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Citigroup Threw Troubled Funds a $7.6 Billion Lifeline

Reuters
Tuesday, 6 Nov 2007 | 12:05 PM ET

Citigroup, which faces rising losses from the global credit crisis, said it provided $7.6 billion of financing to off-balance sheet investment funds that have had trouble funding themselves recently.

Citigroup said it has given the funds, known as structured investment vehicles, or SIVs, $10 billion of available credit, and the funds had drawn $7.6 billion of credit as of Oct. 31.

The disclosure, which was revealed in a quarterly filing with regulators late Monday, comes as Citigroup reveals it's named Richard Stuckey to help it untangle the complicated subprime portfolio that may lead to a fourth-quarter loss for the bank.

Back in 1998, Stuckey helped Citigroup extricate itself from losing bets on Long Term Capital Management, a U.S. hedge fund that collapsed. The fall of LTCM nine years ago is regarded as the last time the global credit markets were as tight as they are this year.

Citigroup has direct subprime exposure of $55 billion, $43 billion of which is to collateralized debt obligations. CDOs are instruments that bundle of different kind of risk, and some include pieces of bonds backed by mortgages given to subprime borrowers, or those with poor credit history.

What has been worrying investors is not only that Citigroup, the nation's largest bank, may have to take losses, but that those losses could end up being even wider if the credit markets don't improve.

SIV May Stoke Concerns

The additional information on Citigroup's funding of SIVs may further add to investor concern about Citi's $83 billion of structured investment vehicles, which issue short- and medium-term debt to finance their acquisition of bank bonds, repackaged debt and other securities.

Some investors fear that SIVs will lose access to the short-term funding market and that Citi may feel compelled to bail out the funds, even though it is not obliged to do so.

Citi said in its filing that its credit lines to the SIVs were done on "arms-length commercial terms," and that the bank has no plans to list the SIVs' assets on its own balance sheet.

Citi said last month that the SIVs have financing for 98 percent of their assets through the end of the year.

Citi has faced a series of problems in recent weeks. Over the weekend, its chief executive resigned and Citigroup revealed it may face $11 billion more in pre-tax write-downs this quarter for repackaged debt known as collateralized debt obligations.

Those potential write-downs are on top of $6.8 billion of write-offs and losses already recorded in the third quarter.

The meltdown in the U.S. housing and subprime mortgage markets has severely pinched the ability of SIVs to raise capital or refinance maturing debt in the asset-backed commercial paper market. The ABCP market has contracted for 12 straight weeks and the total market has shrunk by more than a quarter over that time.

Citigroup is working with Bank of America, Wachovia and JPMorgan Chase to assemble a fund to provide back-stop financing to SIVs that face problems refinancing their maturing ABCP. The fund, nicknamed "the super-SIV" on Wall Street, has not yet been launched.

Citigroup shares, which are the worst performers in the Dow Jones industrial average this year with a year-to-date drop of more than 37 percent, were off by 2.4 percent at $35.05 in mid-morning New York Stock Exchange trading on Tuesday. The stock touched a four-and-a-half year low of $34.76 in consolidated trade.

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