Citigroup (C)

Commercial Paper CDOs (CPCDOs)

        During the second half of 2007, the market interest rates on commercial paper issued by certain CDO structures increased significantly. To pre-empt the formal exercise of liquidity puts provided by the Company to its CDO structures, the Company purchased all of the outstanding commercial paper issued by these entities, which totaled approximately $25 billion. Because of these purchases, which are deemed to be FIN 46-R reconsideration events, and because the value of the CDOs' commercial paper and subordinated tranches was deteriorating as the underlying collateral of the CDOs (primarily residential mortgage-backed securities) was being downgraded, the Company concluded that it was the primary beneficiary of these entities and began consolidating them in the fourth quarter of 2007.

        Upon consolidation, the Company reflected the underlying assets of the CDOs on its balance sheet in Trading account assets at fair value, eliminated the commercial paper assets previously recognized, and recognized the subordinate CDO liabilities (owned by third parties) at fair value. This resulted in a balance sheet gross-up of approximately $400 million as of December 31, 2007 compared to the prior accounting treatment as unconsolidated VIEs.

        During the first quarter of 2008 and the fourth quarter of 2007, the Company recognized pretax losses of $3.1 billion and $4.3 billion, respectively, for changes in the fair value of the consolidated CDOs' assets.

Commercial Paper CDOs (CPCDOs)

In certain CDO transactions underwritten by the Company during 2003-2006, the senior funding of the CDOs was in the form of short-term commercial paper. In order to facilitate the issuance of commercial paper by the CDO, the Company wrote a put option (“liquidity puts”) to the CDO to benefit the commercial paper investors, which was accounted for as a derivative. The total notional amount of these written liquidity puts was approximately $25 billion. Under the terms of the liquidity puts, if the CDO was unable to issue commercial paper at a rate below a specified maximum (generally LIBOR + 35bps to LIBOR +40 bps), the Company was obligated to fund the senior tranche of the CDO at a specified interest rate. At the time the liquidity puts were written, the put options were considered deeply out of the money and unlikely to be exercised. In July 2007, the market interest rates on commercial paper issued by certain of the CDOs increased significantly and in order to forestall the formal exercise of the liquidity puts, the Company chose to purchase the outstanding commercial paper and continued to do so in subsequent months as additional commercial paper matured. The Company chose to do so because owning the commercial paper directly was economically equivalent to its contractual obligation under the liquidity put, but holding the commercial paper was believed to provide some additional flexibility in finding third-party investors in the event of improved market conditions. As of December 31, 2007, the Company had purchased all $25 billion of the commercial paper subject to the liquidity puts.

Because the Company obtained the commercial paper in the form of a purchase rather than the contractual exercise of the liquidity put, the Company considered the purchase to be a reconsideration event under FIN 46-R which requires that the Company evaluate, using current estimates and assumptions, whether the Company must begin to consolidate the CDO issuer. As of September 30, 2007, the Company’s quantitative analysis of the expected losses and residual returns of the particular CDOs demonstrated that the value of the subordinate tranches held by third parties remained sufficient to absorb a majority of the expected loss of the CDOs and the Company did not consolidate any of the liquidity put CDOs. During the fourth quarter of 2007, the Company obtained additional commercial paper from these CDOs as the existing commercial paper matured, thus causing additional reconsideration events under FIN 46-R. Because rating agency downgrades of the CDO collateral in the fourth quarter caused further deterioration in the value of the commercial paper and subordinate tranches of these CDOs, the Company has concluded that the Company is now the primary beneficiary of all of these CDOs under FIN 46-R and has consolidated them.

Upon consolidation of the CDOs, the Company reflects the underlying assets, primarily residential mortgage-backed securities of the CDOs on its balance sheet in Trading account assets at fair value, eliminates the