花旗銀行 (C) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Citi's third-quarter 2008 earnings review, featuring Citi 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.

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

Mr.

Freidenrich, you may begin.

Thank you, operator.

Good morning.

Thank you all for joining us.

Welcome to our third-quarter 2008 earnings review.

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

You may want to download the presentation if you have not already done so.

The financial supplement is also available on the website.

Our Chief Financial Officer, Gary Crittenden, will take you through the presentation.

We will then be happy to take any questions you may have.

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

Citi'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 Gary.

Thank you, Scott, and good morning to everyone.

Thanks very much for joining with us.

We have slides that are available to you on the website and as usual I'm going to walk through the slides here, so I will start with slide 1.

Slide 1 shows you our consolidated results for the quarter.

There were three factors that drove this quarter's results -- higher consumer credit costs, continued losses related to the disruption in the fixed income markets, and a general economic slowdown.

To summarize our third-quarter results, our net revenues declined 23% year-over-year and 8% sequentially.

Expenses were up 2% year-over-year.

Excluding, however, the impact of acquisitions, divestitures, and the press release disclosed items from both quarters, expenses were down 2% versus last year.

Sequentially, expenses were down by $1.2 billion.

The cost of credit was up by $4-point billion(Sic- Presentation slides) over the last year primarily due to higher net credit losses of $2.5 billion and a $1.7 billion incremental net charge to increase loan loss reserves.

The majority of the increases were in our North America real estate and cards businesses.

These factors drove a loss of $2.8 billion for the quarter or a loss of $0.60 a share.

This EPS is based on a basic share count of 5.3 billion.

On a continuing operations basis, we had a net loss of $3.4 billion or a loss per share of $0.71.

Slide 2 highlights the major P&L items this quarter, and I will go into each one of these in more detail.

First, consumer net credit losses were $4.6 billion and we recorded $3.2 billion in charges to increase our loan loss reserves in the Consumer Banking and cards businesses, both in North America and in certain countries internationally.

Second, $4.4 billion in marks in the Securities and Banking business, details of which I will discuss further and are outlined in your deck on slide 26.

Third, a $1.4 billion downward adjustment in the valuation of the interest-only strip in our North American's Cards business, driven primarily by higher expected losses flowing through the securitization trust.

Fourth, write-downs and expenses on auction-rate securities of $712 million split equally between fixed income markets and Global Wealth Management.

Of this amount, $612 million against revenue is related to the legal settlement announced in August.

Additionally, we paid $100 million in fines recorded as expenses, also related to the settlement.

Fifth, repositioning charges of $459 million related to our ongoing reengineering efforts.

Finally is a $347 million revenue gain on the sale of CitiStreet, which we announced in May.

Slide 3 shows some of our key revenue drivers.

In some cases we have chosen to curtail some of these key drivers, and in other cases we have seen a slowdown due to weakening market conditions.

For example, as the environment for consumer credit continues to deteriorate, we have taken many actions such as tightening underwriting criteria and reducing credit lines, which has slowed loan growth in most regions.

Turning to deposits, in North America end of period retail and corporate deposits were up 6% over last quarter, driven primarily by higher deposits in Transaction Services.

As the slide shows, deposits in EMEA declined 6%, primarily driven by price competition and customer rebalancing for deposit insurance coverage, especially in the UK.

In Latin America and Asia, excluding the impact of foreign exchange, deposits are up 1% and 4%, respectively.

Overall, consumer deposits outside the US are essentially flat, excluding the impact of foreign exchange.

In Transaction Services, total average deposits were up 7% versus last year and virtually flat sequentially.

End of period deposits, however, were up by $30 billion versus last quarter.

In the second half of September, which marked extreme uncertainty and unprecedented events in the markets, our GTS business had deposit inflows of approximately $55 billion.

The inflow of deposits in the last two weeks of September is particularly indicative of the flight to quality that occurred.

Card purchase sales in North America, however, have declined as we have seen higher spending on consumer necessities such as gas and food offset by a decline in discretionary spending.

The decline in investment asset under management is a result of weaker equity markets globally, which has resulted in declining asset values.

The graph on slide 4 shows the nine-quarter sequential trend of net interest margin for the Company.

Net interest margin for the quarter is 3.13%.

Last quarter, we reported a net interest margin of 3.18%.

However, when adjusted for the sale of our retail banking operations in Germany, last quarter's net interest margin would have been 3.14%, as is shown on the slide.

Benefiting net interest margin in this quarter was a decrease in overall funding rates versus the prior quarter, which reflected the Fed's rate cuts which occurred during the second quarter.

Offsetting these benefits were decreases in yields on our trading portfolio, only partially offset by increases in yields in Transaction Services and on our corporate loans.

GAAP assets were down another $50 billion versus last quarter, making the total reduction now $308 billion versus our peak in the third quarter of last year.

Average interest-earning assets were down approximately $81 billion, driven by a decrease in Trading Account assets and loans.

Slide 5 shows the components of our year-over-year decline in revenues.

The blue bars on the left and the right show our reported revenues, while the areas within the dotted lines represent the marks that we have taken in our Securities and Banking business.

Adjusted for these marks, revenues for the quarter showed a $3.5 billion decline versus last year.

One could classify this revenue decline into two categories.

The first is the market-sensitive category where the quarter's results are not necessarily indicative of the future revenue potential.

In other words, if market conditions improve, then trading and transaction volumes, client activity, and therefore overall results could all resume at higher levels.

The businesses most affected by this are our Securities and Banking business and our Global Wealth Management businesses, where revenues were down $1.2 billion and $355 million, respectively.

The second category is the impact on revenue from credit losses in our securitization trusts.

I will take you more detail on this in our outlook, but as I have said before, credit card losses may continue to rise well into 2009.

This means that revenues in that business may continue to be adversely affected in that time frame in the form of reduced servicing fee revenue due to increased credit losses in the trusts and the continued downward adjustments in the valuation of the interest-only strip, which has a remaining value of approximately $1 billion.

This quarter, $2.5 [billion] of the total decline was related to securitization activities in the North American card business.

We also recognized a $729 million gain in the prior-year period related to the sale of Redecard shares.

Offsetting these negative results were higher revenues in Consumer Banking and record revenues in Transaction Services.

Consumer Banking revenues were driven by 6% growth in North America, primarily due to higher net interest revenues.

Transaction Services revenues were a record for the 20th consecutive quarter on new client wins and the higher end of period liability balances.

I'm going to turn now to slide 6.

This shows the trend in our expense growth.

Expenses in the quarter grew 2% versus last year.

This quarter there are three components computing to expense growth.

First, 3 percentage points come from $459 million in repositioning charges related to a number of activities, such as headcount reductions.

We will continue this process as we make progress on our reengineering program.

Second, there is 1 percentage point from acquisitions and divestitures.

And third, there is a 1 percentage point contribution from the $100 million fine related to the auction-rate securities settlement that was recorded in the current quarter.

In the prior period, there were two components which offset each other.

They include, first, a $150 million write-down of customer intangibles and fixed assets in the Japanese consumer finance business, which lowered expense growth by 1 percentage point.

Second, there was a downward adjustment in the incentive compensation as the full year outlook for the business changed substantially in that quarter last year.

The difference in this quarter's incentive compensation accrual versus that of the prior period accounted for 1 percentage point of expense growth.

Combining all of the above factors, expenses on a business-as-usual basis were actually down 3% in a year-over-year comparison, as the benefits of our reengineering efforts are becoming apparent.

Foreign exchange contributed 1 percentage point and is reflected across all of the categories that I just mentioned.

Sequentially, expenses declined for the third quarter in a row, and were down 8% or $1.2 billion.

Over half is due to lower incentive compensation in the current quarter and the remainder is largely attributable to the benefits from our reengineering efforts.

Slide 7 shows the trend in our headcount.

This graph indicates that we have continued to reverse the year-over-year headcount growth from the 12% to 16% range to now a decline of 5%.

This quarter's repositioning charges relate to nearly 6,300 in headcount reductions.

In the last four quarters, we have recorded cumulative repositioning charges of approximately $2.1 billion relating to approximately 22,000 headcount reductions.

Of that 22,000, nearly 12,900 have already been reduced from our headcount and with the remainder to be expected to be realized over the next 12 months.

CitiCapital and CitiStreet contributed 3,700 reductions to the total year-over-year number.

Not included in these numbers are the sale of Citi Global Services and the German retail banking operations.

The Citi Global Services sale will reduce headcount by approximately 12,500; and that should close in the fourth quarter.

The sale of our retail banking operations in Germany, which was announced last quarter and is not yet closed, should result in an additional headcount reduction of about 5,600.

I am turning now to slide number 8, where I will discuss credit.

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

The total cost of credit increased by $4.2 billion with $2.5 billion being driven by higher net credit losses, and $1.7 billion being driven by higher loan loss reserve builds.

First, higher net credit losses were driven primarily by the Consumer Banking and cards business in North America.

Together, they comprise $1.7 billion or 70% of the total increase in NCLs for the quarter.

In North American residential real estate, net credit losses were higher by $1.1 billion over last year.

Slides in the appendix will show you that there has been an increase in losses and delinquencies across the mortgage portfolios in North America.

In North American cards, net credit losses were up by $311 million, reflecting the deterioration of flow rates, higher bankruptcies, rising unemployment, and lower recoveries during the quarter.

Net credit losses in the personal and auto loan portfolios increased by $279 million in the aggregate.

The net charge to increase loan loss reserves was $3.9 billion for the quarter, higher than the net charge in the prior-year period $1.7 billion.

Approximately one-third of the total build was in North American residential real estate to reflect an increase in our estimates of the losses inherent in that portfolio.

With the addition to reserves in our North American mortgage business, we were at a 15-month coincident reserve coverage ratio for the residential real estate portfolio; 15.2 months and 14.7 months of coincident reserve coverage for our first and second mortgage portfolios respectively.

In North America Cards, we added $481 million net to our loan loss reserves.

More than half of this build relates to balances coming back on to the balance sheet as we chose to retain these balances instead of renewing the securitizations at significantly higher funding costs.

The remainder was in part due to a weakening of lending credit indicators, including rising unemployment, higher bankruptcy filings, and the continued decline in the housing market.

The rate at which customers became delinquent has increased significantly, as has the rate at which delinquent customers are written off.

These trends and other portfolio indicators led to a build in reserves for the North American Cards business in the quarter.

ICG credit cost increased by $733 million, driven by an incremental net charge of $442 million to increase the loan loss reserve for specific counterparties, and due to a weakening in the credit quality of the corporate loan portfolio.

Net credit losses were higher by $291 million due to loan sales that took place during the quarter.

Now slide 9 is a variation on a slide that I have shown for the past two quarters.

It charts the net credit loss ratios of our North American Cards and first mortgage portfolios as well as the unemployment rate.

Here the slide is divided between the early 1990s recession and its aftermath in the left-hand box, and the current period beginning with the first quarter of 2007 in the narrower box on the right.

As you can see, the blue and red line at the top on the left-hand side shows the net credit loss rate for our Cards business over these two periods, while the green checkered line at the bottom shows the same for our first mortgages.

The black line shows the unemployment rate for the time period.

If you look at the left-hand box, you will notice two things.

First, it took 10 quarters for the Card losses to reach their peak rate of 6.4%.

Mortgage losses, while growing at a slower rate, peaked a few quarters after the peak of Card losses.

Second, losses for both Cards and first mortgages did not return to their pre-recession levels for several quarters after the unemployment rate returned to those levels.

This is particularly so with first mortgages, where losses remained elevated well into the mid-1990s.

Based on our data points, one could conclude that card losses rise and fall in concert with unemployment rates.

Mortgage losses on the other hand generally have a more protracted cycle of increases and then declines.

Looking at the chart on the right, you can see that the NCLs in both categories are increasing more rapidly than they did in the early 1990s, while the increase in unemployment rate continues to lag the increase in card losses.

Another point worth noting here relates to the mix of Cards in the portfolio.

As shown in the yellow box on the left, Citi branded cards comprised the vast majority of our portfolio before 2004.

As I said last quarter, this portfolio historically has had different loss characteristics from retail partner cards.

Since 2004, we have continued to add retail partner cards to our portfolio mix, which have significantly higher losses but, importantly, also higher yields than bank cards.

At the end of the third quarter, retail partner cards comprised over one-third of the portfolio.

While it is obviously impossible to know if this historic relationship will hold in this environment, it is possible that we may see loss rates exceed their historical peaks.

For the Cards portfolio, we are now into the fourth consecutive quarter of increasing losses; and for the mortgage portfolio, we are into the sixth consecutive quarter.

Our assumptions have been stress-tested with unemployment rates ranging between 7% and 9% into 2009.

Obviously, such unemployment levels could result in significantly higher credit costs well into 2009.

We have obviously carefully planned both our capital and our costs with a focus on this range of outcomes.

It is harder to draw conclusions on the losses in the mortgage portfolio based on historical patterns.

However, one could say that mortgage losses are generally seen to have elongated cycles with fairly long tails.

Last quarter, I told you that we reduced our marketing expenditure in Cards, particularly on new accounts, reflecting the current environment.

We also tightened underwriting criteria such as initial line assignments, particularly in certain geographies where we can use mortgage data to enhance our decision-making capabilities.

While these actions continue, we are also taking specific actions in our US mortgage business that are tailored to an individual borrower's profile.

One of our goals is to help certain at-risk borrowers to refinance their mortgage into GSE and FHA eligible products, which will allow us to originate and sell these loans instead of having to fund them on our balance sheet.

Our preemptive loan refinance program is called [Portfolio Express].

It is in its early stages and is intended to ensure that these borrowers can stay in their homes.

In this manner, customers are being prequalified to refinance into an agency-salable product with payment and rate benefits.

To ensure we reach these individuals in a timely manner, we deliver the offered via overnight mail and follow up with phone calls and e-mails.

We have added significantly to our loss mitigation staff, doubling it from the beginning of the year through mid-September.

We expect to increase staff by another 50% from mid-September to year end.

We have also provided additional training to default servicing and collections staff, to return at-risk borrowers that we are servicing to performing status.

So far, this and other mitigation efforts have shown substantial progress.

Using a combination of extensions, forbearance, reinstatements, modifications, and other strategies, we have restructured over 64,000 mortgage loans just in the second quarter and over 120,000 in the first half of the year in our servicing portfolio.

The chart on slide 10 shows our combined exposure to credit cards and Consumer Banking loans by our top countries outside the United States.

The first column shows a country's ranking by total average net receivables.

The next column shows the country's ranking by its contribution to the change in net credit losses from the second quarter of this year.

As you can see from the chart, many of our largest portfolios remain fairly stable.

For example, Korea accounts for 13% of our total International Consumer loans, making it the largest portfolio outside of Mexico.

Its share of NCLs, however, was a relatively small 2%.

Korea is predominantly a retail branch business; and many of the loans originated there are based on face-to-face relationships in our 218 retail bank branches.

This is also true of other countries like Taiwan and Singapore, which are predominantly retail branch banking businesses.

The NCL ratios and the contributions to the increase remain low in these countries.

Conversely, Brazil, which accounts for only 3% of our loans, comprised 19% of the total NCLs this quarter and contributed 24% to the sequential increase.

It also had an elevated NCL ratio of 14%.

Taken together, these countries that we have circled -- Mexico, India, and Brazil -- are responsible for 74% of the sequential increase in NCLs despite comprising only 23% of the average net receivables.

These losses reflect continued deterioration in India and simultaneous portfolio growth and asset quality deterioration in Mexico and Brazil.

An important point to note here is that some of the places that did not make significant contributions to the NCLs this quarter are beginning to experience a slowdown in their economies.

Countries including Spain, Greece, Italy, and Colombia are places where we are seeing losses accelerate although the portfolio sizes are relatively small compared to those in Mexico, India, and Brazil.

The degree and speed at which the downturn in the US economy spreads overseas will in some measure determine the extent of our International Consumer losses over the next several quarters.

Within the countries experiencing current and expected deterioration, we are implementing risk mitigation programs with the same vigilance that we are in the United States.

Now slide 11 shows the historical trend of our asset balances on the left and a number of our key capital ratios on the right.

We have made good progress on asset reduction.

Since last year's third quarter, we have reduced our assets by over $300 billion.

During the first half of 2008, additional capital raising and diligent management of the balance sheet caused all of these ratios to improve.

This quarter, not surprisingly, our capital ratios have declined.

Our sequential asset reduction of $50 billion benefited the ratios, but was offset by negative earnings.

In the last five quarters, our loan loss reserve was increased by $13.5 billion net, and we have added approximately $50 billion in capital.

Combined, these actions have strengthened the balance sheet of the Company.

The total allowance for the Company stood at quarter end at $25 billion; and total capital, including Tier 1 and Tier 2, was about $175 billion.

We are also on track to realize the gain from the sale of our German retail banking operations, which is expected to close in the fourth quarter.

Also benefiting our capital will be the newly announced plan by the US Department of Treasury, the FDIC, and the Federal Reserve.

As I just mentioned, we have already strengthened our balance sheet without having assumed any such benefit.

Therefore, this is going to be incremental to the efforts that we already have in place.

Under the terms of this plan, the Treasury will purchase $25 billion in preferred stock and warrants from us.

In addition to the $25 billion investment, the plan includes an FDIC guarantee until June of 2012 on senior unsecured debt issued before June 30, 2009, in amounts up to 125% of our qualifying debt under the terms of the plan.

Also under the terms of the plan, the Fed will buy three-month commercial paper.

Taken together, these actions by Treasury should be significant for the financial system and should help restore investor confidence.

While we have significantly strengthened our balance sheet already, the Treasury's actions will further our ability to act on client and other opportunities as they become available to us.

Our liquidity position also remained very strong in the quarter.

At the end of the quarter, we had increased our structural liquidity, which is defined as equity, long-term debt, and deposits.

As a percentage of assets, this ratio increased from 55% of assets one year ago to approximately 64% at the end of the third quarter.

At quarter end, we had extended the maturity profile of our Citigroup senior unsecured borrowings to a weighted average maturity of seven years.

We also reduced our commercial paper program from $35 billion at the end of $2007 to$29 billion.

Our reserve of cash and highly liquid securities stood at approximately $53 billion at the end of the quarter, up from $24 billion at the year end 2007.

Continued deleveraging and the enhancement of our liquidity cushion have allowed us to fund the maturing parent Company debt and broker-dealer debt obligations significantly in excess of 12 months without having to access unsecured capital markets.

Now slide 12 shows the results of our Global Card business.

Managed revenues in North America were up 7% due to 4% growth in managed receivables, reflecting a slowdown in payment rates in North America and spread expansions.

Outside North America, excluding the $729 million gain on Rede shares in the prior year's quarter, growth in new accounts, purchase sales and average receivables drove revenues up 14%.

Expenses decreased 1% despite a 1%-point contribution from repositioning charges.

On a reported basis, revenues were down 40%, primarily driven by two factors.

First, higher current and expected losses and higher funding costs in the securitization trust in North America, which also drove a downward adjustment in the valuation of the interest-only strip.

Second, the fact that last year's results included a $729 million benefit related to Redecard.

Higher managed funding costs are due to significant widening of credit spreads in the asset-backed and commercial paper market.

Higher credit costs reflect deterioration in the consumer credit environment both in North America and in certain parts of our portfolio in the regions.

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

Now, slide 13 shows our results in our Consumer Banking business.

Revenue growth was 2% and without the impact of our Japan Consumer Finance business.

Revenues in North America were up 6% reflecting higher net interest revenues, primarily driven by personal and residential real estate loans, and by increased deposits spreads, partially offset by a $192 million loss resulting from the mark-to-market on the MSR and related hedge.

Similar to last year, the MSR loss was primarily driven by volatility in the markets, which caused us to continually rebalance the hedge, as many of the assumptions diverged from market indicators.

Revenues in all regions outside of North America declined due to a slowdown in investment activities, spread compression, and increased competition.

Expenses were down 2% with repositioning charges contributing 4 percentage points, fully offset by the write-down of consumer intangibles and fixed assets in the Japan Consumer Finance business in the prior-year period.

Excluding these and the impact of acquisitions, expenses would have decreased by 3%.

Excluding Japan Consumer Finance, we reduced branches by 107 net in the last 12 months.

In our Consumer Banking business in North America, we have added approximately 1,200 collectors in the last 12 months.

Net income was affected primarily by higher credit costs in North America and the residential real estate business.

I think on the prior slide, I misstated the total amount of Tier 1 and Tier 2 capital.

I think I said $175 billion and I think the correct number is $137 billion.

Let me turn now to slide 14.

Slide 14 shows our results in our Securities and Banking business.

Revenues were a negative-$81 million versus $539 million last quarter.

We reported a net loss of $2.8 billion, $89 million below last quarter.

The seasonal second to third quarter slowdown affected most of the business, but there were improvements versus last year's third quarter in certain areas.

Interest rate and currency trading posted strong results, primarily driven by extreme volatility in the foreign exchange and rates markets.

In prime finance, while hedge fund customers continued to delever, prime finance fees and interest-bearing balances continued to grow.

We also made good progress on winning new clients in the disrupted market environment during the quarter.

More broadly, however, continued disruption in the fixed income markets, lower equity volumes, and fewer M&A transactions being closed due to the financing uncertainty resulted in a decline in the underlying business activities.

Expenses increased 21% versus last year but declined 13% in a sequential-quarter comparison.

Last year's third quarter included a significant downward adjustment to incentive compensation as the full year outlook for the business changed substantially in that quarter.

The sequential decline in expenses reflects ongoing rightsizing efforts to reflect the current environment.

Headcount in the business declined by 1,158 since last quarter and by approximately 5,000 over the last 12 months.

Securities and Banking credit cost increased by $734 million, driven by an incremental net charge of $447 million to increase loan loss reserves for specific counterparties and due to a weakening in credit quality in the corporate loan portfolio.

Net credit losses were higher by $287 million due to loan sales.

Net income was a negative-$2.8 billion driven by marks and write-downs in the business.

Now slide 15 is a chart that we have used in prior quarters.

It shows the write-downs that we have taken against each category of our direct subprime exposure.

The total write-downs including related higher credit costs for the quarter were $800 million as shown near the bottom -- as shown towards the bottom of the slide, including $470 million taken against the lending and structuring position of $4.3 billion.

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

Moving to the top of the table, where we recorded a $281 million write-down against the net super senior direct exposure of $18.1 billion shown in the middle of the first column.

We started the quarter with total subprime exposure of $22.5 billion, as shown at the bottom of the first column.

There have been several changes in the methodology for valuing our super senior exposures that are worth mentioning.

The discounted cash flow methodology remains generally consistent with what we did in the prior quarters, and was described in detail in the first-quarter earnings call.

As we have previously said, the model is continually subject to refinement and enhancements.

The home price appreciation assumption that we are using in our valuation methodology for this quarter has changed from the last quarter and now reflects a cumulative price decline from peak to trough of 32%.

The assumption reflects price declines of 16% and 10%, respectively, for 2008 and 2009, with the remainder of the 32% decline having occurred before the end of 2007.

The projected 32% decline peak to trough is based both on home affordability as well as other factors, such as the large overhang of homes in foreclosure, which has further depressed prices.

We have also changed the index on which we base our home price appreciation projections from the S&P Case-Shiller Index to the Loan Performance Index.

We made this change because the Loan Performance provides more comprehensive data, although the Loan Performance and the S&P Case-Shiller national HPIs have tracked each other closely in the past.

In addition, we have updated our mortgage default model to incorporate mortgage performance data from the first half of 2008, a period of sharp home price declines and high levels of mortgage foreclosures.

As I described on the last earnings call, our valuation methodology uses a discount margin that is calibrated to the underlying instrument, such as the ABS Indices and other verified cash bond markets marks.

To determine the discount margin, we apply our mortgage default rate to the bonds underlying the ABS Indices and other referenced cash bonds, and solve for the discount margin that produces the market prices of those instruments.

Using this methodology, the impact of the decrease of the home price appreciation projection from a negative-23% to a negative-32% results in a decrease in discount margins.

Taken together, these two factors directionally offset one another.

We also changed the way we value the high grade and mezzanine positions for the quarter from model valuation to trader prices based on the underlying assets of each high grade and mezzanine ABS CDO.

Unlike the ABCP and CDO-squared positions, the high grade and mezzanine positions are now largely hedged through ABX and bond short positions which of necessity are trader priced.

We believe it makes sense for there to be symmetry in the way our long positions and our short positions are valued.

Additionally, there were a number of liquidations of high-grade and mezzanine positions during the third quarter.

These were at prices close to the value of trader prices.

The liquidation proceeds in total were also above the June 30 carrying amount of the positions liquidated, contributing a substantial portion of the profit for the high-grade and mezzanine positions in the third quarter.

We intend to use trader prices to value this portion of the portfolio going forward so long as it remains largely hedged.

With respect to mono lines, the credit value adjustment for the quarter was $919 million as is shown on the bottom of the slide.

At quarter end, our credit value adjustment balance was $4.6 billion; and the market value direct exposure declined to $6.6 billion from $8 billion in the second quarter.

I will turn now to slide 16.

Slide 16 provides vintage and rating data for each of the exposure types.

We showed you this table last quarter.

Let me highlight just a couple of changes.

First, in the ABCP category, the percentage of triple-A to double-A has declined from 71% last quarter to 62% this quarter, primarily driven by downgrades of the 2005 vintages.

Second, in the high-grade category, the percentage of 2006 vintages in the portfolio substantially declined.

This was due primarily to liquidations of the positions during the quarter.

As a result, the overall exposure has declined as well, but the mix has shifted towards a higher concentration of 2004 and 2005 vintages.

All of this has resulted in a change in the mark from 27% last quarter to 41% this quarter.

Finally, there are no material changes in the mezzanine exposure vintage and ratings mix.

I will turn now to slide 17.

It provides more disclosure on our Alt-A exposure, which stands at $13.6 billion at the end of this quarter.

Of that $13.6 billion, $10.2 billion is held as available-for-sale securities, in which we recorded a $580 million impairment charge in the quarter.

The remaining $3.4 billion is held in a mark-to-market portfolio where the marks for the quarter were $573 million net of hedges.

Moving to the box at the bottom of the page, we show you the market value of the portfolio relative to the face value and also provide vintage and ratings information.

A few points of importance.

First, in the AFS portfolio, approximately one-third of the portfolio is 2005 and earlier vintages; and three-quarters is rated double-A to triple-A.

That portfolio is marked at $0.67 on the dollar.

The trading portfolio is comprised of 11% 2005 and earlier vintages; 69% is rated double-A to triple-A.

That portfolio is marked at $0.63 on the dollar.

The trading portfolio marks that I have just mentioned do not include any residual or I/O positions.

Including these positions, the combined marks of the trading Alt-A portfolio would have been marked at approximately 15% or $0.15 on the dollar.

Slide 18 provides more detail on the four major drivers of negative revenue in the Securities and Banking business.

We have shown you a similar slide before, but this time we have replaced the Alt-A chart with one on our SIV.

For highly-leveraged transactions on the top left, our commitments totaled $22.9 billion at the end of the quarter, with $9.7 billion in the funded category and $3.2 billion in unfunded commitments.

During the third quarter, we had a $790 million pretax write-down on these commitments.

As the graph on the bottom left shows, our commercial real estate exposure is split into the same three categories we showed last quarter.

Excluding interest earnings, we recorded a $518 million write-down net of hedges on the portfolio subject to fair value assessment.

Moving to the top right, our SIV assets totaled $27.5 billion at the end of the quarter.

This quarter, credit spreads of financial institution debt instruments, which comprise approximately half of the long-term underlying assets of the SIVs, widened substantially.

The credit ratings on these assets, however, remained virtually unchanged from last quarter.

The $2 billion write-down reflects a significant spread widening during the quarter.

Finally on auction-rate securities, at third quarter end we held proprietary positions with a par value of $6.7 billion in our inventory and a market value of $5.2 billion as shown in the slide.

We recorded a write-down of $166 million on these proprietary positions in the quarter.

In addition, not shown on the slide, we have committed to purchase approximately $6.2 billion of auction-rate securities for which we have recorded a pretax loss of $306 million in this business, which represents half the difference between the purchase price and the market value of these securities at the time of settlement.

I'm going to turn now to slide 19.

In our Global Transaction Services business, revenues increased 20% to a record $2.5 billion.

This quarter marked the 20th consecutive record revenue quarter for the business.

Performance was driven by a strong transaction pipeline, and new wins, and continued growth in liability balances.

Expenses were higher by 5%, mostly driven by acquisitions, transfers, and FX.

Expenses are well below the revenue growth rate even as we continue to invest in our global platform.

Every region had had double-digit revenue and net income growth, with record revenues and net income in North America and in EMEA.

Total average deposits were up 7% versus last year and virtually flat sequentially.

Assets under custody are down 6% versus last year, reflecting a drop in asset values in global equity markets.

As I have already talked about, in the second half of September, which marked extreme uncertainty and unprecedented events in the market, our GTS business had deposit inflows of approximately $55 billion, which increased end of period deposits by $30 billion in a sequential-quarter comparison.

Clearly we saw a flight to quality and we were able to benefit nicely from that trend.

Slide 20 shows our results in Global Wealth Management.

Revenues were down 10%, reflecting a particularly challenging global market affecting both investment and capital market revenues.

In North America, revenues included a $347 million benefit from the sale of CitiStreet, which partially was offset by a $306 million write-down related to the auction-rate securities settlement.

In North America and in Asia, results were particularly reflective of the slowdown in capital markets activities.

Assets under fee-based management were down 19% due mainly to the adverse impact of market actions.

Deposit balances were up 4%, driven by growth in Asia and North America.

We saw net client asset flows of $3 billion in the quarter.

Expenses were down 4% due to lower variable expense and incentive compensation, partially offset by a $50 million charge related to declines in the auction-rate settlement.

Headcount in GWM was down by approximately 3,500 in this quarter, mainly reflecting the CitiStreet divestiture and the impact of reengineering programs.

Overall, the decline in net income mainly reflected the market-driven decline in capital markets revenue in the US and Asia, combined with the impact of declining client asset values on our fee-based revenues.

Slide 21 shows the results in our Corporate/Other and Discontinued Operations.

In Corporate/Other, improved revenue reflects lower funding costs and effective hedging activities, partially offset by funding of higher tax assets and enhancements to our liquidity position.

Net income reflects tax benefits contained at Corporate during the quarter.

Discontinued Operations reflects three major items, all related to the sale of our German retail banking operations, which is expected to close in the fourth quarter.

First, $112 million of net income from the business this quarter.

Second, a $213 million after-tax benefit related to foreign exchange hedging of the expected gain on sale.

This is an economic hedge, and an offsetting impact on the gain on sale will be recorded in the fourth quarter when the transaction is expected to close.

Finally, the recognition of a tax benefit of $279 million related to German tax losses arising as a result of the sale.

Now to wrap up, let me say a few words on our performance in the quarter and talk a bit about our outlook.

There are really four factors that drove results for the quarter and are related to the risk positions we hold, the economic environment or movements in the capital markets in the quarter.

First is the continued volatility in fixed income markets which has caused negative mark-to-market valuations, disrupted funding cost, and created widespread illiquidity.

We are managing this by lowering our risk positions aggressively, which has resulted in lower marks again for the third sequential quarter.

We have also built a strong capital and liquidity position and continue to rightsize our business to reflect the realities of the current economic environment.

To the extent that this will affect us in the future depends on the valuations of the risk premiums, which in turn are dependent on a return of liquidity in the markets and investor confidence.

The second area is consumer credit, which is affecting us primarily in Cards and Mortgages in the US and less so internationally.

Here I have discussed the many risk-mitigation strategies in place to manage our losses.

However, if unemployment rates continue to rise and there is continued deterioration in the economic environment, there are several possible outcomes, one of which is that Card losses could exceed their historical peaks and Mortgage losses could continue to grow.

Third, in this quarter, we are experiencing an unusually slow economic environment which affected a number of our businesses.

While third-quarter seasonal slowdown is normal, this quarter's activity was particularly affected by the volatility and lack of general investor confidence, as few transactions were being completed and investors continue to sit on the sidelines.

Fourth, the other factor to consider in thinking about future quarters is the degree to which our own credit spreads and those of our counterparties move from one quarter to the next.

To use two examples, you have seen the impact of these movements on the liabilities for which we elect fair value, and then also on our SIV positions this quarter.

To the extent the volatility in the market continues, we expect to see an impact on quarterly results from changes in credit spreads.

On those things we can control, we have made excellent progress, and we are going to continue this.

Assets were down by $50 billion sequentially, with a $48 billion reduction in legacy assets.

So in total now, our legacy assets are down by over $100 billion.

Expenses were down by $1.2 billion sequentially, the single biggest sequential quarter decline in recent history.

Headcount came down by 11,000 sequentially.

Our Tier 1 ratio was 8.2% and our liquidity ratio remains -- our liquidity position remains strong.

While the current market disruption presents many challenges for us, it also presents many opportunities.

We have positioned ourselves with a strong balance sheet and a liquidity base to avail ourselves of those opportunities, but will only do so in the most disciplined and methodological, as you have seen us do very recently.

That concludes the financial review of the quarter, and we are very happy now to turn to questions and answers.

(Operator Instructions) John McDonald with Sanford Bernstein.

Gary, first question on the government preferreds.

Where does that put you in terms of the cap, the maximum amount, that Tier 1 that can be composed of preferred?

Well, it essentially is a moot point.

If you treated these as normal hybrids, normal hybrid securities that we funded in the open market, we would be above our cap.

But because this equity is, by its very nature, deemed as Tier 1, it still factors into our Tier 1 calculation.

Okay, so the whole pie goes up, so it doesn't matter?

Yes, that's correct.

Okay.

Is the straight tangible to common equity ratio important to any of your constituents, rating agencies, regulators?

Is anyone tracking that?

You know, that conversation really never comes up in a regulatory session, in a rating agency session.

I have yet to have that question posed to me since I have been at Citigroup.

Okay.

The second question I have is on the international consumer credit.

It is hard for us to evaluate it and the outlook there.

Can you separate where you are having some rising losses because of seasoning, because of growth, where you have been growing fast; and where you are seeing economic stress in some of the international consumer businesses?

And maybe kind of separate regions and products.

I think maybe the best way to think about it, if you turn to page 10, the slide that I talked about a little earlier in the presentation, you obviously can see the split by business.

Outside the US, we were growing rapidly before we saw these type of increases in our net credit losses.

So, I would say that most of what you are seeing here is a fundamental deterioration in credit, and relatively little of this would be related to seasoning because our growth rate here has been going on for some time period.

What I think is important to note, however, is that it appears at least at this point to be relatively concentrated.

So it is concentrated, as I said, in Mexico, India, and Brazil.

On the right-hand side of that chart, you can see the percentage contribution that each of those made to the sequential increases in our NCL ratio.

So, while there is some deterioration outside the United States, at this point it appears to be fairly concentrated in a few places.

But generally, there is some deterioration in credit broadly.

You know, it turns out both the best opportunities for us and the places where you are going to have the possibility of having credit risk overlap.

Clearly, we are trying to grow our business in these regions; we are carefully rich managing our credit exposures there.

But there is some risk associated with that growth.

Okay, and that slide combines both credit cards and the global consumer?

That is exactly right, so this takes both of those things into account.

Okay, my last follow-up, just in the US Card, the securitization loss, is that a combination of higher assumed chargeoffs going forward and funding costs?

That is exactly right.

Most of it was related to credit costs, but it also included the higher funding costs.

Why do the higher funding costs not seem to impact your NIM on a managed basis in the US Card?

There were other factors in aggregate that offset it.

So if you kind of play through the details, the fact that funding costs overall had come down quarter-over-quarter was sufficient to ensure that our NIM stayed stable in the quarter.

Okay.

Do you have any outlook on the Card NIM and whether you can hold it stable?

Or is the prime-LIBOR spread starting to hurt more?

Well, what is fundamentally happening here is payment rates have in fact slowed a bit, as we have come into this more difficult credit cycle.

As payment rates have slowed, obviously that has had a yield benefit associated with it.

So if you anticipate that that is going to persist as we go through the next few quarters, particularly compared to the prior year, and you add to that the fact that it is unlikely -- at least in the short term, I think -- for funding costs to go up, it is a reasonable assumption, I think, that the NIM here is durable for a while.

Okay, thank you.

Glenn Schorr with UBS.

I mean, obviously spread flowed out everywhere, but could you help us with what some of the larger components of the unrealized loss position on balance sheet is?

Then it's such a big change this quarter, maybe just point us in the larger buckets.

Yes, I would be happy to.

So, there was a change, obviously, in the quarter that took place in OCI.

If you go to the supplement under the balance sheet section of the supplement, you can get a good sense for what that looks like.

So quarter over quarter, it went up about $6 [billion].

If you divide it, it roughly split into two separate categories.

So the OCI, the amount of OCI increased by $6 [billion].

So, if you look at the split of that, it was in two separate categories.

The two separate categories are the AFS book; and then the marks that we take as a result of deteriorating currencies in countries outside the US where we have significant investments.

So for example, if we have an investment in Brazil, that investment is held in local currency terms.

We hedge that position, obviously.

When those conditions deteriorate that has a negative impact on our OCI calculation.

That accounts for roughly half of the value.

The other half, as I said, was related primarily to spread widening in AFS securities.

The single largest component of that was in the Alt-A category.

I took you through some detail on the Alt-A category in the presentation that I went through earlier.

Got it.

I would assume that both go towards standard tests over time for permanent impairment; and that will just hopefully not play out over time.

Yes, so we have a very comprehensive process that we go through, Glenn, that reviews this each quarter.

What we do is we look at all of our positions in the book.

We compare those positions against where they are currently trading, if there was a trading analog to these securities.

We make estimates about the realizability of the position that we are carrying.

Unless we are absolutely convinced that for some reason we can hold these securities to value and recognize the amount that we are carrying them for, we then take an impairment as we need to.

In this quarter you saw, I think, something over $500 million in impairments that we took against AFS securities for exactly that purpose.

So, those obviously, if they have an other than temporary impairment, are recognized as appropriate.

In the case of the FX impact, so the $3 [million] or so that was related, those kind of impairments would only be realized if we actually sold our position in a particular market.

Okay.

That is cool.

One follow-up is, maybe you could provide some commentary on undrawn commitments, what you have experienced so far from the client side, and how it is reacted.

Then two, what have you been doing proactively that you could actually start reassessing those, cutting where you need to cut, repricing where you need to re-price?

Yes, so as you might guess, we have anticipated this time for quite a while.

So the first time I participated in a meeting where we discussed this was probably a little over a year ago, where we sat down and looked at other historical periods of economic weakness, how much had been drawn on lines during that time period.

We did a pretty comprehensive review of what we thought the maximum draws might be and where those draws might come from.

We started a program back then to proactively manage our relationship with those accounts where we thought we might have the most negative effect.

And particularly if the breadth of our relationship was such that it was not particularly profitable.

So we have been working on that for a while.

Now we are actually obviously into a period now of economic weakness.

We have seen accounts begin to draw on their credit lines.

At this point, there is nothing out of pattern with those drawdowns that we haven't seen in prior recessions.

We clearly have thought very carefully about the liquidity implications of this.

So as part of our normal ongoing stress event, one of the things that we look at is the impact of that drawdown, the impact of that on our liquidity, and we manage our liquidity to ensure that we are in a position to absorb that.

So, I think as we view things now, obviously drawdowns have increased.

It seems to be roughly in pattern with what we have seen in other economic slowdowns, and I think we are managing it well from a liquidity standpoint.

Then just in general, do you have the ability to reduce and eliminate?

And that goes across both consumer and Corporate.

Because similar to your comments on, hey, you never know, but credit card loss rates could be higher, I would think drawdown rates could be higher, too, especially when the CP world freezes up the way it did.

Yes, so we have very actively managed that.

So as clients accounts come up for renewal, as these lines come up for renewal, we do an active evaluation of that; and in some cases we size them down; in some cases we eliminate them altogether; in some cases we say where we are.

It just depends on what the situation is.

We have had a very active process to do that.

One of the best ways to actually see evidence of that is to look at the corporate loan portfolio.

On the second slide in the deck, I showed that the corporate loan portfolio in this quarter was down I think something like 15%.

That is reflective of the fact that we really are very focused on client profitability.

So one of the reasons why our assets are down by the $308 billion over the course of the last few quarters is that we have taken a very hard look at customer profitability and have ensured that we have a good breadth of relationships with the customers that we serve, so that we can fully meet all of their needs, but do it within the confines of the profitability that we set out for ourselves.

Cool.

Then this leads to the last one, because it seems like between expenses, the positions, the undrawn commitments, customer profitability, you are controlling what you can control in this horrible environment.

On the heels of Wachovia mess, what do you think now on the strategic front?

Do we wait for the next situation to arise?

Because we all know more situations will arise.

Here is what I think we would say internally, what we are saying to ourselves.

Basically we had a strategy that we outlined at Citi Day that had us focused on growing five businesses.

Two of those are asset businesses, our Card business and our markets and banking business; and three of those are liability gathering businesses, deposit gathering businesses.

That is our Wealth Management business, our Consumer retail business, and our GTS business.

Our focus is behind those businesses; and that remains exactly as it was before.

In order to fund those businesses, we have the program underway that you just talked about.

We are cutting our expenses; we are showing good traction on that.

We are moving assets out of categories that don't fit with that profile.

We have been selling businesses that didn't match there.

We have carefully managed down our headcount.

So we have worked very hard to execute against that strategy -- and that is our strategy.

Now opportunistically, we had the chance, obviously, to acquire Wachovia.

For all of the reasons you are aware of, that is not going to happen.

But the net result of that is not a change in our strategy.

Our strategy still fundamentally remains as it was, to execute against the plan that we had set out at Citi Day.

I think as you correctly said, we are doing our level best to execute on all of the factors that are in our control.

Thanks for all the answers, Gary.

Guy Moszkowski with Merrill Lynch.

Good morning.

Could you comment on the degree to which you thought through the potential use of the TARP for disposition of mortgage-related assets?

Is that something that you think might be appropriate for Citi?

We are in the process of doing that.

So, as you know, all of the parameters here are still ill defined.

What we have tried to do is go through a whole set of scenarios about how this might work.

We have obviously had many conversations with Treasury about this, going back more than a month ago, about how this might work.

Obviously depending on how it is structured, it is of more or less use to us.

So at this point, I would say that there is active engagement but little concrete that I can report in terms of how we think we might potentially use it.

Maybe just as a follow-up to that, on the other, the newer portion of the program, which of course is the capital injection, you talked about the $25 billion.

How are you thinking about the use of those funds?

Are you looking at it as more an opportunity just to shore up the balance sheet?

Or actually an opportunity to, in conjunction with the availability of debt funding at a very low cost with the FDIC guarantee, being able to sort of more aggressively use this as a way of, say, going out into the market and acquiring distressed assets?

I think you asked the question in just the right way.

I think in the first instance we can say that we felt good about our capital position, obviously, before this whole thing happened.

We didn't know this was going to happen until we actually found out about it on Monday.

We felt good about the fact that we had a strong capital position, about to become stronger as a result of the sale of our business in Germany.

So this represents in many ways something that we had not counted on, something we hadn't planned for.

It does present, then, the possibility of our taking advantage of opportunities that otherwise might have more closed to us.

Now as we think about that, the way we approach it is in the same disciplined manner that we have approached these other opportunities over the last few weeks.

So I think, in total now we have looked in detail at the possibility of acquiring three institutions, two of which you are aware of and one that we haven't talked about publicly in any way.

As we approached that, we did it with a very well-defined set of parameters.

There was only a certain set of circumstances which made sense for us to do that.

We will think about the use of this capital in the same way.

It is an attractively priced amount of equity capital; and as you correctly said, an attractively priced amount of fixed income that can match with that.

But we are going to approach it with the exactly the same discipline.

If it makes sense for us, if it grows our business in the five areas that I talked about, if it furthers our strategic agenda in some way that is fundamental, then we will use it in that way.

But we are not going to treat this like a windfall and in some way back off of the other measures that we have underway to get the Company fit because we have this as an additional capital capacity.

Okay, thanks for that.

Let me just follow up with a question about -- and you may have already said this and if so, I apologize.

What is the Tier 1 impact of the sale of the German operation and CitiStreet?

We had estimated the German business would impact by about 60 basis points or so at the time that it takes place.

CitiStreet has a gain, I think, of about $300 million.

So the impact on Tier 1 is relatively modest.

Right.

You gave a number of the marks at which you are now carrying various distressed assets; but I don't think you gave us that for leveraged finance assets.

Yes, the reason for that is, obviously, there are a discrete number of names that are held in our highly leveraged finance commitment bucket, and we just don't think competitively it makes sense for us to talk about where those are marked.

Well, let me try a different way.

JPMorgan talked about $0.71 yesterday.

Would you be materially different from that?

I mean the way to think about this is there is lots of benchmark information out here, and we look at those benchmarks all the time.

Obviously, for the things that are funded, to the extent that there are marks, we carry them at whatever those marks are.

For the things that are unfunded, we compare all the time those -- kind of the nature of those agreements, what the agreements look like, with other securities in the market.

And we ensure that we conform with the other securities in the market.

So you don't have to worry about there being some odd mark associated with this segment of our balance sheet.

I think we do a pretty good job of ensuring that it is properly marked.

Okay, fair enough.

Then you spoke to rolling securitized card balances into balance sheet funding.

Is there any update more broadly on the potential for asset securitizations to have to be consolidated under either FAS, I think is FSP 140-3 or (multiple speakers) 46-R?

I'm impressed by your ability to pull those out of the air.

There isn't really any update.

The current anticipation is that on January 1, 2010, the [QS fees] will come onto the balance sheet.

For us, that primarily has an impact on our credit card receivables that have been securitized.

As we go through this year next year, as we go through 2009, the amount of securitization that we do and the amount that will actually just come back on our balance sheet as loans, will in large measure be a function of the funding opportunities that exist in the different markets.

So if the markets for securitization open up, funding costs come down, we are likely to continue to do more securitization.

If they don't and if they are tight and if funding costs are high, as they were at the back end of the last quarter, then we are likely to have those come on to our balance sheet.

In some ways this would then represent a gradual movement from where are to the position that we would be at, at the beginning of 2010.

Obviously, this whole thing continues to evolve, and we are not sure that 2010 is going to be the final number.

But that is what we know today at least.

Okay, thanks very much, Gary.

Mike Mayo with Deutsche Bank.

Good morning.

I have an easy, medium, and hard question.

Okay, so the easy question is, what is the size of the tax benefits in Corporate and Other?

Because it is an easy question I don't know it off the top of my head.

So I just don't know it as a fact.

If it is immaterial, we will handle just from a regular call; you can just call the IR team and they will give you the fact.

Okay, then the medium question.

You have downsized assets by $300 billion from the peak.

How much more do you have to go and what is the timing?

Well, here is what we set out to do.

In fact, it is actually a good question because it allows me to clarify something a little bit.

As you know, at Citi Day we talked about legacy assets of between $400 billion and $500 billion.

Let's assume for a minute that that number was $450 billion.

And we talked about over a three-year time period getting down to $100 billion.

So that would kind of be the target.

So the objective was $350 billion over a three-year time frame.

We have now taken $67 billion of that out in the last quarter; and in the quarter that we are in we have taken out about $48 billion or so.

So say you take the $67 billion, you add it to the $48 billion, we are somewhat up over $100 billion of the $350 billion target that we have had.

So we are a little bit better than a third of our way there after two quarters' worth of effort.

I think the good news about that is obviously this has been in a time period where it hasn't been easy to reduce those assets, where it's been difficult to do it.

So we feel good about the progress.

I think that gives you rough benchmarks on kind of the bookends on where we are trying to head.

And we are seeing some benefit of that, obviously, in our NIM.

So we did have, as I mentioned, some improvement in yield; and part of that is due to the fact that we are peeling off low-yielding assets.

So the new $25 billion of preferred, maybe you don't lend so aggressively with that new money, but just it gives you more flexibility to delever faster and take some marks if you need to?

Well, no, I wouldn't necessarily say that.

The way we are approaching it is the way I just described it, which is we hadn't planned on this capital.

It is incremental to what our plans had been, and we want to make sure that we use it in the smartest way possible.

So we are going to be opportunistic with that, and as we see opportunities that when approached in a highly-disciplined fashion are things that we think make sense to do, we will continue to do that.

Even if that would imply growth in the balance sheet as we are bringing down other balance sheet categories that we are trying to exit.

Then the hard question.

What can the government do to bring down LIBOR?

And how much does that hurt you?

Because LIBOR is still not coming down despite the new government plan, and that is a little frustrating.

On the other hand, I guess it is an opportunity for you that they are guaranteeing a three-year debt, so you can term out your debt a little bit more.

So can you talk about kind of LIBOR is bad, but the new government guarantee is good, and how do you benefit from that, and what else can the government do?

Yes, obviously there are a lot of people who are focused on what could happen to bring LIBOR down.

I wouldn't pretend to be able to say that I have the answer that will finally make that change happen.

I think the important thing is if it continues at these rather dislocated levels, we will obviously have to take some steps in our business that will allow us to have different bases on which we recognize our cost of funds.

If we have this dislocation between the pricing mechanism that we use, for example, in our Card business, and the cost of funds, over time that disparity is something that we would not be able to tolerate.

So we would make adjustments in the way we approach things to reflect the discontinuity that exists.

So it is a little bit puzzling, obviously, given all of the efforts that have taken place, that the movements have been so modest.

But again, a lot of these things have not happened yet.

They have been announced.

We are in the process of implementing them.

It is going to take time to actually get them implemented.

When they actually get implemented is the time in which it kind of changes your perspective on things.

The funding, for example, which I think obviously is very helpful, I think for any institution to be able to borrow at these rates, plus the insurance premium that you pay as a result of having access to this fixed income funding, is a real benefit and obviously goes a long way to ensuring that there will be an adequate amount of funding to be able to pursue business opportunities.

But that is not available yet.

It is not part of the process yet.

So, I think the way I have thought about it is, these are good incremental steps that obviously have added on to where we thought the world was headed, that with time are more likely than not to help the financial system overall.

You know, we will see how they actually play out, but I generally think of them as very positive.

Then lastly just a follow-up.

So when can we expect some new three-year debt from, say, Citigroup with that government guarantee?

Because then we can monitor how it is working.

Well, we don't know exactly what the timing is going to be.

I don't think anybody knows exactly the timing of when this is going to be available.

We have, I think, something like $7 billion worth of maturities that are happening through the remainder of this year.

So assuming that things happen kind of in the normal course here, we will probably have the opportunity to do at least that $7 billion.

Thank you.

Meredith Whitney with Oppenheimer.

I have a couple of questions that are not related, but the first one is on the Card business and the funding and this quarter's charge.

Prospectively, if things don't change, how does the OCI -- not the OCI, excuse me, the I/O write-downs and then whatever funding problems you had during this quarter, how does that model out for future quarters?

Or at least the fourth quarter and then maybe the first or second quarter of '09.

That is my first question.

Sure.

So, I went into that in some detail in the material that I covered.

So the I/O strip itself has about $1 billion --

I got that.

(multiple speakers).

So that is kind of the maximum amount of risk would be the way to think about that.

So if you had major dislocation in credit markets that continued at a much higher level over time, that would be recognized through income, and there would be a P&L impact associated with that.

The second piece as regards the residuals that flow out of the trust that had an impact on the financial results this quarter, that is mainly a credit impact.

Right?

It is mainly credit.

It is only partially funding.

Funding is a relatively small portion of the total.

To the extent that there continue to be higher credit losses we are going to see that impact.

When I went through the revenue slide in the early part of the deck, I specifically talked about that as being one of the effects that could continue.

It could be durable, that we might have to face over time and would be a headwind for our results as we go into next year.

Okay, I follow that.

I guess what I was specifically asking is if any of your card receivables were funded with ABCP and that market was unavailable, what cost would be associated with that going forward?

Well, we have a wide range of choices for how we fund the receivables, I think is the way I would think about that.

We have the entire right-hand side of the balance sheet for the most part.

So if one category doesn't become available to us, we would shift and fund in a different category.

So as I talked about just a minute ago, the decisions that we make about securitization will largely evolve over time.

We will look and see how those markets look and what the funding costs look like, and if the funding costs look appropriate then we will probably do that.

If not, then there is a wide range of additional sources that are available to us to fund.

Okay.

Separately, with respect to the investment banking or Institutional Clients group, when you look at what has gone on over the past year, and you look at the size of that business, what is the appropriate quarterly expense base for that business?

Has that changed over the last few months?

Well, I think obviously, the volume levels are down.

There is no doubt about that.

And some aspects of the business are down for the foreseeable future.

So as I said in some of the comments that I have made, we have taken 5,000 people out over the course of the last year.

I think we took 1,100 people out over the course of the last quarter.

We are very focused on making sure that that business is rightsized for the future opportunities that the business has.

Now, the third quarter was an unusually dislocated period.

So I wouldn't extrapolate off of that base necessarily, to say that is the ongoing business volumes that we have.

In fact, the best way to think about it is we had a terrific quarter in the second quarter.

We had a less than average quarter in the third quarter.

You really have to look at these things over the course of a number of quarters to kind of get the real run rate level.

But that doesn't take away from the point that the business is going to be smaller down the road.

We have taken aggressive actions so far to make sure that the staffing is rightsized, and we are going to continue to do that if necessary.

Okay.

Has that impacted any of your technology efforts in terms of your technology spend?

No.

In fact the opposite.

So we have had a pretty significant effort that is focused on upgrading our technology there.

The fact that we have reduced our heads has not impacted the effort around technology.

In fact, if anything, it gives us more incentive to make sure that we complete those programs.

Got it.

All right, thanks.

Betsy Graseck with Morgan Stanley.

On the Card side, I just wanted to ask a little bit about the revenue line as it relates to some of those proposals that are outstanding by the Fed and the regulations that they are reviewing currently.

Could you speak to any that you may need to change in the event that that went through?

Well, I think, obviously it depends on exactly how these proposals shake out.

In its current form, they would have what I would say is probably a material impact on the way we currently approach the Card business, and it would require us to make changes to our business model.

There have been things like this that have happened in other places around the world.

Generally, the competitors who participate in the business change the nature of the business model to reflect what the new regulation is.

At the end of the day, you have to earn a return on capital in the business that justifies the risk that you are taking, and that can come from a number of different ways.

We currently have a process that has that coming from merchant discount fees; it comes from fees that customers sometime pay for cards, depending on the card product; depending on the interest rate that we earn; there are backend fees, as you know.

There is a whole variety of sources from which we take income.

If the legislation or the regulations come through as they are kind of currently contemplated, my guess is it will change the mix of those items that are currently used as revenue generation around the business.

What I am quite sure of is that people are going to want to continue to use charge cards as a payment product.

It's going to be an important part of the payment system not only in the United States, but globally.

And we're going to be a major factor in that.

Although all of those things may not have been perfectly -- that is, we might get impacted by one thing before we are able to make the changes in an additional quarter, and it might take some time to sort its way out -- my guess is over the course of time this will be a business that is going to have returns that are sufficient to attract the capital that is necessary to support it.

But we will see.

It will play out, I think, probably here over the next few months.

Then on the LIBOR stress that is going on, at what point do you decide to take action on that?

Clearly it is hard for any of us to know exactly when it is going to start to --

Yes, probably sooner rather than later.

So we're obviously something very focused on, and this obviously puts a squeeze on the cost of funding.

So this has now gone on for a while.

We are well into the second quarter where this has become an issue.

So we are very focused on it, and we are looking at a number of different scenarios.

I think we will see how this whole thing plays out here over the next few weeks.

But we will take action, obviously, if it continues to be kind of disconnected, if the pricing and the cost of funds continue to be disconnected.

Thank you all very much.

We appreciate you joining with us on the call.

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

You may now disconnect.