Citi to take $49 bln in SIVs onto balance sheet

NEW YORK (Reuters) - Citigroup C.N plans to rescue $49 billion of structured investment vehicles in a move that further strains the biggest U.S. banking group's capital levels and may scupper a U.S. government-endorsed SIV bailout plan.

A man is reflected in the Citibank logo in Tokyo November 5, 2007. REUTERS/Toru Hanai

Citi is already wrestling with billions of dollars of assets whose market value has declined, prompting Moody’s Investors Service on Thursday to cut the bank’s debt ratings. Lower debt ratings often translate to higher borrowing costs.

The Moody’s downgrade hit shares in Asian banks and financial groups early on Friday, with MSCI’s index of regional financial stocks dropping more than 2 percent.

Citi’s decision to move SIV assets to its balance sheet further ties up the bank’s capital in assets likely to produce relatively low returns, potentially hampering profitability.

As the subprime mortgage crisis widens to other credit markets, U.S. banks will have fewer resources to fund corporate activity, and the U.S. economy may suffer.

Citi said in a statement announcing the SIV move that it is still supporting a U.S. Treasury-backed plan for a backup fund for SIVs, but analysts said that fund is less likely to be set up without Citi’s SIV assets.

“The super-SIV idea never made sense economically,” said Bert Ely, a banking consultant in Alexandria, Virginia, adding that Citi’s SIVs had been seen as the major contributors to the fund.

Citi's decision to take the SIV assets comes just two days after the bank appointed a new management team led by Chief Executive Officer Vikram Pandit, a former Morgan Stanley MS.N executive and hedge fund manager.

“The CEO seat has hardly had time to cool off before he acted,” said Tim Ghriskey, chief investment officer at Solaris Asset Management.

One of Pandit’s key mandates is to get a handle on the billions of dollars at Citi that have dramatically declined in value and are in many cases risky.

Assets linked to subprime mortgages spurred some $6.5 billion of third-quarter writedowns at Citi, and could spur another $11 billion in the fourth quarter.

Those writedowns helped push Citi’s tier one capital ratios, a key measure of financial strength, down to 7.3 percent in the third quarter, from 8.6 percent a year earlier. Citi aims to keep that ratio above 7.5 percent.

Citi said in a statement that it still expects key capital ratios to return to their targeted levels by the end of the 2008 second quarter.

Fears about Citi’s assets have contributed to the 44 percent decline in Citi’s shares this year, about double the decline of the broader banking sector.


Citi earlier this year had some $100 billion of assets in SIVs, or off-balance sheet vehicles that buy longer-term assets and issue short- and medium-term debt to fund themselves.

That $100 billion represented about a quarter of all outstanding SIV assets. Citi’s outstanding SIV assets have since shrunk as the vehicles have sold assets.

Moody’s estimated earlier this month that the SIV sector’s assets globally had fallen to just under $300 billion from $370 billion in July. But, excluding SIVs that have defaulted, or whose assets are now on bank balance sheets, total outstanding SIV debt is closer to about $170 billion.

Citigroup’s sale of a $7.5 billion stake in itself to the Gulf Arab emirate of Abu Dhabi also may have paved the way for the decision, analysts said.

“New capital from Abu Dhabi, gave them more equity to fund this ... They may have to cut back on taking on new assets, or raise more funding, though,” said Steve Persky, chief executive at Dalton Investments in Los Angeles.

Moody’s downgrade of Citigroup debt reflects those concerns.

The ratings agency said it doubted Citi would succeed in rebuilding its capital ratios any time soon, and it warned that if Citi fails to do so in the medium term, another rating downgrade could be in the offing.

The $49 billion of assets represent a little more than 2 percent of Citi’s total assets, and will depress Citi’s tier one capital ratio by about 0.16 percentage point, Citi said.

Moody’s and Standard & Poor’s recently said they were considering cutting the Citi SIVs’ senior debt ratings.

SIVs have traditionally sold such notes to fund their purchase of longer-dated, higher yielding securities. Citi has seven SIVs outstanding.

Additional reporting by Chris Sanders; Editing by Carol Bishopric, Leslie Gevirtz & Ian Geoghegan