花旗銀行 (C) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Citi's first quarter 2008 earnings review, featuring as Citi Chief Executive Officer, Vikram Pandit, and Chief Financial Officer, Gary Crittenden.

Today's call will be hosted by Scott Freidenrich, 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.

Freidenrich, you may begin.

Thank you, operator.

And thank you all for joining us this morning.

Welcome to our first quarter 2008 earnings presentation.

The presentation we will be going through is available on our website.

So you will want to download that now, if you haven't already done so.

The format we will follow is Vikram will begin the call, Gary will take you through the presentation, and Vikram will have some summary remarks.

Then we will be happy to take any questions that you may have.

Before we get started, I'd 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 Vikram.

Scott, thank you.

Good morning, everyone.

To start with, we're not happy with our financial results this quarter, although they're not completely unexpected, given the assets we hold.

I do want to start by emphasizing a few points, and then I'll turn it over to Gary.

Firstly, despite the bottom line results, we had good operating performance in a number of areas.

We had record revenues and transaction services, where revenues grew 42%, and net income grew 63% versus a year ago.

International consumer revenues were up 33%, or 22% excluding one-time items.

Deposits in our international consumer franchise were up 23%.

International card revenues were up 37% ex the one-time items.

Within fixed income markets, we had very good results in our client-related or flow rates and currencies businesses, with revenues up 17% versus a year ago and up 52% versus last quarter.

Of particular note was the strong performance of our local market business in the emerging markets, a franchise that is unique to Citi.

Revenues at Smith Barney grew at 18%, and the private bank grew 10%.

So we had continued strong momentum in many of our businesses.

Secondly, our capital ratios were up versus fourth quarter with our tier 1 ratio slightly higher than our internal target, and our TCE ratio slightly lower than our target, but more importantly, we're executing on our capital plan and are enhancing capital by reducing legacy assets in noncore businesses.

I'm sure you've seen the many announcements we've made, including the sale of most of CitiCapital to GE, the sale of Diners and Redecard, and the planned reduction of our mortgage portfolio.

Thirdly, we're on top of our risks and have focused on prudently managing our legacy risk assets and on reducing the risk assets in a way that does not dilute our shareholders.

For example, on CDOs, at year end, our net super senior gross exposures were about $30 billion.

At the end of first quarter, they were down to under $23 billion, With the reduction driven mostly by marks.

We have done extensive analysis on our assets and believe we have a very good understanding of their value and have marked them appropriately.

We've also been working hard on reducing our risk in these structures.

Some of our riskier positions have been hedged by covering the underlying exposure with CDSs.

On the super senior liquidity puts, we believe that at these levels the cash on cash returns are very attractive and there is significant equity in front of us.

On leveraged loans, at year end, we had $43 billion of highly leveraged finance commitments.

At the end of first quarter, that number was $38 billion.

We have sold some of these loans and Gary will tell you more about that.

As of today our remaining position is $28 billion.

Of the $28 billion, $17 billion were unfunded commitments at the end of the quarter.

More importantly, the leverage loan market is beginning to trade, and that is good news.

Lastly, I believe we've reduced our risk in our institutional business.

We continue to have risk in our consumer loan portfolio, but that is also not completely unexpected given our historical loan positions.

We can continue to say that we have a strong earnings base that will offset issues arising from this book.

We have some other risk issues that we're on top of that Gary will talk about more.

Through all of this, even as we expect economic news to be challenging, my confidence in this company's abilities and our future is extremely high.

I'll share some of these thoughts with you towards the end.

Let me turn it over to Gary who is going to take you through the results.

Thank you, Vikram, and good morning to everyone.

Thanks so much for joining us today.

Once again this quarter I have a lot to cover so I apologize in advance for the length of my prepared comments but I'm going to go quickly.

Please turn to the slides that are available to you on the website.

I'm obviously going to begin on the first slide.

Slide number 1 shows our consolidated results for the quarter.

The first quarter results were driven by two main factors.

Write-downs, and losses related to the continued disruption in the fixed income markets and in higher U.S.

consumer credit costs.

As I take you through the results of the quarter, I'll discuss the actions that we're taking against the key risk exposures for the company.

To summarize our first quarter results, net revenues declined 48%, driven by the continued disruption in fixed income markets, partially offset by underlying growth in several of our other businesses.

Expenses were up 4%.

The reengineering plan for 2008 is well underway, and we're very focused on managing expense levels in the company.

The cost of credit more than doubled over last year, primarily due to higher net credit losses and a subsequent change to the increase in loan loss reserves, both principally in our U.S.

consumer business.

These factors drove a loss of $5.1 billion for the quarter or a loss per share of $1.02.

This EPS is based on basic -- on a basic share count of 5.1 billion shares.

Our diluted share count for the quarter was 5.6 billion but in accordance with GAAP, is not used in the EPS calculation in a net loss situation.

I'm turning now to slide number 2.

Slide number 2 shows a significant -- shows a number of items which significantly affect our results for the quarter.

First, $6 billion from write-down and credit costs on subprime related direct exposure in our fixed income markets business.

At the end of the quarter, our net super senior ABS CDO direct exposure was $23 billion.

And our gross direct subprime exposure related to the structuring and lending business was $6.4 billion.

We had $3.7 billion in net credit losses, and $1.8 billion in charges to increase our loan loss reserve in the global consumer businesses, with the majority of that being driven by the U.S.

consumer business.

$3.1 billion in write-downs on our highly leveraged finance commitments.

$1.5 billion in credit market value adjustments related to our mono line exposure.

$1.5 billion write-down of our inventory of auction rated securities.

A $1 billion write down net of hedges on alt-A mortgages in the CMB business.

Additionally we recorded $622 million in repositioning charges related to this quarter's installment of our reengineering plan.

It was offset by a $663 million gain from the sale of our Redecard shares, a $633 million benefit related to the gain on Visa shares, and a partial release of previously established Visa-related litigation reserves.

Revenues included a $1.3 billion gain related to the inclusion of Citi credit spreads in the determination of the market value of those liabilities for which the fair value option was elected.

Excluding the write-downs and the benefits affecting the market and banking segments listed on this table amounting to $11.8 billion, revenue for the company would have been $25 billion, or close to flat versus the prior year period.

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

It's encouraging to see that this quarter, most of the drivers have continued to grow at a fairly consistent pace with the second quarter of 2007, which was the best quarter in the firm's history.

Strong momentum continued across these drivers, especially in our international franchises.

Slide 4 shows the first quarter year-over-year revenue growth in each of our major businesses.

Markets and banking revenue reflects the write-downs and losses that I have already mentioned.

Alternative investment revenues declined -- the alternative investments revenue decline reflects sharply lower revenues from our proprietary activities and the write down of some of the civ assets.

Offsetting these results was revenue growth in international consumer and global wealth management driven by both organic growth and acquisitions.

In addition, U.S.

consumer revenues were up on a GAAP basis by 3%.

International revenues were up in every region except EMEA where the decline reflected a $1 .4 billion subprime related write-down and $460 million in write-downs on highly leveraged finance commitments in the region.

Acquisitions produced year-over-year revenue gain in the quarter of 2%.

Let me turn now to slide number 5.

The graph on slide 5 shows the 12-quarter sequential trend of net interest margin for the company.

Net interest margin for the quarter is 2.83%, up 30 basis points sequentially, and 36 basis points over the prior year period.

The primary driver of this improvement is from significantly lower cost funding and driven primarily by deposits in fed funds which is reflecting the benefit of the fed rate cuts.

Partially offsetting the benefits from lower funding cost was a decrease in asset yields primarily related to fed funds.

In the sequential quarter comparison, the assets were down sharply last quarter and remained virtually flat this quarter.

This is primarily due to an increase in trading assets driven by higher revaluation gains from interest rates, the impact of foreign exchange, and derivative investment movements, offsetting a decrease in fed funds sold.

You've seen us announce many actions in the quarter to reduce our non strategic assets.

We -- we expect to continue down this path and to be extremely focused on enhancing asset productivity.

Let me turn now to slide 6.

Slide 6 shows the trend of our expense growth.

Expenses in the quarter grew 4% versus last year and foreign exchange accounted for three percentage points of that growth.

Excluding acquisitions, expenses were actually down 4% in the quarter.

The major components of the change are a $622 million repositioning charge related to a number of activities such as headcount reductions and branch closings, including an expected reduction in force of over 9,000.

This is in addition to last quarter's expected headcount reduction that we announced of 4200.

We'll continue this process throughout the year as we make progress in our productivity and continuing reengineering program.

We also had a $250 million reserve to facilitate for global wealth management clients and exit from specific -- from a specific Citi-managed fund and a $200 million write-down on the hedge fund intangible assets related to Old Lane.

Offsetting these were three items.

Upon Visa's funding of the escrow account, Citi released $166 million of a previously established reserve based on the pro rata Citi ownership of Visa shares.

Secondly, $282 million benefit resulting from a legal entity restructuring in our Mexico business in March 2008.

Finally, in last year's first quarter we recorded a 1.4 billion restructuring charge.

Excluding the impact of acquisitions and the items I just mentioned, expenses grew 2%.

Savings from our reengineering efforts were reinvested in expenses related to branch build-outs and more collectors in our consumer businesses as well as in our highest return businesses.

In international cards for example, we opened 2.3 million new card accounts during the quarter, and continued to actively expand our partnership programs, reaching 209 total partners by the end of the quarter.

Similarly, we have invested in our transaction services business to extend our global and product reach.

The results of these investments are clear in the underlying growth metrics that I discussed on slide 3.

Sequentially, expenses declined 2%, and excluding the impact of foreign exchange, declined 3%.

On slide number 7, as I have said before, a good way to track our progress on expense management would be to track headcount growth and the expense growth related to revenues.

And slide 7 shows the trend in our headcount growth.

The graph indicates that we have significantly slowed the headcount growth from the 12 to 16% range to 8%.

Acquisitions and divestitures contributed 7 percentage points to the year-over-year growth rate, so that excluding acquisitions and divestitures, year-over-year growth was 1%.

In a similar comparison -- I'm sorry, in a sequential comparison, headcount declined 2% versus the prior quarter while expenses are also declining 2%, excluding the repositioning charges.

Turning now to slide number 8 on credit, it shows the year-over-year growth rate in the components of our total cost of credit and the key drivers within each component.

The total cost of credit increased by $3 billion, with $1.7 billion driven by higher net credit losses and $1.4 billion driven by incremental loan loss reserves.

First, higher net credit losses were driven primarily by our U.S.

consumer businesses where NCLs increased by $1.1 billion.

Consumer lending net credit losses were higher by $762 million over last year, driven primarily by higher losses in the consumer mortgage portfolio.

In U.S.

cards, net credit losses were up by $102 million, reflecting higher write-offs and lower recoveries.

Delinquency levels were higher and the increase in write-offs reflected higher bankruptcy filings and the impact of customers that are delinquent advancing to write-off at a higher rate.

In the U.S.

retail distribution, net credit losses were higher by $228 million, reflecting higher losses in personal finance, sales finance, and home equity portfolios.

Second, as shown on the chart, the loan loss reserve build was higher this quarter versus the prior year by $1.4 billion.

We strengthened the loan loss reserve by adding $1.9 billion, primarily driven by the U.S.

consumer reserve build of $1.4 billion.

Approximately half, or $659 million of the U.S.

consumer build, was in the consumer lending group, reflecting continued weakness in the mortgage portfolio and a higher expectation of losses in the auto portfolio.

The auto portfolio is primarily subprime with the loans sourced indirectly through dealers.

With the addition to reserves in our U.S.

mortgage business, we are at a 14.7-month coincident reserve coverage ratio for the real-estate lending portfolio.

13.3 months and 15.6 months of coincident reserve coverage in our first and second mortgage portfolios respectively.

As we said last quarter, we expect higher losses in the portfolio and this quarter these ratios have declined accordingly but remain at very strong levels.

In U.S.

cards, we added $302 million in loan loss reserves.

The build reflects recently observed trends, which point to an expectation of higher losses in the near term.

As I mentioned, the rate at which delinquent customers advance to write-off has increased.

This is especially true in certain geographic areas, where the impact of events in the housing market have been greatest, driving higher loss rates.

Bankruptcy filings have also increased from historically low levels.

These trends and other portfolio indicators led to a build in the reserves for U.S.

cards for the quarter.

In U.S.

retail distribution, higher delinquencies in retail bank home equity portfolio and the consumer finance personal loan portfolio and portfolio growth and a generally weakening credit environment led to a $362 million reserve build.

Markets and banking credit costs declined 2% over last year to $249 million.

Slide number 9 shows consumer net credit losses and loan loss reserve as a percentage of loans for the U.S.

consumer business in the top box and the same data for the international consumer business in the bottom box.

Looking at the top box, loan loss reserves and net credit losses as a percentage of the consumer loan portfolio have risen sharply, reflecting all of the factors that I have discussed.

The largest contributor to the increase in the U.S.

is the consumer mortgage portfolio.

As the bottom of the -- as the bottom graph shows, the two credit ratios in international consumer are increasing.

The increase is driven in large part by our cards business in Mexico and in India and our consumer finance business in India.

Mexico and India accounted for approximately one quarter of the net credit losses and three-quarters of the reserve build in the international consumer business.

Outside of the specific businesses in Mexico and India, international consumer credit remains generally stable.

On slide 10, the graph shows that the losses for the entire mortgage portfolio have increased substantially since September 2007.

The yellow boxes indicate the delinquency for our highest risk segments, that they have increased much more relative to the entire portfolio.

Our reserve actions for our mortgage portfolio primarily reflect this significant deterioration.

One point to note, the FICO, LTV and delinquency distributions for our first and second mortgage portfolios that we have shown you in the past few quarters have remained consistent and therefore we have not included them in this presentation.

Let me turn now to slide number 11.

Slide 11 shows a different cut of the first mortgage portfolio, which is the buyer selected low documentation portfolio, by LTV and by FICO band.

We have $58.1 billion of such mortgages, which are a subset of our first mortgage portfolio of $151 billion.

The box on the left shows you the FICO and LTV distribution of the loan balances as a percentage of the entire first mortgage portfolio.

The box on the right shows the FICO and LTV distribution by delinquencies.

This category of loan represents cases in which the borrower has elected to pay a higher interest rate to avoid assembling a full list of documents.

As a percentage of the total first mortgage portfolio, 33% of the buyer selected low documentation loans have a FICO score above 660 and an LTV below 80% as shown in the box on the left.

For the same FICO and LTV band, the entire first mortgage portfolio has a delinquency ratio of 1.6% versus 2.2% for this subset of loans as shown in the box on the right.

Conversely, in instances -- I'm sorry.

In extreme cases represented by a FICO below 620 and an LTV at or above the 90% band, which had a delinquency rate almost three times as high as the corresponding cell in the first mortgage portfolio.

However, importantly, this cell represents only 1% of the first mortgage portfolio.

Conversely, in instances where we as a lender have chosen to accept a borrower with limited or no documentation due to a preexisting relationship with a borrower, or other borrower characteristic, delinquencies for that portfolio are very much in line with the loans that have complete documentation.

The weighted average delinquency for this entire portfolio is 3.8% versus 3.2% for the entire first mortgage portfolio.

We have stopped originating stated income and stated asset loans and we're actively working with borrowers to mitigate losses in this portfolio.

Let me spend a moment talking about real estate originations.

You saw the announcement in March where we were committed to reduce real estate assets by $45 billion during the course of the year.

A key contributor to this decline is that we plan to originate loans that we can sell as opposed to loans that we hold in our portfolio.

Of the total consumer lending group mortgage originations of $34.3 billion in the quarter, we decreased the proportion of those held on balance sheet to 29% versus 42% in the prior year's $39.6 billion of originations.

Slide number 12 shows a 20-year historical view of net credit losses in the U.S.

cards portfolio.

While the mix of our cards in the portfolio has changed over time, there are some interesting observations to make about this history.

There are two spikes that are driven by unusual events.

The first one occurred in 2005 as a result of a large private label portfolio acquisition, which carried higher losses.

The second one occurred in the 2005 and 2006 period, and related largely to the change in bankruptcy legislation and the aftermath of hurricane Katrina.

Putting those two events aside, there are three clear periods in the chart where losses have increased steadily, and first, in the period from 1989 to 1992, lasted eight quarters during which unemployment increased by approximately 200 basis points and housing prices declined by more than 5% and our net credit losses increased by 175 basis points.

Second, the period from 2000 to 2003 lasted seven quarters.

Unemployment increased by nearly 200 basis points but housing prices increased significantly and losses in the portfolio rose by over 200 basis points.

Finally, the current period of increasing losses started in the third quarter of 2007, when home prices started to decline.

Two quarters in, unemployment has risen by only 40 basis points, and housing prices are already down 7.8%, and losses on our card portfolio have increased by more than 125 basis points.

If historical trends were to repeat, there is a potential for higher loss in our cards portfolio into 2009.

What we have shown -- we have shown you historical trend data for losses in our mortgage portfolio and in our card portfolio.

Using this information, as well as internal assumptions for each of our consumer portfolio, there are scenarios which could result in significantly higher credit costs for the remainder of the year.

Our reserves reflect our best estimation of losses embedded in our portfolio today.

Slide number 13 shows the historical trend in a number of our key capital ratios, as well as a progression in our tier 1 ratio from the fourth quarter to the first quarter.

As the graph shows, all of our capital ratios declined during 2007, driven primarily by acquisitions, organic growth in assets, and negative earnings in the fourth quarter.

In the fourth quarter, we ended with a tier 1 capital ratio of 7.1% and a TCE ratio of 5.6%.

As a consequence of the capital raising we did in the first quarter, our tier 1 ratio was 7.7%, exceeding our internal target.

The TCE ratio was 6.2%, below our internal target, and it is not our expectation that we will achieve the internal target in the second quarter as we had previously stated.

In the last four quarters, we have added $8.7 billion net to our loan loss levels.

In the last two quarters, we added approximately $35 billion to our capital base.

Both of these actions combined have strengthened the balance sheet of the company.

Now let me turn to the individual businesses.

I will start on slide 14 with the results of the U.S.

consumer business.

Revenues were up 3% on continued momentum from our strategic actions.

Excluding the $349 million gain on Visa shares this quarter and the MasterCard gain from last year's first quarter, revenues were up on a GAAP basis 1%.

Managed revenues in U.S.

cards increased by 14% on 6% growth in managed receivables.

Excluding the gain on Visa shares this quarter, and the MasterCard gain in the prior year period, managed revenues were up 10%, driven by new product introductions, the reconfiguration of our rewards programs, and investment in higher growth segments.

Both retail distribution and consumer lending revenues were higher on strong volume growth.

Expenses in U.S.

consumer grew by 6%, reflecting continued investment in building branches, and higher costs related to managing deteriorating credit, such as adding collectors.

Credit costs increased by $2.2 billion, driven by the factors I discussed earlier.

The decline in net income results primarily from higher credit costs.

Slide 15 shows the results of our international consumer business.

This quarter the results are affected by a number of the items that are disclosed in the schedule on this -- on slide 22.

Excluding these items, revenues increased by 22%, although net income would have declined significantly due to higher credit costs.

Higher credit costs were driven in large part by our cards and consumer finance business in Mexico and India, as I have discussed already.

As usual, we have shown you our results with and without the Japan consumer finance business.

As the results show, Japan consumer finance did not have major impact on our business during this quarter.

Slide 16 shows the results in our markets and banking business.

Revenues were a negative $4.5 billion, and we reported a net loss of $5.7 billion.

The last two weeks of March were particularly difficult in the securities and banking business.

Partially offsetting the severely affected businesses were strong results in certain areas.

In global transaction services, as Vikram mentioned, revenues increased 42% to a record $2.3 billion, driven by higher customer volumes, stable net interest margins, the acquisition of Bisys group, which closed in August 2007.

Key revenue drivers continue to grow at strong double-digit rates, with each of the three major businesses, cash, securities and fund services, and trade, posting record revenues.

In equity markets, prime finance had its second strongest quarter in revenues, driven by a number of new account acquisitions and increased customer activity.

Cash equity revenues driven by customer activities were strong, but were offset completely by a decline in proprietary cash trading.

Within fixed income markets, we had very good results in our client related or flow rates and currency businesses, with revenues up 17% versus a year ago and up 52% versus last quarter.

We had record foreign exchange and local emerging markets revenues.

Strong results in Asia reflected the strength of the franchise in the region and the fact that the market dislocation in the U.S., while increasing the volatility in many markets, did not extend uniformly to all global markets.

Expenses increased 3% versus last year, excluding $321 million from this quarter's expense related to repositioning, expenses were down by 3%.

Lower compensation costs in securities and banking were offset by higher costs from acquisitions and foreign exchange and higher compensation costs in transaction services.

We continue to focus our efforts on realigning certain businesses.

This effort is embedded in our current reengineering plans.

As a result, there was a headcount reduction of over 1300 in securities and banking in this quarter.

Slide 17 shows write-downs that are taken against each category of our direct subprime exposure.

The total write-downs, including higher credit costs for the quarter were $6 billion, which is shown at the bottom of the slide, including $336 million taken against the lending and structuring position of $8 billion.

Within the lending and structuring positions, the CDO positions are virtually entirely written off.

Moving now to the top of the table, we recorded a $5.7 billion write-down against the net super senior exposure of $29.3 billion shown in the middle of the first column.

We started this quarter with a gross exposure of $37.3 billion shown at the bottom of the first column.

In addition, there was an incremental loss of $1 billion, but shown towards the bottom of the slide, principally related to credit rating downgrades of hedged counter parties with subprime exposure, primarily mono line insurers.

As to the $29.3 billion of net super senior direct exposures and the associated $5.7 billion write-down, these exposures continue to be subject to valuation changes, based on a discounted cash flow methodology and not on observable transactions.

As in prior periods, we used a proprietary model to calculate vectors for conditional payment, default rates, and loss severity.

A key input for this model is a projected home price appreciation or HPA.

We used the outputs to calculate the projected cash flows for the collateral assets which we then run through the CDO distribution waterfall for each transaction.

Finally, we discount the cash flow by a discount margin that reflects factors including a liquidity discount and the uncertainty associated with structured investments.

The methodology that we use has been refined and the inputs have been modified to reflect current conditions.

The two principal refinements and modifications this quarter are the use of a more direct method of calculating projected HPA and a more refined method for calculating the discount rate.

First, in the last quarter, the projected HPA was based on a series of factors, including projected national HPA and differences between subprime and other sectors of the mortgage market.

This quarter the HPA is based on a forward-looking projection of the S & P consumer home price index that embodies greater subprime representation.

While this change allows a more direct projection of HPA without requiring additional separate adjustments for subprime, it has a relatively small impact on our valuation.

The HPA used in our valuation methodology this quarter reflects a cumulative price decline from peak to trough of 20%, 9% which we saw through the end of 2007.

Our assumptions reflect a remaining price decline of 8% and 3% respectively for 2008 and 2009.

As in the past, an adjustment was made for the geographic concentration of the relevant mortgage pools.

Second, our methodology for calculating the discount rate was refined this quarter.

In the past year, we used observable CLO spreads and applied a liquidity discount to those spreads to arrive at our discount rate.

This quarter we have used a weighted average combination of the implied spreads from single name ABS bond prices and ABS indices and COO spreads, depending on vintage and asset types.

This refinement was made in part in response to the combination of continuing rating agency downgrades of RMBS and ABS CDOs and a lack of COO spreads at the resulting rating levels.

Many analysts have been using the ABX as a rough proxy for the value of super seniors.

While we have considered the ABX, we believe that care has to be used in applying it to determine the value of super seniors for several reasons, one of which does it not contain earlier vintages that make up a substantial portion of our portfolio.

As it to the $8 billion of gross lending and structuring exposure and the write down of $336 million, of the $336 million total, $78 million related to the CDO warehouse inventory and unsold tranches of ABS CDOs.

As to the $1.5 billion incremental loss taken with respect to our hedged counterparties, we have now taken $2.5 billion in cumulative credit market value adjustments related to our mono line exposure since the third quarter of 2007.

The market value direct exposure to mono lines increased from $5 billion at the end of the fourth quarter to $7.3 billion at the end of this quarter.

Now slide 18 provides vintage and rating data for each of the exposure types.

82% of the collateral backing asset backed CP, the asset backed CPs that we hold is of 2005 or earlier vintages, as no ABCP transactions were originated after 2006.

In contrast, the collateral backing the high grade and mezzanine CDOs have a higher proportion of 2006 and 2007 vintages as those transactions were primarily originated in 2006 and 2007.

89% of the ABCP portfolio has a credit rating between single A and AAA.

Another impact of vintage can be seen in the downgrades that have occurred within the collateral pools of high-grade ABS CDOs, which initially owned collateral pools with an average rating around AA.

Our CDO research team looked at all high-grade ABS CDOs ,and found that for those transactions which were issued in 2004 and 2005, which would include most of our ABCP transactions, approximately 10 to 12% of the collateral pool has been downgraded to BBB or below.

For transactions that were originated in the first half of 2006, the percentage of the pool downgraded to BBB or below raises to about 25%, and for the second half of 2006 and the first half of 2007, the downgrade rate increases to 38% and 45% respectively, or about four times the rate of the 2004 and 2005 vintage issues.

This is another reason that we view our ABCP transactions, where most were issued between 2003 and 2005, to be of higher credit quality than the later vintage high-grade ABS CDOs.

Slide 19 provides more detail on the other four major drivers of negative revenues in markets and banking.

On the top left, in leverage lending our commitments for highly leveraged transactions totaled $38 billion at the end of the quarter, with $21 billion in funded and $17 billion in unfunded commitments.

This compares to total commitments of $43 billion with $22 billion funded and $21 billion unfunded at the end of the fourth quarter in 2007.

During the first quarter, we had a net $3.1 billion pretax write down on these commitments.

Since the end of the quarter, approximately $8 billion of these funded commitments to financial sponsors have been sold in a structure which allows us to lock in the price and eliminate potential downside price risk associated with these commitments.

While we still retain a portion of the credit risk associated with this $8 billion sale, we believe the underlying credit quality of the borrowers is strong and that the credit risk is manageable.

We sold approximately $4 billion of funded commitments in the normal course of our business activity after the end of the quarter.

In alt-A mortgages, we had $22 billion in market value of such securities at the end of 2007, and are now down to $18 billion.

Of the $18 billion, we have a $4.7 billion mark to market portfolio where the marks for the quarter were approximately $900 million net of hedges.

The remaining $13.6 billion is held as available for sale securities, in which we recorded $120 million impairment in the quarter.

As the graph at the bottom left shows, our commercial real-estate exposure is split into three categories.

For the first quarter, the blue bar represents assets subject to fair value assessment, including a $2 billion portfolio available for sale securities and a $2.3 billion trading portfolio in the alternative investments business.

Excluding interest earnings, we recorded almost $600 million of write-down net of hedges on this portfolio.

The second category, represented by the green bar, is loan commitments of approximately $21 billion, which are reserved to the extent necessary in our loan loss reserves for unfunded commitments.

Finally, as the gray bar shows, we have approximately $6.4 billion in equity investments from, for example, limited partner fund investments, which are accounted for by the equity method.

We have announced just this last week that we have hired Thomas Flexner, who will be responsible for directing commercial real estate activities across investment banking, commercial real estate finance, and Citi alternative investments.

In mid-February, we experienced our first failed ARS auction driven by continued deterioration in the credit markets.

The market continues to experience failures and there is no secondary markets for trading the paper.

The most significant markdowns have been taken on student loan paper, where we recorded a $971 million mark to market loss as ABS spreads widen significantly.

In addition, we took a $355 million write-down on municipal bonds, and a $132 million write down on tax exempt and other assets.

We are starting to see, and are actively involved in transactions being restructured and refinanced.

At the end of the first quarter, before accounting for the write-down, we held ARS securities with a PAR value of $8 billion in our inventory, down from a peak of $11 billion in mid-February.

After accounting for the writedowns in this quarter, the inventory stood at $6.5 billion as is shown on the chart.

Slide number 20 shows our results in global wealth management.

Revenues were up by 16%, driven by strong customer activity.

The impact of the Nikko acquisition and the inclusion of Quilter.

Assets under fee-based management were up 15% but down 5% sequentially, due mainly to the adverse impact of market action.

Revenues in the private bank were up double digits again, reflecting strength in structured lending and in capital markets products.

Expenses were up 32%, 20% excluding a $250 million reserve driven by acquisitions, increased customer activity and a repositioning charge.

Guim is facilitating the liquidation of investments in a Citi managed fund for its clients that have been negatively affected by recent market stress in certain fixed income assets.

Guim has established a $250 million reserve to cover the estimated cost of this offer.

Net income declined 33% on higher expenses and credit costs.

Excluding the reserve, net income would have been up 3%.

The private bank had a strong quarter with net income up 27% due to robust domestic and international revenue growth.

The performance was outweighed by Smith Barney, where credit costs and an adverse market action drove net income down by 56%.

Slide 21 shows results in alternative investments and corporate and other.

Alternative investments recorded a net loss of $509 million on sharply lower proprietary revenue.

At $202 million write-down of hedged fund -- I'm sorry, a $202 million write-down of hedge fund management contract intangible assets related to old lane, and a $212 million marked to market loss on the civ assets.

Let me spend a minute on each.

During the quarter, Old Lane's management team sent out letters to investments on its multistrategy fund, offering them redemptions in light of the change in the management at Old Lane.

It is our expectation that a number of investments we'll redeem from this fund, as they consider possible reinvestment in new old lane funds.

As a result we have written down fully the multihedge strategy fund intangible assets related to Old Lane.

The value of the civ assets and liabilities at the end of the quarter was $47 billion, including $170 million of junior notes.

Though some of the junior notes are still intact, we have recorded a loss because losses are calculated for each civ independently while in certain civ asset, write-downs have not exceeded the value of the junior notes, in others, the junior notes have declined to zero.

We continue an orderly wind-down of civ assets by selling them in to the open market.

Corporate and other net income increased $248 million.

The current period included a $212 million pretax writedown of an equity investment held by Nikko Cordial.

The prior period included a $1.4 billion charge related to the structural expense review offset by a gain on certain of our corporate-owned assets.

To wrap up, let me first address the areas where we continue to see risks and the actions that we have taken against each.

The fixed income markets continue to be disrupted, and investors remain wary, resulting in continued illiquidity in many product areas.

However, we are aggressively managing our position to reduce our expenses.

As I have discussed, we were able to sell down a significant portion of our leverage finance commitment and are working very hard at reducing these positions methodically.

The market for auction-rate securities while still very thin, is starting to show momentum in certain areas such as in municipal bonds and preferred markets.

We have exposures to the commercial real estate industry, mono line insurers and to Alt A mortgages in our markets and banking business.

All of these exposures are being managed opportunistically to reduce them in an economically viable fashion.

As we look to the magnitude of disruption in the fixed income markets that have already occurred we believe we have substantially reduced our risk given the size of the write downs that we have taken in the last three quarters.

As I explained earlier, credit costs in the consumer business may continue to rise throughout the year.

You have seen us build reserves and as this trend continues, we believe that consumer credit costs could have a meaningful impact on our results for the remainder of the year.

The situation in the Japan consumer finance business remains difficult.

We have taken a number of specific actions to reposition our company.

We're focused on expense management and the results for the quarter demonstrate significant progress in reducing expenses and headcount growth.

Our 2008 reengineering plan is well underway and we expect efforts to generate cost savings that will be redeployed to our highest return opportunities.

As we make progress we expect to continue to show discernible results from these actions.

We are making substantial progress on asset management.

Just yesterday we announced the divestiture of CitiCapital, which had $13.4 billion in assets.

We are building reserves to manage our expectation of higher credit costs and are working actively to mitigate credit costs within our portfolios.

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.

Our new organizational structure is designed to enhance exactly these competitive advantages in every region where we do business.

With our capital raising efforts, the new organizational structure and management team firmly in place, we expect to be able to continue this growth momentum and take advantage of many new client and market opportunities across the franchise.

That concludes the final review of the quarter and let me now turn it back to Vikram for his final remarks.

Gary, thank you.

I want to reiterate many of the things that Gary just said.

We had good operating performance in a number of areas.

We're executing on our capital plan.

We're executing on managing our legacy assets down.

We're executing on positioning the company for the future, and we're very, very focused on efficiency.

And I hope you've all been watching the announcements we've been making over the last three months.

We brought in a tremendous amount of new talent into the company, starting with risk, we have Brian Leach as our chief risk officer.

Just yesterday we announced Richard Evans will be joining us as Head of Risk in our institutional clients group.

We asked Neal Bacci to be the head of our risk area for the consumer businesses.

We also hired Charles Monet, Dale Natani, Greg Hawkins, and John Davidson, all as senior risk professionals.

Together with our current team, I believe we now have a world-class risk organization.

In addition to risk, we announced significant additions in several of our businesses.

You saw our announcement on Terri Dial, who is a world-class consumer banking leader.

John Havens, who is now running our institutional clients business.

Ned Kelly, who is running our alternatives business.

Tom Flexner, who will be Head of our real estate business across the entire institutional area.

And Paul McKinnon who is leading talent.

You should expect us to continue to bring in new talent to the company to add to our very deep talent pool that we already have here.

As you can see, we have a fierce focus on having the right people in the right places doing the right things.

As I said, we're also completely focused on efficiency, both in terms of driving our client business as well as in cutting costs.

You might have seen that we announced that Mark Rafay, a world-class productivity expert is joining Citi.

And Gary is taking the lead on our firm-wide reengineering efforts that are going very well.

And you see that we finally reported a sequential decline in expenses.

This will be clearly enhanced by some of the reorganizations that Gary talked about, particularly in our functions where we're centralize all our functions.

We've also made changes to other areas of our organization.

We do have a new organization, which will create accountability at many levels.

I believe that we finally have the right organization structure focused on clients, product excellence, and execution.

Other announcements we made this quarter include repositioning of our wealth management business, the realignment of our mortgage business, and the sale of noncore assets that Gary has talked about.

So as you can see, we've been very busy over the last three months.

I also want to tell that you I'm looking forward to seeing you all on your day, which is investor day, on May 9th.

And at that time, we'll provide you more detail about all the changes we're making.

We can also share with you what we can build on and build with and we'll tell you why we think we're positioned so well in many of our businesses like cards, emerging markets, GTS and others, and we'll also tell would you we're doing to improve our positioning in others.

After hearing about these things, I think you will see that we're taking all of the actions you'd want us to take in order to maximize the value of this franchise.

We're going to stop there, and with that, I'd like to open up for Q and A.

Thank you, Vikram.

Operator, we are ready to begin the question-and-answer session.

Before we begin, may I ask that all callers observe a one question and one follow-up limit.

Thank you.

(OPERATOR INSTRUCTIONS).

Your first question will come from the line of Guy Moszkowski with Merrill Lynch.

Good morning.

Good morning, Guy.

I wanted to follow up on your discussion of consumer allowance for loan loss compared to the coincident write-off rate.

As you pointed out, although in the U.S.

you're now slightly ahead in terms of allowances internationally, you're below, and when I look at the page towards the end of the supplement, which does it on a global basis, you're about ten basis points below your coincident loss rate in terms of your allowance.

Your global allowance is 241 and your coincident loss rate is 250.

Given some of the trends that we're seeing, I'm just wondering why you wouldn't have wanted to bring that more in line or even ahead.

Guy, I'll take the question.

If you look at most card competitors that have businesses that are outside the U.S., card businesses outside the U.S., generally you find the loan loss reserve to be somewhat lower outside the U.S.

as it is in the U.S.

And importantly for us, if you look at the 90-day delinquencies in the card business or in our international card business, or in our international retail banking business, the 90-day delinquencies are dead flat with a year ago.

In fact, they're actually slightly better than they were a year ago.

So we feel that with the additional things that we've done in Mexico and India that we've properly captured the amount of reserves that we should have in that portfolio.

As you rightly point out we feel very good about our overall level of reserves, we've taken very aggressive action.

We've added $8.7 billion to strengthen our reserves over the course of the last four quarters and feel good about our aggregate reserve position.

And with respect to that international delinquency rate, which as you correctly point out is very, very consistent, it doesn't really seem to predict either very significant increases or decreases in the coincident loss rates, and we did see that loss rate pop up on the international cards by a couple hundred basis points again this quarter on a 12-month lag basis or a coincident basis actually.

So just wondering why you have as much faith as you do in the delinquency data to predict your long-term losses.

Well, I wouldn't -- I guess the way I would think about it is we have many different reserve pools across the company.

This is one of the reserve pools that we have.

We look at each one of those independently, and make a valuation about what we think is appropriate.

The impact of acquisitions in any given quarter can have a fairly significant impact on the loss rate.

So, for example, when we acquired Egg, that's primarily an international card portfolio, the losses that are embedded in the card portfolio at the time we that we do the purchase end up in the goodwill, rather than being embedded in the loss rate calculation.

And so that loss rate calculation can go up because of things like that acquisition is where the underlying delinquencies can remain relatively flat.

As I said, we look at each one of these things individually.

There is some noise in it from quarter to quarter but we feel like we're properly reserved for that at this point in time.

Having said that, we're carefully watching Mexico, we're carefully watching India and we will be reporting on that to you as we go forward.

We're very focused on taking the right actions in those markets to ensure that credit doesn't deteriorate beyond what our forecast would indicate that it will.

But I think most of what you're seeing there is probably acquisition noise.

One more question on the U.S.

card business.

Can you comment on the sharp decline in the managed yield that we're seeing there two quarters in a row now?

It's now about 100 basis points below where it was six months ago.

Yeah, I think there's a couple things there.

So the Federated impact is included in those numbers, and so there's some mix change associated with that portfolio.

There's also, if you look at the way LIBOR and fed funds have moved together, and, in fact, this is the primary factor, some of our pricing takes place off of the fed funds rate while our underlying funding cost is based off of LIBOR and the combination, as you know, LIBOR and fed funds have not moved in concert in the same way they have over the course of the last couple of years, the last six months has been a distinct difference from where it had been before, and that difference in LIBOR versus feds funds has resulted in some of that yield squeeze.

Thanks.

I'm going to try and respect your restriction on questions so I'll let you move on.

Thanks, Guy.

Next question will come from the line of Glenn Schorr with UBS.

Hi, Gary.

How are you?

That wasn't my one question.

The balance sheet grew a little bit sequentially, and a little bit more than a little year on year.

Tier 1 is in reasonable shape all things considered, but if you look at the tangible common equity ratio it's pretty low.

How do you and regulators, how much do you care and what exactly are you managing towards as you think about your decisions on what to sell off and capital raises and things like that?

There are actually a number of different points to the question that I think are important to respond to.

If you look at the balance sheet you correctly say the balance sheet was flattish during the course of the quarter but a fair hunk of that was revaluation gains that were driven by widening spreads that took place during the course of the quarter.

The actual balance sheet itself, if you actually look at the management of assets, the management of assets continued pretty much unabated during the course of the quarter, and we feel good about progress that we're making in that regard.

We obviously have a commitment to having a very strong capital structure, and you saw rightly that the tier 1 ratio improved from 7.1 to 7.8.

And the TCE ratio improved substantially.

We do have an ongoing plan to continue to reduce assets.

We announced about three weeks ago that we expected the mortgage business to have a roll-off of assets of about $45 billion over the next 12 months, and we're continuing to manage other noncore assets very aggressively, the legacy loan sales that we announced last night is a good example of that.

We continue to manage those nonlegacy assets very aggressively, and that will generate capital.

Additionally, we've had three major transactions this quarter, the Redecard transaction, the Diners Club transaction, and now the CitiCapital transaction with GE that we announced yesterday.

A good way to think about that that is a pace that we expect to continue through the remainder of the year.

We don't anticipate reducing the pace of those kind of divestitures during the year and all of that will add to our capital base as we go along.

That said, we are very focused on ensuring that we have the right amount of capital in the company.

We proactively raise capital and we thought that was the right thing to do.

We're very focused if opportunities come up with that we think are appropriate for the company or if the risk environment should be fundamentally different, we'll do whatever is necessary to ensure a strong capital base.

One last one.

On slide 11, given that full detail on the $58 billion of the low-doc borrowers, I guess if you could provide any color on -- it feels like a little bit of a mismatch.

Most of these people are reasonable high FICO scores, or at least above the Mendoza line, and low LTV.

But it feels like a mismatch of what I think of as a high quality borrower but doesn't want to fill out documentation.

In other words, are these all wholesale funded or are these being derived from your platform?

They come from both sources but I think you pointed out exactly the point that we were trying to make on this slide.

I probably didn't do it very well in my written script.

I actually think there's good news associated with this.

Of our $151 billion portfolio or so, $58 billion tall into this category.

It was this category that was characterized by a somewhat higher loss rate but even though, for whatever reason, the buyer selected to provide less documentation about these loans, we were very careful to ensure that we had borrowers that had very strong credit rating, and so the net result of that is the 33% of the entire prime mortgage portfolio falls into this category, 33% of the total 150, is in that top left hand box, and the delinquencies against that are very, very manageable.

You can see how different that would be if more of the borrowers were down in the bottom right hand corner where we've actually had very high losses against the portfolio.

So as we study this issue and dissect where losses exist and where reserves need to be taken, we thought this provided valuable additional information of the true exposures of the company.

Appreciate that.

But no split-out on wholesale originated versus the in-house?

Not today.

Okay.

Thank you.

Your next question will come from the line of Mike Mayo with Deutsche Bank.

Good morning.

Hey, Mike.

Another question on capital, what are your thoughts for needing additional capital?

And I understand that's in the context for your outlook for problem assets.

You mentioned consumer credit is likely to get worse this year.

And also if you could describe that in that the context of the short term money markets, LIBOR is not behaving very well, so can you address the potential need for additional capital given those considerations?

Yeah, it is exactly as I described it so we feel very good about our capital position, as you know we moved very early to raise capital and as I mentioned with all of the actions taken we've raised about $35 billion.

That is reflected in the way our ratios have improved during the course of the quarter.

We're trying to be very prudent about this.

We're managing our assets down.

We have a large pool of legacy assets that we hope are not part of the family here a couple years from now that we hope to continue to manage through.

And we will continue to do divestitures.

But we are committed first and foremost to having a strong balance sheet.

And so either in the event of opportunities that come along that we think are very valuable opportunities, or if, as you mentioned, the factors in the environment become significantly difficult, you know, we will be properly capitalized.

We have a firm commitment to be properly capitalized.

That's the way we have thought about it in terms of our capital position overall.

So you feel good about your capital, and that means you don't need more capital unless things get really bad?

Well, the fact is, you can never say they ever with regards to these things.

Our commitment is to after strong capital base, and so we will monitor this, and we do monitor this virtually every day.

We look at the situation and we act appropriately.

We have a schedule by which we hope to reduce assets, by which we hope to sell businesses.

We have an expectation of what we think losses are going to be going forward and we monitor our results relative to those losses and we try to be very realistic about it what.

I really try to underline is that we have been proactive and we intend to continue to manage our capital such that we have a strong balance sheet and the ability to both take advantage of the opportunities and withstand a difficult environment.

Then as a follow-up what is your outlook for the increase in problem assets?

You mentioned consumer credit.

Any other areas that you're watching more?

What I tried to do is give you a pretty good feel around the card business.

Because around the card business we have a lot of history.

So you can kind of go back and look at that and gives you a sense of the volatility and how much that has moved.

Obviously an important factor for us.

We don't have that same history around the real estate business.

We're kind of in unchartered territory.

So what we have done obviously is we have chosen to take significant reserves there, I mentioned the months of coverage that we have as a result of our reserving methodology, the months of coverage that we have around the losses that we have in that portfolio and we are watching it very vigilantly.

It is turning up as you saw very significantly during the course of this quarter.

We are going to continue to monitor that.

We believe we have properly accounted for the losses we have currently embedded and the reserves we have taken but we are going to monitor that and if things change the reason why I mentioned near the end of what I said there's a possibility of additional losses if things change we'll continue to try and stay ahead of that.

Thank you.

Your next question will come from the line of Jason Goldberg with Lehman Brothers.

Thank you.

With respect to I guess on headcount, I guess last quarter you mentioned you are going to reduce 4200 positions, I think mostly in banking, I think this quarter it was 1300.

So is there more to go on that 4,200?

And the 9,000 you mentioned this quarter incremental to that and what parts of the company is that coming from?

It is incremental.

We announced 4,200 last quarter.

We announced 9,000 this quarter.

The way to think about this, these are the heads we can reserve for 12 months in advance.

You are kind of limited to taking reserves for a 12-month time period.

This is the severance we have paid out or will pay out to these individuals , so these are identified positions.

And the way I would think about this is that we will continually, as we go through the year, be focused on reengineering.

So I think it's unlikely that you will hear some very large significant number that we're going to announce, but I think it's highly likely that you will continue to hear that we're very focused on improving our cost competitiveness, and as a result are consistently working away from a productivity perspective.

If you split the two of these pieces out on the consumer side about 7,000 of the 9,000 comes from the consumer business, and the actual number is 9300.

1.3 comes out of -- I'm sorry -- yeah, so actual number is 9,000.

1.3 out of the commercial banking

Follow-up.

15,000 position reductions since April of last year.

I guess of that, how many have actually left the company?

Well, if you look at the chart, the best way to track that is to go to the headcount chart without acquisitions, right.

So if you -- we actually don't split the acquisitions out of this number but if you pull the acquisitions -- so the big driver of our headcount increase that we went through was the acquisitions that were added in the second, third, and fourth quarters, were down from the peak that we had in terms of headcount of 375,000, and so actually I don't have a split that would show the total number that have left the company.

We have -- in terms of the strategic initiative that we did he first quarter last year we expected 14,000 people to come out by this point in time, and those 14,000 have come out.

As regards to the 4200 that we announced last quarter, I believe the number against the 4200 was about 1500 or so that had come.

So if I add that up in aggregate, somewhere in the 16,000 range, something like that.

Thank you.

Your next question will come from the line of Meredith Whitney with Oppenheimer.

Good morning, Gary.

Good morning, Meredith.

I had two questions.

The first is with respect to Smith Barney.

And you guys show the net asset flows.

They look like for the last four quarters, anyway, actually you go on the flows five quarters, you haven't had much inflows, and then from the last four quarters revenues have been really flat.

Can you comment on what's going on there and what's the reaction of your customers to what's going on in the civ market, what's gone on in the auction-rate securities market?

Give some color on that, then I have a follow-up, please.

It is accurate.

What you said is true.

So our flows have been flat in Smith Barney.

There's two parts of the revenues that we recognize there.

The fees that we earn on assets, which are heavily driven by the level of asset market.

So as asset markets go up and down, and since that's primarily a U.S.

number, that number has gone up and down with the level of the market.

So as you know equity market weakened as we came through the month of March.

They have obvious rebounded over the last three weeks or so.

But equity markets weakened for the most part during the first quarter of the year and the overall revenue level associate with that was weakened as well.

The second element of the revenues are transaction revenue.

Transaction revenues were actually quite strong in the fourth quarter, have weakened as we have come through the first quarter, and tend to go down during time periods where customers are concerned about what the levels of equity marks are going to be.

So both of those things impact their revenues in the quarter.

Obviously focusing on flows is he a key initiative that Sallie has underway, and one of the things that she has done is she has revised the F A comp plan to specifically provide incentives to our FA team to increase customer flows.

And so it is certainly one of the strategic objectives that we have and we hope to be able to have a positive impact on that trend.

Auction-rate securities is not a happy outcome for anyone.

It's not a happy outcome for those who operate these auctions, where we've had warehouses and have operated those auctions ourselves and where we took marks, and it's certainly not a happy outcome for customers, either.

We have tried to be very thoughtful about providing support to these customers and we have made a decision to do a couple things.

One to provide a liquidity facility for our customers, and that has already been done.

And secondly to mark these securities at a level that we think is appropriate for their valuation in their account.

We're working on what's necessary to do the latter of those two and anticipate being able to do that over the next little while.

Okay.

And my follow-up relates to real earnings visibility for the remainder of the year.

Is it fair to say that you feel you're properly -- well, you said you were ear properly reserved on the consumer side, so you wouldn't expect special reserves along the way, unless something material changes.

But it also sounds like you're going to have persistent restructuring charges and sort of more moving parts than less moving parts.

I wanted to get an outlook on operating leverage, when you think you're going to turn the corner this year or in '09, and how much earnings visibility any of us have and particularly you have, please.

we hope to be able to provide at Citi day a good sense of what our long term view is on our financial molds.

I'm very sympathetic to the difficulty you're having.

There are some big blocks you can look.

A if you took the marks out of the markets and banking business that it impacted us significantly that our revenues would have been roughly flat.

Obvious on page, I think it's page 2 of the deck, I talked about a number of charges, which if you roll those back into pretax income you could do some kind of estimate of what the run rate would be for the company and would it give you a little bit of sense of what our core earnings might have been during the course of first quarter but we hope to do good job of kind of talking about the steady state company with the core businesses when we get together on Citi day.

As regards to reserving, I think I carefully said that we had -- we feel very comfortable that we're properly reserved for the losses that are embedded in our portfolio but we're watching the real estate and credit side of this thing very carefully.

You can see that historically there have been increases in credit card losses that have happened during the course of cycles like these and this cycle could be particularly difficult if the real-estate issue is compounded by significant increases in unemployment.

We haven't really had cycles where both of those factors were happening in magnitude at the same time, and that could result in losses that extend beyond where we've seen historical levels go.

We are in unprecedented territory from a real-estate standpoint.

We've tried to slice and dice as many ways as we could, by broker channels, amount of documentation to give you the maximum amount of transparency but we are uncharted territory.

There were a couple times as I went through that detail where I emphasized that we could, in fact, facing head winds, resulting from these in creases, and that is certainly a possibility.

And we are dedicated to ongoing reengineering.

There's going to be some dispositions that are going to take place in this quarter as in future quarters as we had in this quarter, and in this quarter the amount of income from dispositions actually exceeded the amount that we took in severance charges and I don't know whether that will happen perfectly in all of the quarters that we have going forward, but we obviously are making an effort to be thoughtful about when those severance charges hit and the timing at which we decide to sell certain of our businesses, and so we're going to try and operate the business in such a way that provides some consistency going forward but nonetheless you're right in what you said about noise.

Operating leverage is going to be a difficult thing to measure us on for awhile.

For a couple of reasons.

We're in the active process of divesting businesses, and that's a lumpy process almost by definition.

There's no assurance that the amount of marks that we have taken in this quarter are finished.

We're three quarters into this.

I think we have substantially reduced our amount of risk but there's also the prospect that you could have additional marks, and that throws the calculation of that number pretty much out the window.

What I would say is that I think you should hold us accountable for a couple things that we make significant progress on headcount and that we make significant progress that is discernible in our numbers on expenses.

Those are things that you should be able to see if we're doing a good job on reengineering.

I think for now that's going to have to be the best way to think about our progress on expense management.

Could I have one last, please?

When you talk about noncore assets, just conceptually how big could a noncore asset be?

Well, I guess the way I would think about it is, we've been engaged in a pretty significant effort of selling business for the last little while.

You have seen what we have sold.

I said that you should expect the same kind of a pace going forward in future quarters.

And so I'd think about it roughly in that context.

In aggregate, taken over a long period of time, that's a fair amount of asset reduction.

And as important, Meredith, on investor day, at least you'll know what our core assets are.

That will give you guidance on the other side.

Thanks so much.

Your next question will come from the line of Betsy Graseck with Morgan Stanley.

Thanks.

On the leverage in the investment bank, could you give us a sense as to where you feel you stand on that and how you see yourself trending?

Do you anticipate further de-leveraging, or do you feel that you're done for now?

I think we're going to continue to work down those exposures, and a way to refer to that is de-leveraging, but I think we're going to continue to work away it at that.

Some of these positions we actually feel very good about.

So I talked in some detail about the remaining CDO positions that we have, and I think it the's very important that there was the chart that I showed that talked about the collateral position that we have against those positions and the amount of delinquencies against various types of collateral.

We feel pretty good about those positions.

Leveraged loans have now been marked down pretty significantly and we see pretty good opportunity at these pricing levels to hold those kinds of positions to maturity.

That being said, I think we're very dedicated to -- the word I'll use is narrowing the guardrails here a little bit so that the inherent volatility that we have on any individual position is not as large as the inherent volatility that we've had historically.

So whether you call that de-leveraging or whether you call that just narrowing the risk parameters around the warehouse or carry trade positions that we have, I think we're very dedicated to trying to move those into a category that will expose us to less volatility from shocks in the environment.

Okay.

And on the headcount, is any of the headcount numbers related to the businesses that you will be exiting?

Yes, obviously so far not, because we've just -- real business divestitures have just happened, but the eventual headcount numbers will be what our real headcount numbers are.

It would include divestitures, it would include if we offshored activities and moved jobs outside the company, it would include all of those activity.

We'll report to you what our real underlying headcount numbers are.

So the 13,200 in headcount does come with some top line associated with it?

Does it come with some top line associated with it, that's correct.

I'm just trying to estimate what expense falls to the bottom line.

It's very accurate.

It's a small portion of the number that we're talk about here, but does it come with some top-line impact associated with it.

Lastly, on Japan, could you give us an update as to how you're feeling about the reserve ratio that you have for your Japanese consumer loan business relative to domestic peers?

The domestic peers after different accounting regime and they have taken very large multiyear reserves and it's not U.S.

GAAP to be able to do that.

We have been very vigilant in managing that exposure and each quarter we evaluate exactly what our position is and we are very careful to take the reserves against that, that are necessary.

This is a difficult business environment.

There are no easy solutions here, no silver bullets, and our intention is to manage this as effectively as we can and to ensure that we're reserving each quarter for whatever exposures evolve.

This happened to be a quarter where there was not a lot of news around that business, fortunately, but that shouldn't take away from the fact that there's still risk associated with that.

But we're just managing it.

As I said in my commence, it's in a difficult environment.

We're going to continue to manage it, reflecting the difficulty that surrounds it.

Just to make sure I understand, you're limited to a one-year look forward as opposed to a cum loss expectation?

That's essentially correct.

Thanks.

your next question will come from the line of James Mitchell with the Buckingham Group.

Good morning.

Good morning.

Could you maybe just two quick questions.

One on the CDO, the ABCP paper.

Obviously it's older vintage.

Can you speak to the duration of that portfolio and at would point would you expect if you aren't seeing material actual losses start seeing some time value act crease into the valuation of those assets?

It's about four years, about the duration of the portfolio.

From today or when they were originated?

Going forward.

That's helpful.

And how much in civ assets do you have left on the backs?

Let's see, we're down by $9 billion so the total is 47.

47 now.

Okay, great, thank you.

Your next question will come from the line of William Tanona with Goldman Sachs.

One question.

On the alt-A portfolio, obviously you guys have $22 billion there, and looking at the writedown of 1 billion, when you compare that to other industry participants who have taken things down to 70 cents on the dollar, it just seems like it's a little light.

I don't know whether we're just looking at that incorrectly, or is there hedges involved, or is there something we should be look at differently or comparing that 1 billion to the 6 billion as opposed to the available for sale?

Just trying to get a sense why that write-down was so light relative to your peers.

it's the last point that you made.

If you look on the chart we split it out into available for sale versus trading.

Obviously we do have some hedged positions against the trading book but it's the all available for sale versus the trading.

So we took 1 billion in writedown against the trading book essentially.

$120 million was associated with the 15.4, the larger in the top right-hand side of slide number 19, 120 million of the write down was associated with the 15.4.

The remainder was associated with the 6.7.

Okay, thank you.

Your next question will come from the line of David Hilder with Bear Stearns.

Good morning.

Two separate questions.

Sorry.

Looking at that time chart on page 12 in your presentation, you mention that of the nature of the credit card portfolio in the U.S.

has changed a bit over time.

How relevant do you think the prior maximums are, as we look tore ward to what a potential peak write-off ratio might be?

We do have private label portfolios that are bigger today than we had in the earlier cycles, and that's an important difference.

If you look in the supplement you can actually get a pretty good breakout of the amount of private label versus the bank card.

The private label portfolios do have losses.

They have higher net interest margin as well but they do have higher losses.

So that mix change will cause the number, all else being equal, should cause the number to be higher.

That said, I think it's important to point out that the real high points that you Zion '05 and '06 were driven by unusual factors.

So the '05 was driven by a private label portfolio where we had some unusual losses right after acquisition, and the '06 spike was caused by the anticipation running up to the bankruptcy legislation and the Katrina reserves that we took so those two real high spikes I think are not necessarily indicative things that one should plan off of.

This is a very, very difficult thing to do.

We provided this information to give you the best look at kind of what the ranges might be, but this particular situation, economic situation, is different than others that we've confronted in the past.

And so none of this is necessarily dispositive about what the eventual outcome is going to be but I think does it give you a handle on where things have been historically with all the caveats that you've rightly pointed out about looking at the data.

Separately, on page 7 of the supplement, it looks like there was a negative swing of about 2.7 billion in accumulated other comprehensive income.

Wondering if could you break out what the major sources of that were.

it's primary funding essential.

We obviously have interest rate hedges to try and protect us from negative surprises in the environment, and obviously there was a -- interest rates have improved somewhat during the course of the quarter, and so that's an impact on that.

So we also have losses in our AFS book which at this point are not fully recorded in our regular income statement, and in addition to the losses on those interest rate positions, the losses that we'd have on those AFS positions are recorded through that particular line item, OCI.

But those would have been the two biggest components rather than currency?

Those are are the two biggest components.

Next question, Larry Greenberg with Langen McAlenney.

What portion of your CDO portfolio has EOD language allowing you to liquidate, and in cases where you can what factors govern your decision?

And in cases where perhaps you have liquidated, are the levels received consistent with the written down valuations?

In answer to the first question, I don't actually know the answer.

I'm sure Rick Stucky, if he were here, could give us an answer but I don't know that.

I tell you what we do in this process.

I went through a long explanation of how we actually do the valuation of these securities to ensure that we're properly marking these.

That said, we also look at the underlying trading value of the collateral, and we cross reference the underlying trading value versus the positions.

You can't use that to value because the collateral in trading covers a relatively small portion of the total so it's not necessarily representative of the value but where we can we cross reference that.

I can assure you, having completed that cross referencing process, we're very comfortable that the marks represent what observable trades may be in the environment.

Do you have any examples of where there's been liquidations and what that has amounted to relative to valuations?

Again, I'm not -- I don't have the detail on this one to offer to you.

We have, as you know, we have a team under Rick Stucky's leadership that is very focused on managing our exposure down here.

There's a lot of activity that has taken place to try and hedge particularly our highest risk exposures here but I'd be gore stating to say that I knew the detail of it or that it would make sense for us to disclose it frankly.

Fair enough.

Thank you.

And this morning's final question will come from the line of Jeff Harte with Sandler O'Neill.

Good morning, guys.

Good morning, Jeff.

Can you talk a little bit about the loan growth you're seeing on the commercial side of the business?

And I suppose I'm curious as to whether -- what's driving that?

Are you starting to see lines of credit being drawn down and things like that?

No.

It really is -- I mentioned this a little bit.

If you turn to page 7 of the supplement and kind of step down through some of the categories here, you see, for example, brokerage receivables that are up a fair amount.

So part of this, these are very idiosyncratic things.

Because of the trading in the quarter we did a higher amount of treasury trading that has a longer settlement period associated with it.

That had an impact on that number during the course of the quarter.

We had revaluation gains against our trading account.

Those had an impact on the numbers in that particular column.

And so they are very I had idiosyncratic factors that are driving each of those individual line items.

If you were to take the real day to day management of assets, it has been very, very tight, and I think particularly our markets and banking team has done an outstanding job of managing the exposures that they have and eliminating less productive areas where we have capital invested.

That's a long-term process.

It doesn't happen overnight.

We are still going to be working on this dill Gently I'm sure a year or two from now.

But the team itself has made good progress, and these -- the areas where you see increases here generally are caused by these idiosyncratic factors that happen to impact us in the quarter.

In aggregate, taken over the last two quarters, assets are down nicely.

You can see how the matched book, for example, is down both on the assets as well as the liability side here.

So we feel pretty good about how these assets are managed.

We haven't seen anything in terms of drawdown of credit lines that would be out of pattern in any way in particular.

And can you talk a little bit about the net interest margin?

Some nice expansion we saw.

You reference cost of funding being down and that kind of a big part of driving it, but also in the credit card comments you talked about LIBOR versus the fed.

How should we be looking at the net interest margin going forward?

Is that expansion sustainable snow.

This was a little more than I think you should plan on going forward.

As you know there's a part of this that comes from the investment banking, a part that comes from the consumer bank.

If more of this benefit had come out of the consumer side I'd feel better saying it's sustainable at this kind of movement up.

A lot of this improvement in this particular quarter came out of the trading parts of the CMB, and the markets and banking business, and so I don't think you should extrapolate off of this kind of improvement.

We could even see some backtracking against that as we settle down to more normalized levels.

Obviously we had nice improvement in the quarter but I wouldn't necessarily use this as the basis from which you would do a projection.

Okay.

Thank you.

Well, thank you all for listening today.

If you have any questions regarding what has been discussed today, please call Investor Relations.

This concludes the call.

Ladies and gentlemen, this does conclude Citi's first quarter 2008 earnings review.

You may now disconnect.