Consumer increased over $2.8 billion as we built both loan loss reserves and had a meaningful increase in net credit losses.

Gary will take you through the drivers of this increase in great detail later in the presentation.

Now at the same time we had this poor performance in these various businesses, I do want to touch on a couple of areas where we continue to have strong performance, and strong performance that continues the trend we saw beginning in the fourth quarter of '06 and continuing in the first and especially in the second quarter of '07.

In securities and banking, we had many businesses perform well.

Equity markets, equity underwriting up significantly.

Advisory revenues up significantly.

And even in the fixed income markets we discussed earlier, several product areas performed well; for example, municipals, interest rate trading, and currency trading.

Our global transaction services business generated another quarter of strong growth and record results.

In our international Markets & Banking businesses in Asia, Latin America, and Mexico, we again generated record revenues and double-digit net income growth.

Our Global Wealth Management business also had a very strong quarter, with record revenues; and that is even before adding the benefit from the Nikko Cordial acquisition.

Also in the international space, our International Consumer business continues to do very, very, very well, with both revenues and business volumes growing at a strong double-digit pace.

This reflects our strategy, with both organic growth and our recent acquisitions pulling forward very strongly.

In our US Consumer business, though the market dislocation that affected our fixed income business affected certain aspects of the revenue generation of this business, which Gary will get into, the underlying business momentum that we have seen over the last few quarters continues to be very good.

Deposits were up 16%.

Loans up 8%.

So I have said right along I'm cautiously optimistic about our US Consumer business, and I would say the third quarter reinforces that I still feel good about that business momentum.

In addition to the operating results, we also announced or closed several important transactions during the quarter.

We recently announced our intention to make Nikko Cordial a fully-owned subsidiary in Japan via a stock exchange.

The Nikko transaction is a very good one, something I am proud of, and something where we can show how we combine with strong, local institutions to grow our international franchise.

In August, we closed the acquisition of The Bisys Group, which increases our footprint in the high-growth prime brokerage and securities processing area.

We recently completed the acquisition of ATD, making us a top-tier electronic marketmaker and liquidity provider to institutional and retail clients.

So with that overview, let me just wrap up.

This quarter's results were well below our expectations; and as Gary will describe, we are working very hard on the areas that need improvement.

At the same time, the underlying momentum across many of our businesses continues very strong.

Execution on our strategic priorities continues, and we are very well positioned to grow these businesses and especially to grow our international franchises.

So with that as an overview, Gary, let me turn it over to you.

Thank you, Chuck, and good morning to everyone.

Thank you for joining us this morning.

Let me turn to the slides that are available to you on our website.

Slide 1 shows you our consolidated results for the quarter versus the third quarter of 2006.

To summarize our third-quarter results, net revenues grew 6% on strong underlying volume growth, partially offset by losses in fixed income and write-downs in leveraged lending.

Expenses were up 22%.

The cost of credit was up 139%, driven primarily by a substantial charge to increase loan loss reserves and higher net credit losses in our Global Consumer businesses.

Pretax income was down 59%.

Net income and EPS were down 57%; and our return on equity was 7.4%.

Turning to slide 2, it shows five items which significantly impact the results for the quarter.

First, we took a $1.352 billion write-down in our highly leveraged finance portfolio.

Second, we took write-downs in the value of our mortgage-backed securities and leveraged loans which were warehoused for future CDO or CLO securitizations, as well as on CDO positions of $1.561 billion net of any hedges.

This number is higher by approximately $250 million from the time of our October 1 announcement, due to a refinement of our calculations as we went through the quarter-end closing process.

Third, in credit trading we suffered a $636 million loss as many of the historical relationships which form the basis for trading decisions in this business were disrupted.

Fourth, we had a $729 million pretax benefit in international card revenues from a partial sale of the shares that we own in Redecard.

Finally, we had a $2.847 billion higher credit cost in our Global Consumer business.

This number is higher by approximately $250 million from the figure which we disclosed in our October 1 announcement.

The increase is driven by higher charges to loan loss reserves, reflecting accelerating delinquencies in September in our US mortgage portfolio, and a finalization of our estimates during the quarter-end closing process.

Turning now to slide 3, this shows a five-quarter trend in some of the key drivers in our business.

Strong momentum continued across these drivers, especially in our international franchises, which drove revenues up by 30%, including the impact of acquisitions and the Redecard gain.

Drivers of net interest revenue showed strong growth.

Consumer loans were up 8% in the US and 29% internationally.

Internationally, organic consumer loan growth was 16%.

Corporate loans were up 22%.

Consumer deposits were up 16% in the US and 18% internationally.

Internationally, organic deposit growth was 8%.

Drivers of noninterest revenues also grew nicely.

Credit card purchase sales were up 6% in the US and 37% internationally.

Internationally, organic card purchase sales growth was 22%.

Investment assets under management were up 28% in International Consumer.

Client assets under management in CAI were up 50%.

In our Global Wealth Management business, assets under fee-based management grew 38% or 20% organically.

In investment banking, we ranked number one in global debt underwriting; number three in announced and completed M&A; and number two in global equity underwriting on a year-to-date basis.

Now slide 4 shows third-quarter year-over-year revenue growth in each of our major businesses on the top half.

The graph at the bottom of the page shows the year-to-date growth.

In looking at the top half of the page, in US Consumer revenue growth was flat, primarily driven by the absence of a prior-year gain from the sale of mortgage-backed securities; a writedown in the valuation of the residual interest related to the securitization activities; combined with lower securitization gains on lower-yielding assets in our U.S.

Cards business.

Markets & Banking revenues reflected the writedowns and losses that I have mentioned already.

Alternative Investments revenues were lower, reflecting lower hedge fund activities; the absence of a prior-year gain from the sale of MetLife shares; and changes in the market value of the Legg Mason shares.

Offsetting these results was organic revenue growth in International Consumer and Global Wealth Management, driven by both organic growth and acquisitions.

US revenues were down 12% and international revenues were up 30%.

Acquisitions accounted for 5% of the year-over-year revenue growth; and business as usual activities accounted for 1%.

Year-to-date revenue growth trends are strong despite the severe market dislocations in the third quarter.

We are pleased to see that the relative growth rates of our businesses -- Markets & Banking, International Consumer, and Global Wealth Management -- all grew revenues at double-digit rates.

In total, our international revenues grew 27% and our US revenues grew 2% as we continue to reweight Citi to the higher-growth opportunities.

Acquisitions accounted for 3% of the year-to-date revenue growth.

Business as usual activities accounted for 11%.

The bar graph on slide 5 shows the nine-quarter sequential trend of the change in net interest revenue.

The table at the bottom shows you the net interest margin for the entire Company for those same nine quarters.

As I mentioned earlier, we have had strong volume growth in all of our businesses, which has resulted in a fairly steady improvement in the net interest revenue over the last four quarters.

As the table at the bottom of the page shows, net interest margin declined by 3 basis points sequentially.

If you exclude the gray zone impact from both periods, net interest margin decreased by 1 basis point sequentially.

Slide 6 shows the trend of our expense growth.

We anticipated that this quarter's expense growth comparison would be challenging.

If you look at the chart, expenses in the third quarter of 2006 were the lowest in the last seven quarters, primarily reflecting reductions in advertising and marketing spend in US Consumer, and lower expenses in Markets & Banking.

The best way to truck our progress on expense management would be to track headcount growth and expense growth relative to revenues.

On both structural expense saves and total headcount reductions, we are ahead of our commitments.

Our reported expense growth is 22%, and 14% without acquisitions; Nikko was the main driver.

Our business as usual expense growth of 14% is driven by higher business volumes throughout the franchise and the opening of more than 600 de novo branches in the last 12 months.

Sequentially, expenses were down, primarily on lower compensation cost in securities and banking.

Slide 7 shows the trend in headcount growth.

Although the graph indicates significant year-on-year growth, this was driven predominantly by acquisitions, which contributed 11 percentage points of the 16% year-over-year growth.

Excluding acquisitions, from the first quarter of 2006 to the first quarter of 2007 headcount grew by 9%.

From the second quarter of 2006 to the second quarter of 2007 headcount grew by 5%.

This quarter we had 5% headcount growth, which includes 2 percentage points caused by de novo branch openings.

The sequential headcount growth rate is 3%, with approximately half from acquisitions and half from business as usual activities.

We continue to be heavily engaged in ongoing re-engineering efforts and are focused on expense management driving results for the next year.

Turning now to slide 8, we discuss credit.

It shows the year-over-year growth components in our total cost of credit and the key drivers within each component.

The total cost of credit increased by $3 billion, with $780 million or approximately one-quarter of the increase driven by higher net credit losses, and $2.2 billion or three-quarters driven by higher charges to increase loan loss reserves.

Higher net credit losses of $780 million were driven primarily by our Global Consumer business.

In Consumer, NCLs increased by $736 million driven primarily by higher balances from organic portfolio growth and acquisitions; continued deterioration in mortgages and in unsecured personal loans in the US, and in international cards and Japan consumer finance.

This quarter's increase in loan loss reserves was driven primarily by the increase in Global Consumer reserves of $2.1 billion.

The Global Consumer increase can be split into two categories, the first contributing approximately 40% of the increase and the second contributing approximately 60% of the total.

The first category, which accounts for approximately 40% of the build, includes for example a credit card customer who is currently in paying status with us but may increase his balance on a card, or for the first time start to use the card to take cash advances.

These behavioral patterns can be correlated with future delinquency and future losses.

Our reserve build this quarter reflects such observed behavioral patterns in our portfolio as an enhancement to our loss estimation process.

The reserves we built in U.S.

Cards last quarter and the builds in our remaining consumer businesses this quarter completes this particular review of our Global Consumer business.

The second category accounts for approximately 60% of the build.

Over half of this approximately 60% build is driven by leading indicators which point to a continued deterioration in credit in certain portfolios, such as in US Consumer mortgages and certain macroeconomic indicators.

Less than half is driven by growth and seasoning in the portfolio and acquisitions.

Looking ahead, our reserve balance will always reflect the types of considerations I have just described.

Markets & Banking credit losses increased $98 million, primarily reflecting higher net credit losses and a $123 million charge to increase loan loss reserves for specific counterparties.

Credit costs reflected a slight weakening in portfolio credit quality.

The top half of slide 9 shows consumer credit net losses and loan loss reserves as a percentage of loans.

The bottom two graphs show 90-day delinquency rates for our first and second mortgage portfolios in consumer lending.

The top graph demonstrates that loan loss reserves and NCLs as a percentage of the consumer loan portfolio have held steady.

Excluding the impact of gray zone, the ratio of NCLs to average loans has been fairly stable excluding last quarter.

As a reminder, last quarter's 13 basis point sequential decline in the NCL ratio was driven by a number of acquisitions that closed during that quarter.

When impaired loans are acquired, they're booked on our balance sheet at their estimated net realizable value, which results in lower NCLs in the early months following the close of a transaction.

Loan loss reserves as a percentage of loans are higher sequentially, but in line with levels of two years ago and below the peak in the first quarter of 2004.

Since that peak, the ratio has consistently declined until the first quarter of this year, when we started to see it tick up.

The declines were a reflection of a particularly favorable credit environment over the last couple of years.

The increase now is a reflection of the current environment and the factors I described above, all of which warranted the addition to our reserve levels.

The two graphs at the bottom show the 90-plus-day delinquencies in our first and second mortgage portfolio in the consumer lending group, which have increased substantially, particularly in the month of September.

The first mortgage delinquency trend shows that the current delinquency levels are still running below their 2003 peak.

In contrast, delinquency rates in our second mortgage portfolio are at historically high levels.

In part, our reserve action for our mortgage portfolio reflects the significant deterioration.

Since the beginning of this year, we had added over 1,700 collectors and recovery staff in our US Consumer businesses, of which over 560 were for mortgages in US Consumer Lending.

We continue to take deliberate actions to lower the volume of second mortgage originations through channels that have historically demonstrated a higher incidence of delinquencies, such as third-party correspondents.

The shift in origination channels, along with tightened underwriting criteria, have resulted in an improvement in the quality of originations whereby loans originated in this quarter had higher FICO scores and lower loan-to-values on average than those originated a year ago.

In addition to restricting the channels of originations, we have eliminated a number of product offerings.

For example, we no longer offer mortgage loans for investment properties or three- to four-family homes.

A word on resets.

In our Consumer Lending first mortgage portfolio, approximately $1.7 billion or 2% of our adjustable-rate mortgages are scheduled to reset in the fourth quarter.

Approximately $10 billion are scheduled to reset through the end of 2008, compared to $1 trillion of resets in the US consumer mortgage market.

Approximately 90% of our resets have been projected to be in the higher FICO, lower loan-to-value categories.

Slide 10 shows a historical trend of a number of key capital ratios and return on common equity for the quarter.

As the graph shows, all of our capital ratios have declined since the beginning of the year, driven primarily by acquisitions which we have completed and organic acquisition growth.

As we have said before, we target to keep our Tier 1 capital ratio above 7.5% and the TCE -- total common equity -- to risk-weighted managed asset ratio above the 6.5% level.

Both the Tier 1 capital ratio and the TCE to risk-weighted managed assets ratio reflect the impact of acquisitions and additional assets, such as certain leveraged loans and commercial paper which came onto our balance sheet during the quarter.

Although at this time there is a lot of variability around the factors that impact our capital ratios, we expect that we will return to our targeted capital ratio sometime early in 2008.

We expect to restore our capital ratios in a number of different ways.

First, we are using stock as opposed to cash as consideration for the purchase of the remaining 32% of Nikko in a share-for-share exchange.

Second, we are focused on pursuing a disciplined approach to growing our balance sheet and deploying capital to the highest growth and return opportunities.

You may have seen our announcement a few weeks ago to centralize our treasury operations.

Finally, organic earnings growth and earnings from our acquisitions will continue to generate capital for the Company.

We anticipate, however, no further buybacks until we have reached our targeted capital ratios.

Now I will briefly take you through the results of each of our major business lines.

Slide 11 shows results in our US Consumer business.

Revenues were flat versus last year's third quarter.

Good volume growth from our strategic actions was offset by three factors.

First, the absence of a $133 million gain from the sale of mortgage-backed securities in the third quarter of 2006.

Second, we had a downward adjustment in the valuation of the residual interest that we hold on our credit card securitizations which gets marked to market.

This was driven primarily by an expectation of continued deterioration in consumer credit, combined with an increase in short-term funding costs as commercial paper spreads widened significantly during the quarter, partially offset by the decrease in Fed funds in mid-September.

Third, the receivables securitized this quarter were of higher credit quality and had lower yields than those securitized in last year's third quarter, resulting in lower securitization revenues in the current quarter.

Expenses in US Consumer grew by 8%, driven by a significant reduction in marketing and advertising expenses in our cards business in last year's third quarter, as well as the impact of integrating the ABN AMRO acquisition this quarter into our Consumer Lending group.

Credit costs increased by $1.7 billion, driven by the factors that I discussed earlier.

A significant reduction in net income is reflective of the challenging market conditions and year-over-year comparisons, combined with the additions to our loan loss reserve.

Slide 12 shows the results of our International Consumer business which have been affected significantly by the results in Japan consumer finance.

So let me start with the impact of the gray zone this quarter.

We had a loss in Japan consumer finance this quarter of $288 million driven by three primary factors.

First, revenues were lower by 52%, driven by lower receivable balances and increased charges to reserves as estimates for losses for refund claims increased.

Second, expenses increased 67% driven by write-downs of $152 million pretax on customer intangibles and fixed assets.

This charge is being taken because we have concluded that the carrying value of these specific assets is not recoverable.

Excluding these write-downs, expenses in Japan consumer finance are down approximately one-third from last year's levels as we continue to reposition the business.

Third, credit cost increased 25% on higher NCLs and a reserve build of $161 million to reflect our expectation of higher losses inherent in the portfolio.

In this business, the situation remains difficult; and given our recent experience with the level of gray zone related refund claims, our best estimate now is that the business will have net losses in 2007.

We continue to analyze the profitability prospects for this business thereafter.

Now let's put Japan consumer finance aside and look at the results.

As you can see from the middle section of the slide, excluding Japan consumer finance, International Consumer revenues were up 47%.

Pretax income is up 30%.

Net income is up 17% as the absence of prior-year tax benefits caused a 13 percentage point negative impact on net income growth.

Revenues for this quarter included a $729 million benefit from the sale of Redecard sales.

Excluding the Redecard gain and Japan consumer finance, International Consumer revenues were up 31%.

A quick word on Redecard.

Redecard is the only merchant acquiring company for MasterCard in Brazil.

Prior to the July 2007 Redecard Initial Public Offering, Citigroup was a 31.9% shareholder.

We sold a portion of our Redecard shares for a pretax gain of $729 million and an after-tax gain of $469 million which is recorded in our International Card results.

Citi continues to hold a 23.95% investment interest in Redecard.

International Cards' averaged net receivables grew 52%, reflecting strong organic growth and the impact of acquisitions.

We launched five new partnerships in the quarter, including AirAsia in Malaysia and Shell in the UK.

We now have 189 partnerships in 44 countries and continue to expand the partnership program.

Retail banking revenues were up 26% driven by strong loan, deposit, and investment product sales growth.

However, continued investment spending, higher credit costs reflecting the impact of portfolio sales, and a reserve release in last year's third quarter, and reserve builds this quarter, and lower tax benefits this quarter drove net income down 21%.

Outside of Japan, consumer finance receivables were up 20% and revenues were up 22%.

International Consumer expense growth excluding Japan consumer finance reflected the acquisitions that closed during the year and continued investment in our distribution network.

We opened or acquired 392 retail bank branches and 212 consumer finance branches in the last 12 months.

In Japan consumer finance, credit conditions continue to deteriorate.

Outside Japan, credit costs were up $1 billion reflecting increased estimates of losses inherent in the portfolio, results from acquisitions, organic portfolio growth, and seasoning and the absence of prior year's net releases of $93 million in International Retail Banking.

For the total business, the net impact of gray zone and higher credit costs were the primary drivers of a 15% decline in net income.

Slide number 13 shows the results in our Markets & Banking business.

The impact of the severe market dislocations resulted in a revenue decline of 24% and a net income decline of 74%.

There were three major drivers of the revenue decline.

First, $1.4 billion came from highly-leveraged loan write-downs, of which $901 million was taken against our debt underwriting revenues and $451 million against lending revenues.

Second, $1.6 billion from write-downs in mortgage-backed securities which were warehoused for future CDO or CLO securitizations as well as on CDO positions.

Our subprime exposure related to these positions was $24 billion at the beginning of the year, $13 billion at the end of the second quarter, and declined slightly during the third quarter.

Third, $636 million from losses in credit trading.

A major factor driving the magnitude of our losses and write-downs is that we are a major player in the markets that were hardest hit by the dislocation.

We have historically been a top underwriter of leveraged finance and a leader in the structured credit and credit trading businesses.

That said, as Chuck mentioned, there is no question that we underperformed certain competitors even considering turbulent market conditions.

We must examine the situation, learn lessons from it, and make changes.

To give you a sense of some of the things we are working on, first, we have reorganized credit trading and have changed the leadership of this business.

Second, in our structured credit business, CLO and CDO structuring volumes have dropped significant; and we are diversifying our business more towards trading, where we have traditionally had a strong market position.

Third, in leveraged finance we continue to actively renegotiate and restructure the transactions to ensure they are executed at optimal terms.

Fourth, we are examining our risk management organization to enhance particular areas such as convergence risk management and the management of aggregate exposures by asset class.

Fifth, we have changed pricing and terms on many products across the consumer and corporate businesses to reflect the renewed interest in bank funding as a source of capital.

Sixth, in spite of the market dislocation in the third quarter which affected our efforts, we are working on pursuing a disciplined approach to growing our balance sheet and deploying capital to the highest growth and return opportunities.

Finally, as we invest in businesses where we have competitive gaps, such as commodities and prime brokerage, we continue to diversify away from our dependence on the fixed income business in Markets & Banking.

While we are diligently working on many issues across the firm, the underlying business momentum remains very strong across the franchise.

The issues we are dealing with are specific to the market dislocations in the quarter; and we have taken lessons from it to enhance the way we manage the business.

Offsetting the declines I referenced earlier several businesses showed strong results in the quarter.

In fixed income markets, currency and interest rate trading results were strong and revenues were up double digits.

Equity market revenues were up 19% from a year ago, but down 35% from record second-quarter results.

Cash, derivatives, and equity finance showed good growth versus last year, partially offset by weaker results in convertibles due to lower customer flows.

In our Investment Banking businesses, we remain number one in combined global equity and debt underwriting for the 24th consecutive quarter.

We had record revenue results in advisory, and advised on eight out of the top 10 deals year-to-date.

Revenues in fixed income underwriting were affected by the leveraged loan write-downs; and equity underwriting revenues almost doubled versus last year but were lower than the record second quarter.

In global transaction services, revenues increased 38% to a record $2.1 billion, driven by higher customer volumes, stable net interest margins, and the acquisition of The Bisys Group which closed in August of 2007.

Key revenue drivers continued to grow at strong double-digit rates.

Expenses increased 11% versus last year.

Lower compensation costs were offset by significantly higher other operating and administrative expenses.

These higher operating and administrative expenses are a reflection of acquisitions, legal costs, and other business development costs.

Record revenues in Asia, Latin America, and Mexico reflected the strength of the franchise in those regions and the fact that the 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.

However, the M&A pipeline remained at record levels, and the equity underwriting pipeline remains strong.

Slide 14 shows results in our Global Wealth Management business.

Revenues were up 41% driven by strong customer activity, the impact of Nikko, and the inclusion of the Quilter acquisition.

Excluding Nikko, revenues were up 19% and were a record.

Assets under fee-based management were up 38%, 20% excluding Nikko, on strong market action.

Net interest margin increased over the last year in Smith Barney, benefiting from the bank deposit tiering program.

Expenses were up 38% driven by an increase in compensation costs on higher revenues and the impact of acquisitions.

Excluding Nikko, expenses were up 18%.

One point to note.

Last quarter we completed the integration of Citigroup Investment Services, which was previously managed and reported in the retail distribution segment into Smith Barney.

This resulted in a transfer of 686 FAs and $47 billion in client assets this quarter into Smith Barney.

Strong revenue results, good expense control, and the impact of acquisitions drove an increase in net income of 23%.

Slide 15 shows results in Alternative Investments and Corporate Other.

In Alternative Investments revenue and net income declined, primarily driven by lower results in our hedge fund activities, the absence of gains from the sale of MetLife shares in the third quarter of 2006, and lower market value in Legg Mason shares.

Client revenues were up 75%, reflecting the integration of Old Lane and organic growth.

Corporate/Other income declined, primarily reflecting higher Nikko related charges and the absence of a prior-year benefit related to retirement benefits plans, which were partially offset by improved treasury results.

Now to wrap up on slide 16, let me give you a few thoughts on the fourth-quarter earnings environment.

Starting with what we saw in September, there were some promising sign such as better quality leveraged finance and asset-backed transactions being successfully executed.

However, many parts of the fixed income market and many types of investment vehicles such as CDOs have shrunk dramatically; and we're not optimistic that they will regain a foothold in the market.

Our underlying business momentum is strong, and we're well positioned in many of the fastest-growing countries.

We expect our broad presence and the depth of our client relationships to generate results.

We expect continue to rapidly expand our international franchise.

As the structural expense initiatives we announced in early 2007 are on track, they're delivering the cost savings that we projected.

As we embed a discipline of continual re-engineering at the Company, we expect to become more and more efficient, driving stronger bottom-line results.

We continue to watch credit very closely.

Our expectation, based on the acceleration in our mortgage delinquencies in September that I discussed, is that consumer credit in the US will continue to deteriorate in the fourth quarter.

Our overall cost of credit including NCLs and any incremental reserve builds will reflect the economic environment, the credit performance in our portfolio, and the portfolio growth.

The situation in Japan consumer finance remains difficult.

Given our experience with the level of gray zone related refunds claims, our best estimates continues to be that the business will have net losses in 2007.

We continue to evaluate the profitability prospects of the business thereafter.

Finally, as you may know, we announced that we would centralize our treasury functions, which will facilitate the allocation of capital to our highest growth and return opportunities.

Let me now open it up for questions and answers.

Operator, we are ready to begin the questions and answers.

(OPERATOR INSTRUCTIONS) Jason Goldberg with Lord Abbett.

It's Lehman Brothers.

I guess with respect to earnings, I guess, income came in a bit higher than expected despite some writedowns, a bit more than expected.

I guess, relative to your expectations, kind of what came in better?

Because it seems like a pretty big difference given the quarter was already over.

You know, I wouldn't think about it that way.

As you might guess, when we were making our estimates at the end of the quarter, we had not closed our books, had not been through the closing process at the time.

Obviously, we were trying to be judicious in what we expected the total potential decline in income to be.

It was simply, I think, a judicious call at the time to say that we were going to be down by 60%.

So I wouldn't think about it any differently than that, Jason.

Okay.

Then secondly, can you just talk about off balance sheet exposures, particularly related to SIVs in terms of what your exposure remains?

Then obviously, a lot of news coming out over the weekend on that.

Yes, we have different types of off balance sheet exposures.

Those that we have some kind of contractual commitment to, we disclose in our Q.

You can see those numbers in our Q.

We also manage, as you mentioned, a SIV that we manage in the UK.

We don't have any contractual obligation to provide funding for that SIV, nor do we consolidate it.

Okay, and I guess with respect to actions announced this morning, can you give us any color?

You know, I'm not aware that any actions have been officially announced, yet.

Okay.

Then just lastly, can you just maybe talk about in terms of leveraged lending exposures?

I guess you gave us kind of the CDO numbers.

But the kind of the balances in terms of leveraged loans and where we stand on that?

Yes, as we concluded the third quarter, our net exposures were $57 billion.

Okay, thank you.

Betsy Graseck with Morgan Stanley.

Good morning.

Thanks.

A couple of questions.

One was on the reserve methodology.

I know you detailed how you changed it, the impact of the change.

But maybe you could help us understand how you have worked with the regulators to get them to approve this change.

I am wondering if you even needed regulator approval, because I was under the impression that it was difficult to change methodologies.

We didn't need any type of regulatory approval here.

There was actually no methodology change.

What we did during the quarter was refine our estimate process.

We started this actually back in the second quarter and we have been working across our entire consumer portfolio to try and identify behavioral changes, which at the end of the day will result in a loss that is embedded in our portfolio today.

I gave you an example of that.

Another example might be if you had a mortgage customer, for example, that is now paying their mortgage three or four days later in the month that they had historically.

We went back and did the correlations on that kind of thing.

We saw that those eventually resulted in losses that were actually embedded in the portfolio today but hadn't manifested themselves.

So we refined our estimate on that, and that accounted as I said for a hunk of the addition to the loan loss reserve that we did during the course of this quarter.

But the regulators aren't really involved in that.

That doesn't require any kind of regulatory approval.

That is just something that we do as the normal effort to improve the quality of estimating what our eventual loss might be.

Okay, because you indicated that this was the close of the Global Consumer business review with regard to the reserving levels.

Is that right?

This particular set of activities that has gone around, we have really gone around the world.

We did $240 million roughly of this in the first quarter in the U.S.

Card business.

We did the remainder in this quarter.

So that effort to try and identify these relationships that will eventually emerge as losses in the portfolio is now complete.

Okay, but if you were to find other indicators that would help you in the reserving methodology, you could tweak again?

We could, yes.

We constantly are working to try and improve the quality of what we do from a reserve estimation process.

We certainly could do that in the future as well.

Then, it was my read of the chart on, I think it was page 10, the net charge-off, net credit losses, and the reserve levels.

It's on page 9, actually.

Yes?

There is still a gap there, right, of about 20 basis points?

Between what?

The net charge-offs and the loan loss reserves in the Consumer -- Global Consumer book?

Yes, but that is just purely coincidence.

Those numbers, as you can see historically, have been above and below each other.

We don't make any particular effort to try and have those numbers align.

I guess I am just wondering, in an environment where the Consumer is deteriorating, should we expect that this gap should persist?

Or in the past had, because it is not showing here on the chart, in deteriorating credit environments, whether or not the reserve ratio had been running above net charge-offs ever.

Well, I think what I said about my expectations for the fourth quarter is very much what we feel.

We are in a deteriorating credit environment.

That was particularly pronounced if you look at the bottom of that same page that you are talking about, there really is a deterioration happening in mortgages right now.

We think we are running better than the industry based on the numbers that we can see.

But we have kind of a 30-day lag in getting the information from the industry.

We think we are running better than the industry.

But having said that, there clearly was an uptick in the quarter; and our expectation is that that is going to continue as we go into the fourth quarter.

Then on capital allocation, you have indicated a couple of times that there are lots of opportunities for improving the efficiency of the capital deployment.

Could you just give us a sense as to what you see some of the low-hanging fruit is, and the degree to which you could move the needle on ROA or ROE?

Well, during the course of this quarter we organized -- we have been talking about it for a time -- we organized a central treasury group and appointed a new treasurer.

One of the objectives of that team is obviously to help us to allocate capital in the most efficient way across the Company as we possibly can.

We have been through a process of putting together a matrix more or less that shows the product categories in which we compete that have low return on regulatory capital and low return on risk capital.

Those are the first assets that we are focused on.

So if you look on the balance sheet in the supplement, for example, I'm just going to turn there very quickly.

This is now on page 7 of the supplement.

And you focus on the investment line item of the supplement, you will see that that line item is down by 12%, reflecting for example the sale of a significant portion of the mortgage-backed securities that we had in our Consumer Lending business in the United States.

It is examples like that, Betsy, that we are very focused on to try and take out of the portfolio.

As soon as it makes economic sense to do so.

That is the kind of example that I think serves us well.

Now we have a long-term target for return on equity of somewhere between 18% and 20%.

We obvious well underperform that target today, so we have got a lot of work to do to keep the commitments that we have made to you all.

It is not helped, obviously, by the fact that we have had some assets come on the balance sheet this quarter that were not part of our original plan.

But we are attacking those assets.

We are going to be thoughtful about this.

We have got someone I believe who is an excellent leader for the treasury function to lead that effort.

But it's going to take us a while to reverse the impact of these assets that have come onto the balance sheet; but we have every expectation of being able to make good progress on this over the next couple of years.

And the capital -- key capital ratio that you are focused on is TCE to risk-weighted managed assets, is that right?

Yes.

I mean, Tier 1 and TCE care both important, but we are obviously very focused on both.

Our hope, as I mentioned, is that we will return to a more normal level in the early part of 2008.

More normal level is 6.5% on a TCE?

Yes, 6.5%, yes, 6.5%.

Okay, thanks.

Guy Moszkowski with Merrill Lynch.

Can I just ask you, first, a factual question?

Leveraged finance write-down gross of the fees, because you presented it net of fees?

You know, we haven't disclosed it.

Fees typically run 1.5% to 2%, so I'm going to just have to let you make an estimate, because we decided not to disclose.

Okay, thanks.

We will work with that.

On the structured product, MBS writedown, the subprime MBS writedown, etc.

-- the stuff that was going to go into the structured product -- do you have a gross number there?

Would the hedges that you referred to that would have reduced that include structured finance gains on the structured finance liabilities?

Yes, so the -- if you take the total gross number there, again we haven't disclosed that.

There was significant hedging.

So if you look at the way the kind of final position came out, the $1.6 billion, that was net of our hedges.

We didn't disclose the hedge number again.

But I guess the way I would think about it is we cut the exposure that we had, as I mentioned, from 24 or so billion at the beginning of the year down to $13 billion.

Coincident with doing that we also increased the amount of hedging that we did to what I would say is a significant level.

So there was a fairly significant gain on hedges that were reported in the quarter that offset that.

I believe -- I am looking here at John Gerspach -- I believe that during the quarter that also included the fair valuing the liabilities against that number; and the answer to that is yes.

Can we get some round number around the fair value of the liabilities mark?

I think the fair value of the liabilities mark in the quarter was $446 million -- $466 million.

Now, of course, there were also similar counterparty spread movements on the asset side of the balance sheet that would have roughly offset that amount.

Okay, that's fair.

Thank you for that.

Can we talk a little bit about, in broad strokes, the continued decline in net interest margin?

How much of that was due to mix shift in your deposit base toward deposits that you're actually paying for and how much due to some other things?

The underlying trend there really was heavily influenced by Nikko.

So Nikko came on with a lower funding cost but lower yielding assets.

So, a couple of those basis points was influenced by Nikko.

If you kind of take that out of the picture and just say more aggregately what is happening, what is happening is that we actually had higher yielding assets in the quarter.

We had somewhat lower cost of liabilities in aggregate, but the mix shift between assets was adverse.

That is the mix because of the Nikko acquisition and the mix shift towards the trading assets that we have resulted in some deterioration in NIM in the quarter.

But the pronounced impact there was Nikko Japanese gray zone; if you took those two out of the picture, it was essentially flat on a sequential basis quarter-over-quarter.

Thanks, that's very helpful.

Let me just ask one more question, if I might, about the increase in net credit losses and loan loss reserves on the international side, which to me at least seemed surprising, I think, even beyond Japan consumer finance.

Can you give us a little bit more color on what you are seeing in the areas beyond the Japan consumer finance problems in International Consumer that caused you to put up such a significant increase in reserves?

I mean, it is a fair question.

Because if you look, for example, on page 18 of the supplement and focused on the 90-day past due in the Card business, what you see is that it actually had improved some during the course of the quarter.

I think you see that pretty much across International.

That said, we did the exact same exercise, now internationally, that we had done in the US.

Which is we made a diligent effort to go through each one of the portfolios and make sure that, if we could identify behavioral patterns that would eventually end up in a loss of some sort, that we reflected that and embedded that in our reserve today.

So I think you should -- obviously, it is not driven by the underlying deterioration in delinquencies for the most part.

I think that is really what is there.

Now having said that, we do have some continued deterioration in Mexico as part of an ongoing effort that we are making to grow our business there.

A successful effort to grow our business there.

We have had some deterioration, but it doesn't reflect itself -- it is not large enough to reflect itself in the overall numbers for the Company.

Right.

One bright spot actually seemed to be GTS, transaction services.

The dynamic seemed to be pretty positive there.

Maybe you can give us a little bit more color on what was going on in that business.

You know, what is going on, frankly, is a continuation of the excellent things that they have done.

So if you look at the underlying metrics for the GTS business, on just about every count the underlying metrics look good.

The growth in deposits; the strength that we have internationally in that business; as you can see, the expense leverage was good in the quarter.

The addition of Bisys has gone at least to date very smoothly.

So that appears to be a business that is obviously performing very well.

So there wasn't anything in it that you thought was sort of an offset to the problems we were seeing elsewhere, just in terms of like flight to quality and things like that?

You know, the one thing that did happen during the course of the quarter, as people did not invest in typical kinds of things, so companies that might have done asset-backed CP investing in the quarter tended to hold higher cash balances.

And there was some benefit of that that was reflected in the quarter.

Okay, great.

That's very helpful.

Appreciate your answers.

Glenn Schorr with UBS.

Could we just get a comment on, say, the asset-backed commercial paper market?

Just in terms of if it was functioning at full 100% strength, call it like six months ago, a year ago, where are we at now?

How much has moved on balance sheet and how much -- are durations extending at all?

Can you just give a little bit of flavor for what is going on in that market right now?

Yes, if you don't hold me to a specific percent, I will give you a flavor for how it (multiple speakers).

Yes, just the flavor is great.

So, if it was 100% a while ago, it obviously had declined very, very significantly into kind of the August time period and was essentially not functioning.

But it has longer terms associated with it; so it doesn't stop functioning and then suddenly there is no asset-backed commercial paper.

It terms out over time.

So as that was being kind of wound down, you saw the asset-backed commercial paper -- as a percentage of our funding at least -- declining.

But not declining at a precipitous rate, because it comes off gradually.

Now beginning about a month ago, the asset-backed commercial paper market started to reopen.

Now we are seeing, for high-quality issues, the reemergence of an asset-backed commercial paper market.

But it is not even anything like the levels that we saw some time ago.

So some of that is being replaced, at least in our case, by term funding; and that is obviously being balanced as we go forward.

But there has been a return over the course of the last month to funding.

Of course, we have a lot of high-quality assets, particularly our credit card receivables, things like that, that function very well in that market and we anticipate will be funded just fine, as people have become more discriminating in terms of the assets they are willing to buy.

What happens to the assets that they are not willing to buy?

I agree with you, there is plenty of stuff that got lumped into the four-letter word.

But there is plenty of assets that people won't want to buy.

So some gets out, and some -- what happens to the stuff that -- will it sit on balance sheet, most likely?

Well, I think if you are asking about in the world, I think that is generally true.

The world, yes.

If you look at our -- the composition of our assets, the composition of our assets are actually very strong.

So I don't think we are in a position where that is a significant issue for us individually.

But I think in generally that is probably going to be right.

Okay.

Then I will push the envelope a little on this one.

Is just the conceptually of maybe a single master liquidity enhancement conduit, just what is the concept of why it would exist?

Just to provide confidence?

Because it doesn't seem like there is incremental capital being put out.

Or would there be capital put out?

Well, again, there has been no specific announcement about anything like this, so I don't know if I should make any comment about it.

But let me just say that it is not -- it wouldn't be surprising to people on the phone that it would be helpful to have other liquidity alternatives for SIVs that are managed in the UK.

As I understand from what I read in the paper this morning, that is generally the concept here.

Alternatives that would provide liquidity there I think could provide reassurance to the market and make the funding there of very high-quality assets a little bit easier.

Got it.

Okay, one last one, shifting gears in Transaction Services, just did -- is there any numbers you can throw out Bisys would have added on either side of the equation?

Like revenue and expense; or just to the bottom line.

Because I think all the trends still look good.

I just want to be able to piece that piece out.

You know, Glenn, we haven't disclosed it.

It is not in the supplement anywhere; and so, no.

Okay, thanks, Gary.

John McDonald with Banc of America Securities.

Hi, Gary.

Question on the nonperforming assets.

There was a big jump in the commercial side on the back page, total corporate cash basis.

Can you give some color on that?

Yes, that is primarily driven by one single name.

There is actually two there in total; but one is the larger of the two.

That is, let's see, IKB AG, right?

IKB AG, standby commercial paper arrangement that we had.

So they were the funder of a CP.

They were a funder of a SIV in the UK.

We had a standby arrangement to support that SIV.

When they became unable to provide that funding we had a requirement to step in and provide that funding.

You see that as an increase in the cash loans that are there on the balance sheet.

Now, you also see that we took a corresponding increase in our credit reserves in the corporate side of the loan loss reserve.

We did that specifically in response to this.

But that is the largest of the two pieces that are in that increase that you identify.

Okay, so most of the increase from 600 to 1,200 is two things, and you gave us one of them?

And that is by far and away the largest of the two pieces.

Okay.

Did you answer the question on the chargeoffs for International Card jumped a lot.

Is that Mexico?

Mexico was probably the single largest increase in the quarter.

We have had some increase in Brazil and some increase in India as well, but nothing that was -- that would have driven the numbers other than those three items.

The International Card delinquency is pretty stable, then?

What was your outlook there just in the International Card?

Yes, if you look at it, it is very stable, and we feel pretty good about each of the markets that we have internationally.

That said, we did go through a pretty thorough process to ensure that if we could identify losses that were embedded in the portfolio and refine our estimates based on the identification of those embedded losses, that we took them in this quarter.

But it's hard to find that in the delinquency numbers.

It is really much more based on the refinement of the modeling that we have done.

Okay.

A question on the net interest margin.

You look like you have more wholesale funding reliant than the other US banks.

There is some thought that this would make you more a beneficiary of the Fed cuts.

Should theoretically you should have some benefit as short rates comes down and your net interest margin, everything else equal?

It depends entirely on the shape of the yield curve.

So the Fed funds rate has come down, but the yield curve shape has really not helped us materially at this point.

So, the general point that you make is absolutely correct, John.

That if the curve shifted in the right way, because of our wholesale fund exposure it should be beneficial for us.

But it would require the curve to have some steepness associated with it and for the low end to shift down.

Which part of the curve would be most relevant when you talk about that shape, Gary?

If it goes down at the short end, that is the most advantageous thing to happen for us.

Which it has.

I guess you are just talking about -- I mean, it has gone down on the short end.

Something is happening on the long end that is not helping?

You have got to have both the short come down and the long end stay up.

Like the 10-year?

I mean we are just talking --?

Right, like the 10-year.

Okay, okay, last question here.

Just on expenses, you were supposed to get roughly $2.1 billion in expenses this year under the Druskin plan plus the previously announced IT.

Did you say where you are on that?

2.1 expected for '07; how much have you've gotten so far?

We are going to hit that number.

We haven't disclosed the number that we have hit so far, but we are right on track.

In fact, we are probably running just slightly ahead of the plan at the end of the third quarter; and we will hit the $2.1 billion that we committed.

Okay.

Then with the restructuring and management changes, any expected severance or anything like that, or restructuring charges from the new business line announced?

No, nothing that is coming out of the activities that we just announced last week.

Now, one of the things I should point out is that we have ongoing re-engineering activities; and from time to time from those ongoing re-engineering activities there will be severance cost, restructuring charges that we will take.

Those may or may not happen in quarters when we have gains that happen at the same time.

But there is certainly nothing coming out of what we have just done that would generate a restructuring charge.

Okay, thank you.

Ron Mandle with GIC.

Morning.

I have a couple of questions.

One, I was just wondering how much foreign exchange might have added to revenue growth in the quarter?

FX added 2% to revenue growth in the quarter.

Okay, thanks.

Then second, on the loan loss reserve, you mentioned that you saw credit deterioration in September.

I guess in a way I am wondering why you didn't build the reserve more than you did, given that you basically said you were going to build it more in the fourth quarter.

Well, first of all we did.

So if you look at what we announced the reserve to be for credit costs at the time we did the October 1 announcement, it was a couple hundred million dollars lower than what we actually ended up doing.

That came because, as we finished the quarter, we obviously saw this uptick that took place during the last two weeks of September.

The credit losses that you recognize have to be credit losses that are embedded in the portfolio as it exists today.

So you can do your best to forecast behavioral changes like we have; you can look at macroeconomic factors and talk about how those macroeconomic factors influence what you believe the embedded losses to be in the portfolio today.

All of those things you can do.

What you can't do is look forward and anticipate losses that are not yet in your portfolio.

So.

But you might have a view which you can embed in these macroeconomic judgments that you make that your current portfolio is going to recognize those losses.

But you can't pull future losses obviously into this quarter.

So in other words, then, you built the reserve in anticipation of higher fourth-quarter losses, so you will not have to build the reserve in the fourth quarter.

Well, let me just tell you the way I would think about it.

The way I would say it is that there are a series of macroeconomic factors.

Let me just give you an example.

If you look at the number of days homes are sitting on the market, if homes are sitting on the market for a longer period of time, that probably means that we have embedded in our portfolio today losses that have not yet emerged but will eventually have to be recognized.

We have tried to take into account those types of macroeconomic factors in assessing the reserve.

However, you know -- but you can't anticipate beyond that kind of thing.

You can't anticipate a loss that is not embedded in your portfolio today.

If there is significant deterioration in the credit environment that goes beyond where things are today, we simply can't embed that because we have that expectation.

In terms of asset-backed commercial paper and other disruptions in the quarter, I was wondering how much your balance sheet might have gone up in the quarter because those disruptions of that sort.

Well, we didn't split it out specifically during the quarter.

You can get a little bit of a flavor for it, obviously, by kind of going through the piece parts of what happened.

But we haven't specifically identified the balance sheet increase associated with dislocations.

Would you give us some guidance in that regard?

You know, we hadn't -- I don't think so.

Okay.

Then finally, I'm just wondering, you have made the management changes.

I am wondering what criteria the Board uses to decide how high up the management changes should be, given a quarter like this.

Ron, this is Chuck.

I think the Board's criteria for that is to see whether or not we have a good, sustainable, strategic plan, one that can see us through a long-term set of performance; and especially with the kind of headwinds that come -- like this quarter's aberrational impact of the fixed income.

I think with that kind of criteria, the Board feels comfortable at the levels that we have made the changes.

Okay.

So that kind of assumes that markets and business trends will normalize in the fourth quarter and beyond, and that you will be back on the track that you thought you were on at the end of the second quarter?

You know, I think the best way to think about that, Ron, is to go through the comments that I made on slide 16.

I kind of stepped through each one of the business lines or each one of the major business lines and talked about the factors that we think are kind of the current update of where our performance is in the fourth quarter.

Okay, thanks very much.

Mike Mayo with Deutsche Bank.

Good morning.

I just wanted to follow up on Ron's question.

Chuck said this was the year of no excuses.

You guys say the results are disappointing.

So what are the repercussions at the level of the office of the Chairman?

When I look at results -- and feel free to educate me -- but the business line mishaps are not just Investment Banking.

There are some other areas.

There are some risk management issues.

Expense management, no matter how you look at it, year-over-year, year-to-date, linked-quarter, you add back the charges, reducing some for comp; you still have negative operating leverage.

Then management.

It was a year ago when Tom Maheras, Michael Klein were moved to head the Investment Bank.

Now that has kind of changed a little bit.

Also, Dave Bushnell, head of risk management, was promoted three weeks before the preannouncement.

I was not sure what was going on with that.

But the bottom line here is almost all the investors that I talk with feel like there needs to be more significant changes in terms of management.

So that is the data I am looking at.

What are you looking at?

Or what is the Board looking at that they feel more comfortable?

Well, Mike, this is Chuck.

I think I would repeat a large part of what I said to Ron.

It sounds to me like a very similar question.

If you look at our results this quarter, no one can be happy with the results in our fixed income business or with the results that relate to that.

But I think if you are able to look at the other parts of our business, if you look at the strategic plan that we are executing on, I think any fair-minded person would say that strategic plan is working.

And the benefits that we saw in the fourth quarter and then more in the first quarter and then more in the second quarter are showing through in the third quarter in the businesses that haven't been impacted severely by the fixed income dislocations.

So if you look at even parts of securities and banking, and we called those out; if you look at our international business; if you look at our GTS business; if you look at our wealth management business; if you look at our various businesses, the trend line of growth that we have sustained now for several orders is continuing.

It is clear that the fixed income dislocation hurt us, and hurt us in a very significant way in those businesses.

But I think I certainly have confidence in our strategic plan.

I think that it is showing through.

And I personally expect that it will continue to show through in the future.

Those are the factors -- excuse me, I think those are the factors that people are looking at.

Well, one of your main targets for this year was to grow revenues faster than expenses; and that is not going to pan out.

This could be the third year in a row where that doesn't pan out.

And that was clearly a very important factor.

I don't know -- and also at the corporate level the risk management, you said it was on the extreme areas of where you thought it should be.

So how do you think about that?

Well, you ask two questions there.

Obviously, we want to revenues to grow faster than expenses.

It is true in many of our businesses.

As I said, we had a very severe dislocation in revenues in our Markets & Banking business, one that I am not sure any fair-minded person would see a way to lower expenses rapidly enough to offset that in a 5-week period.

In the rest of our business, I think we are actually making very considerable progress in that.

In terms of risk management, obviously, we wish that our risk management models had predicted what had happened here.

In fairness, they included it; but only at the wide margins of what we thought was possible.

I am not sure we were alone in that difficulty.

But the facts are the facts.

We -- our job is to sustain our strategic plan is we go forward, and that is what we're going to do.

As it relates to risk management, the promotion -- or maybe it's not a promotion; I am not sure what it was.

The addition to responsibilities of the risk management head three weeks before the preannouncement?

I am not sure of your question, Mike, but it was a promotion for David.

David has taken on a broader set of responsibilities.

Again, I don't see risk management as a guarantor of results in the kind of market dislocations that we have had this quarter.

So, I don't see that as a connection at all.

Then, last question, I mean, reasonable people can disagree.

If you don't like the office of the Chairman or the way it is being run you just sell your stock.

But my question is, I saw Robert Rubin quoted in the press saying that your job should be safe for four years from now.

Did the Board kind of reaffirm your CDO status for the next several years?

Or what degree was your job title reinforced?

I don't think, Mike, it would be appropriate for me to comment on what Bob said or about what the Board might be thinking in that regard.

But you did say the Board feels comfortable with the levels of changes that have been made.

So should we assume that is most of -- the changes are done?

Well, again, Mike, I think it just wouldn't be appropriate for me to comment further on that subject.

All right, thank you.

Meredith Whitney, CIBC World Markets.

Good morning.

I have some operational questions, regarding Cards, mainly internationally but also domestically; and then Japan's gray zones.

With respect to Cards domestically, you haven't seen receivable growth in some time on a year-on-year basis.

You have seen pretty rapid growth specific to Latin America in international.

So number one, what is your strategic effort, strategic aspiration to grow the domestic Cards, the US business?

And then, what tenets do you have in place to grow that business?

What are your aspirations again?

Then, what governors do you have in place to manage credit losses on the Latin American or international side given the fact that the growth is so outsized?

Then my last question related to the gray zones is, Gary, you have given -- and Chuck has given -- guidance to 2007.

But can you extend that out to 2008 in terms of what you expect in terms of the earnings impact from the gray zones laws -- change in laws -- to be?

Thanks.

Sure, thanks.

That was a long list.

I hope I get them all, Meredith.

So, on the first one, we have a pretty concerted effort around re-engineering in our U.S.

Cards business that I think is going to generate investment dollars for us next year that will be larger than what we have had in that business over the last few years.

You know, essential for that business is having the right level of marketing support.

This will provide additional marketing support for that business going forward that hopefully will allow it to do reasonably well.

That is a relatively mature market in the US from a receivables perspective, and the result of that is that, compared to the investment options that we have outside the United States, we really to look to them to fund their growth.

Now having said all that I have just said, the group has done a really good job of bringing down promotional balances in that business.

That has had a negative impact on our overall receivables growth.

But it has had a positive impact on the margin in the business.

So you have to kind of look at those going in both of the two -- in both directions.

We are obviously very focused on the credit performance outside the US.

I think that is underlined by the fact that we took a $1 billion increase in loan loss reserve to make sure that we have gone through each of those portfolios and identified what within the portfolio might indicate the possibility of a loss that is embedded in the portfolio today, but is not yet evident to us.

That has been a very comprehensive process.

It went on for the last couple of quarters and concluded, as I said, with the results that are embedded in our results this quarter.

But having said that, we are still very much on top of looking at each of these individual countries that are growing very rapidly, and trying to govern the growth rates appropriately, to ensure that the loan losses that we have seen foreseen there are appropriate for what the growth and eventual maturation of the portfolio will be.

Can I just follow up real quick before you get to Japan?

Most of the growth in the domestic portfolio has been through acquisitions of private-label companies -- or portfolios, rather.

So what does the core portfolio look like, exclusive of the private-label growth?

What has the growth specifically looked like there?

Then can you give some tangible examples about how you're marketing to grow that portfolio?

Yes, the additional portfolios that have been acquired are relatively immaterial.

That is, for right now.

So you have got the Federated portfolio that has come in during the course of the last year.

So the larger portfolios that you have in mind are really a little bit further back.

So there is a modest impact from Home Depot, modest impact from Federated, but really relatively small.

You know, the most recent, I think, example of something that they have done is a relaunch of the AT&T Universal Card.

That happened about a month ago.

There is a brand-new value proposition that has been launched with AT&T with a whole set of new reward options associated with it and I think is a good example of an effort to revitalize a product that is a significant part of our portfolio, but has not grown very much over the last little while.

I think there is kind of a three-sided effort here.

One is to take those parts of our portfolio that have not been growing well and go through some effort to revitalize them.

AT&T like that.

There is a focus on the faster-growing segments of the portfolio, like travel and entertainment, and small business.

That is a second effort that that team is working on.

Then the third as you quite correctly point out are partnership efforts that are underway.

All of those, hopefully, are underpinned by a more effective re-engineering strategy next year that will provide them some capacity to expand their marketing efforts.

From a gray zone perspective, you know I would be the last person, frankly, to make a forecast for 2008 financial results.

That is a fluid situation I think is the best way to describe it.

It is important, I think, to take away that we did write down to zero the remaining specific intangibles that were associated with this business in this quarter.

So, there won't be any charges associated with that in future quarters.

As you know in the fourth quarter of last year, we took a charge of north of $600 million to reflect what we think the refund claims will be.

But it is obviously difficult to say, given the environment around that business, exactly how it will evolve in 2008.

Okay.

Just to clarify, when you talk about the gray zone loss going -- extending throughout the fourth quarter of 2007, is that new information?

Or is that just reiteration of what you had said all along?

I said it, I think at the end of the second quarter, that we expected a loss on a full-year basis (multiple speakers).

Right, but I thought you had said that at the end of the year -- or Chuck had said that at the end of last year as well.

No, we had expected that we would breakeven this year at the end of last year.

But we have now said for a couple of quarters that we expect it to lose money.

Okay, thank you.

Jeff Harte with Sandler.

Good morning.

Most of my questions have been hit on.

But a couple, and this is going to be a tough one to answer, but somewhat forward-looking in the Investment Bank.

We are sitting here after a difficult quarter for mortgages and CDOs; and I believe you made a comment earlier about some of those structured finance products really not getting a foothold again.

As we look back over the last couple of years, how important were those businesses for driving revenues in the Investment Bank?

As you start looking to 2008, what kind of budgeting thoughts do you have for what kind of strength we could see in the wake of the troubles this summer?

Well, they have been important for us and obviously have represented a hunk of the growth that we have had in the Investment Bank over the course of the last couple of years.

But they aren't the only area where we have had significant activities underway to try and grow our Investment Banking business.

That -- those elements of our plan are clearly in place.

So if you look at the success, for example, that we have had with equity derivatives from 2006 into 2007, that change there has been actually pretty good.

In interest rate structuring -- the growth in interest rate structuring, 2006 to 2007 looks very good.

So, I think in these areas where we are making strategic investments, which also include commodities and FX options, we are going to continue to reinforce and invest behind these categories as particularly they overlap with emerging markets where we have strong, fundamental positions.

So, this is a business which you know changes very rapidly over the course of years.

If you look at any business configuration among any of our competitors and go back five years and compare it to today, this is a business that evolves and follows the market opportunity.

And we intend to do exactly the same thing.

Jeff, I might add -- this is Chuck -- that one of the things that we are taking into consideration is that over the last four or five years providers of liquidity have not generally been rewarded for that.

I think at least in the intermediate period in front of us, providers of liquidity will have a greater reward for that effort than they have had in the past.

Okay.

Then kind of finally, on the trading side, a difficult quarter, but it was a difficult quarter for most.

You talked a little bit about kind of working on systems to improve the aggregation of risk exposure over kind of positions, geography.

Can you talk a little bit about that?

Because you guys really span the globe more than most and products more than most.

How able are you to aggregate things like credit risk and even interest rate risk kind of across the franchise?

Yes, it is actually more a question of how we think about things, I think.

So let me just give you a quick example.

So we have had a process over the last couple of years that has kept our growth in subprime mortgages on the consumer side in check basically.

That has not expanded very much.

If you look at our mortgage trading results in the second quarter, although we didn't split that out as a separate category, they were actually okay during the course of the quarter.

In part that was because our credit risk team were very focused on the exposures in both of those categories.

The CDOs in large measure were managed by our market risk teams; and they were very concerned about the change in interest rates as it would affect the valuation on the CDO warehouse.

The cross-pollenization between the credit risk team and the market risk team was not as strong as it needed to be.

So one of the things that we have learned from this whole experience is that we have to have more integration between the way those teams operate, so that risks that are apparent and coming up in one area, that historically have not been relevant for another area, are available to us.

So we can see them and make sure that we anticipate them in the future.

That is specifically the kind of thing that I was referring to in my comments.

With regards to interest rate risk, we obviously know what our position is at any moment in time.

What we have talked about on these calls in the past is we need a better capability to forecast under various scenarios on a companywide basis how that interest rate is going to change.

We still need to make progress in that regard.

It is going to take us into next year before we actually have good dynamic capability under multiple scenarios to forecast out what our net interest margin is going to be.

That is one of the initiatives that our central treasury group is working on.

Okay, thank you.

Vivek Juneja with JPMorgan.

Hi.

Gary, can you comment a little bit on -- or Chuck, either of you -- on the US Consumer as well as the International Consumer business?

If you look at them ex the reserve build there has really been no net income growth.

When should we expect that?

What is it that will help drive that, given that you are starting to see a pickup in losses now?

Forget about the -- just stepping aside from the reserve build.

Secondly, if you can comment a little bit on the Alternative Investments business, given that you have added of a lot of international stuff with Old Lane, it was still a difficult quarter.

How should we look at, expect results in that business start to show up?

If I think about the US Consumer business, I think this was a little bit of an unusual quarter.

So US Consumer has done a nice job kind of rebounding off of the lows of a couple of years ago, in terms of their revenue performance.

You all have seen the chart that we have used in many different circumstances that showed the turnaround in revenue performance in that business being roughly in the 4% to 6% range over the last few quarters.

This quarter, there were actually market-related events that had to do with a couple of specific items -- securitization and the way we marked the I/O strip to market -- that resulted in a negative impact on the results in this quarter.

Also we had a gain on the sale of some securities in the third quarter of last year that made this quarter's momentum look weaker.

The fundamental trend, the fundamental revenue growth rate, is basically the same in that business this quarter as it was last quarter.

Last quarter we were impacted by a pretty significant reserve build, particularly when compared to the prior year.

So we had reserve releases in the prior year.

And we took, again, some of the refinement to estimate addition to our reserve in the second quarter.

So I think the elements are largely in place.

That business has had operating leverage on a year-to-date basis, with the exception of what has just happened in this quarter.

And we have had now significant charges from a credit perspective.

We are certainly hoping that on a normalized basis this business will perform as one would expect it to perform.

Internationally, you know, we have made very significant investments in operating expenses.

We have grown the branches there very significantly.

You can see the number of branches that we have grown.

But the revenue growth rate there is strong.

We feel good about -- if you again take out the Japanese gray zone and you look at the business without Japanese gray zone, the underlying performance of that business is actually very attractive.

It is obviously a key area for investment for us in the future, and anticipate that to be a business that will return very attractive results for us.

In Alternatives, you really can't -- that is a very difficult business quarter-to-quarter to manage the underlying results.

So if you look at the results the first two quarters of this year, they did better than what we had anticipated, better than the guidance that we had provided.

That was also true of the fourth quarter of last year.

They did less well this quarter than what we had anticipated and less well than what our typical average guidance might be for that business as well.

But I think it's very difficult to say quarter-to-quarter that that business is going to have a consistent financial result.

Going back to the US Consumer, given that -- yes, the operating leverage, if you look at just (inaudible) your expenses are improving.

But you have to factor in the credit costs.

It is not just the reserve build.

Your credit losses are starting to climb.

If you factor that in, you are not growing your bottom line; and ultimately that is what matters.

What are your plans to try to improve that?

Because either just showing -- obviously with the interest rate environment moving away from being as negative as it was previously, it is easier to make the operating leverage look better.

But net-net is what matters.

Well, I certainly agree with you that net-net is what matters.

We have done what we believed was necessary to do from a reserving standpoint to capture the losses that are embedded in the portfolio today.

I gave you my sense of what I anticipated credit to do as we move into the fourth quarter.

You know we, I believe, have good metric performance in that business.

If you look at deposit growth and loan growth on the chart on the page, we have got good operating expense constraints that have been operating in that business as we have gone through this year.

Obviously, we are at a point in the credit cycle that has been difficult for us.

It has been -- there is no doubt about it.

That may very well impact us as we go into the fourth quarter.

Is it partly also because you have just stretched, just like you did in the fixed income business, certain areas that are coming back that have grown a little too rapidly, so you are pulling back in areas such as home equity?

I am not sure that I understand exactly the point that you are making.

The point being that certain areas such as home equity have grown really fast, are you cutting back on that in any way?

(multiple speakers)

As I said in the comments that I made in the script, we have cut back on third-party originations in the home equity business and are primarily using our own sources of origination.

But if you look at the kind of parameters of our portfolio, we neither grew as rapidly in the subprime portions of that business as others did, and we have very attractive FICO scores in that business.

If you look at the growth in delinquencies in the first and second mortgage portfolio, although they are large as I mentioned in my talking points, at least as we have industry numbers here, we are performing substantially better than the industry.

We don't have the industry numbers for September, but up through August we were doing better than the industry.

Lastly just a little detail.

Tax rate, how should we think about it going forward since ands you had another quarter where it was a nice benefit?

But what is a way to think about that from a normalized standpoint?

Well, I wouldn't -- obviously, I wouldn't assume that this quarter's tax rate is a typical kind of a number.

There were a number of advantages in this quarter that we had.

So I would -- I mean, you can go back historically and see what this has averaged.

I would go back and use historical numbers rather than provide you some kind of a forecast.

Thanks.

Diane Merdian with KBW.

Good morning.

I was also going to ask on the tax rate.

I guess the only thing I would say add, based on your comment, is should we make some adjustment to the normalized tax rate that we have observed over time based on the mix between international and US, which is shifting over time?

Then separately, I was hoping to maybe get some insights on the size of the I/O writedown and securitization gains.

Finally, I was curious if you would give us any sense about the portion of expenses in securities and banking that is noncomp.

Portion of expenses that is noncomp?

So, in terms of the tax rate, obviously the growth rate in international has been helpful for us.

If you kind of go through the actual rates, for the first part of this year it was about 27% in the first quarter; 29.9% in the second quarter; 27.4% in the quarter we have just come through.

Those are all related to the most part to discrete planning activities that we have engaged in that are beneficial for us from an international perspective.

The more we grow our business internationally, the more those kinds of opportunities are available for us.

So.

But again, I wouldn't want to forecast out at these relatively low levels of tax rates.

I would look at -- towards the last couple years and do some averaging based on the last couple of years rather than forecast off of these levels, Diane.

Okay, thank you.

In terms of the I/O writedown, the I/O writedown was about $107 million in the quarter.

The securitization gains in this quarter were less than they were last year.

They were less than last year by over $100 million.

Okay, thank you very much.

Then, the portion of our expenses that is non-operating I'm not going to give you specifically; but if you look in the Markets & Banking supplement, I think the total amount of noncomp expenses is $2.2 billion.

How that relates to comp, you can obviously see back on page 23 of our supplement.

Okay, thank you.

Thanks, everyone, for joining with us today.

Operator, that completes our call.

If anyone -- please call us in investor relations any other questions you have during the day.

And operator, that completes the call.

Ladies and gentlemen, this does conclude this morning's Citi third-quarter 2007 earnings review.

You may now disconnect.