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Monday, July 14, 2008 4:16 PM

Citigroup's $1.1 Trillion in Mysterious Shadow Assets

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Bloomberg is reporting Citigroup's $1.1 Trillion of Mysterious Assets Shadows Earnings.

Given that Citigroup does not have any earnings and is hiding assets off the balance sheet in the shadows, I prefer my title better. At any rate, let's take a look at the report.

At an investor presentation in May, Citigroup Inc. Chief Executive Officer Vikram Pandit said shrinking the bank's $2.2 trillion balance sheet, the biggest in the U.S., was a cornerstone of his turnaround plan.

Nowhere mentioned in the accompanying 66-page handout were the additional $1.1 trillion of assets that New York-based Citigroup keeps off its books: trusts to sell mortgage-backed securities, financing vehicles to issue short-term debt and collateralized debt obligations, or CDOs, to repackage bonds.

Now, as Citigroup prepares to announce second-quarter results July 18, those off-balance-sheet assets, used by U.S. banks to expand lending without tying up capital, are casting a shadow over earnings. Since last September, at least $100 billion of assets have flooded back onto Citigroup's balance sheet, accompanied by more than $7 billion of losses.

Seven of the biggest U.S. banks, including Citigroup, are on the hook for at least $300 billion of credit and liquidity guarantees for off-balance-sheet loans and bonds, according to a June 30 report from consulting firm RiskMetrics Group Inc. in Rockville, Maryland. Such guarantees were remote when pledged as an inducement to bond buyers. Now, the first year-over-year decline in housing prices since the Great Depression and rising home-loan, commercial-mortgage and credit-card delinquencies have begun to trigger them.

"You will rapidly realize what a farce these off-balance sheet things are," said Ladenburg Thalmann & Co. analyst Richard X. Bove. "You could pick up a lot of loan losses with the stuff you're putting back on."

Citigroup has had to bail out at least nine investment funds in the past year, including seven structured investment vehicles, or SIVs, whose funding withered. The bank had to assume $45 billion of securities from those SIVs, which are now included in the $400 billion of on-balance-sheet assets Pandit says he's trying to unload in the next three years.
$400 billion down and $1.1 Trillion to go. I have said this summer of 2007 but it's worth repeating again: Citigroup will not survive in one piece. If Citigroup survives at all it will be a mere shadow of its former self.

Mike "Mish" Shedlock
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