Q4 2007 Citigroup Inc. Earnings Conference Call on Jan. 15. 2008

FINAL TRANSCRIPT

C - Q4 2007 Citigroup Inc. Earnings Conference Call

Event Date/Time: Jan. 15. 2008 / 8:30AM ET

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CORPORATE PARTICIPANTS Art Tildesley Citigroup Inc. - IR Vikram Pandit Citigroup Inc. - CEO Gary Crittenden Citigroup Inc. - CFO

CONFERENCE CALL PARTICIPANTS Guy Moszkowski Merrill Lynch - Analyst Betsy Graseck Morgan Stanley - Analyst William Tanona Goldman Sachs - Analyst Mike Mayo Deutsche Bank - Analyst Meredith Whitney Oppenheimer - Analyst Glenn Schorr UBS - Analyst Richard Bove Punk, Ziegel - Analyst David Hilder Bear Stearns - Analyst

PRESENTATION Operator Good morning, ladies and gentlemen and welcome to Citi's fourth-quarter and full-year 2007 earnings review featuring Citi Chief Executive Officer, Vikram Pandit and Chief Financial Officer, Gary Crittenden. Today's call will be hosted by Art Tildesley. 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 today. If you have any objections, please disconnect at this time. Mr. Tildesley, you may begin.

Art Tildesley - Citigroup Inc. - IR Thank you very much, operator and thank you all for joining us this morning. Welcome to our fourth-quarter 2007 earnings presentation. The presentation that we will be walking through is available on our website, so you will want to download that now if you haven't already done so. The format we will follow is Vikram will begin the call. Gary will take you through the presentation. Vikram will have some concluding remarks, then we'd be happy to take any questions -- or questions that you may have.

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

Vikram Pandit - Citigroup Inc. - CEO Thank you, Art. Good morning, everyone and thanks for joining us today. Going forward, Gary will host these quarterly conference calls, but I thought it was important for me in my first few weeks to share with you some comments on our performance and also on the changes we are making at the Company.

Let me start though first by stating very clearly that Citi's fourth-quarter results are unacceptable; the subprime market deterioration has been unprecedented; other credit metrics such as consumer credit have weakened as well. Even so, we need to do better and we will do better.

As you know by now, we took over $18 billion in write-downs and losses on our subprime exposures. We increased our reserves and had losses in our US consumer business, up over $4 billion, and these numbers completely overwhelmed record performance in many, many of our other large businesses, as well as strong performance in a number of our other businesses.

These are obviously complicated times in the market and we want to be transparent with you on the risks we have and their impact on our results. We will be very candid with you today and also in the future so that you can fully understand the decisions we make.

In my five weeks as CEO of Citi, I have had an opportunity to meet a number of our people, our clients, our investors and regulators and I plan to continue to do that. And I have not yet finished the analysis of the work I said I would to position our businesses for the future. And I am continuing to do that and I will report to you on that when I am done.

But the actions we are taking today should not wait for that comprehensive review. They are completely consistent with my direction and what I believe must be done now. We have terrific people at Citi and we have great, great support from our clients as well.

The areas that need immediate attention and actions are our balance sheet, risk management and expenses. Let me go through these one by one. Starting with the balance sheet, we have taken actions to significantly strengthen our capital base. This morning, we announced a comprehensive set of actions that will position us well and allow us to refocus on earnings and earnings growth for the future.

First, we raised $12.5 billion from sophisticated long-term investors and we are very pleased with the support and the vote of confidence. We are also planning a public offering of our securities to all other shareholders. This capital not only positions us well against our [books] and the economy, but also creates significant flexibility to serve our clients and to take advantage of market opportunities that can be very beneficial to our franchise.

Second, the Board has reset the dividend to a level that is aligned with our business mix and aligned with the growth opportunities we see for each of our businesses. And Gary will take you through our thinking on that.

Third, we will continue to divest non-core assets that are misaligned or do not adequately support our growth strategies. We are in the process of divesting some of them now and this is a part of the broader review of our businesses that I'm conducting.

And lastly, we are completely focused on recycling our balance sheet to take capital away from low or nonproducing assets. We have had great success over the last few weeks and I believe we can redeploy significant amounts more profitably.

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In summary, we have taken a comprehensive and necessary set of actions to significantly strengthen our balance sheet. While the environment continues to be uncertain and the results will definitely be influenced by the economy, these actions allow us to be on our front foot focused on opportunities to drive our earnings and earnings growth.

When you look at the major secular growth trends in financial services, many of our large businesses are positioned squarely against this growth and hence, the strong numbers this year in a number of businesses. In particular, we had record results in wealth management, international consumer, Asia Pacific, Latin America and global transaction services.

Let me turn to risk, which is our second key priority. As some of you know, I have had some experience in this area and am actively involved in enhancing and reshaping our risk philosophy, along with the goal of having the best risk management in the business. The first priority on risk has been to make sure that our legacy portfolio of assets to subprime and mortgage areas are separated and managed to be optimized and we have done that. We have also made sure they are well-capitalized.

Going forward, we are enhancing our risk culture and involving new talents. I have asked Jamie Forese to chair the markets and banking risk committee. In addition, I will sit on this committee and be an active hands-on participant. We are also strengthening independent risk management and over time, risk management will become a key competitive advantage for us, driving bottom-line results.

Let me turn to the third area that we are critically focused on which is expense management. Under Gary's leadership, our reengineering plan for 2008 is well underway. In the fourth quarter, we have already reserved for significant headcount reductions in markets and banking and we continue to make plans for further productivity improvements. You can interpret this current quarter's $539 million charge as a down payment on the productivity efforts we are working on.

The other business reviews are in process with the goal of increasing productivity and right-sizing our staffing levels. And while we have a clear idea of where we are headed, I will not do anything without the right diligence.

Let me spend a minute on our people, our most important assets. As I have been talking to them and meeting them around the world and across all our businesses, we have attracted some of the best talent in the world. We are going to manage this talent more effectively by incentivizing people through a system of meritocracy where we pay for performance and by putting the right people in the right places.

Let me just highlight a few critical actions we have already taken. I have asked Michael Schlein and Jamie Forese to run the markets and banking area. I have asked Hamid Biglari, one of our most talented people, to be Chief Operating Officer of this business. They will focus on driving productivity and on positioning our businesses for future growth.

Just last week, Gary named Carl Levinson to be the head of productivity improvement and reengineering. Carl has been with Citi for 30 years and has institutional knowledge to track down and find inefficiencies. You will find him to be impatient and [not] to do this quickly and to drive bottom-line results. Bill Beckman will lead the effort to integrate our mortgage businesses in an end-to-end model. This is the right model to serve our clients and also the right model to manage our risk and execution. And finally, yesterday, we appointed Paul McKinnon, formerly head of Human Resources at Dell, as head of talent management. Paul will make sure, working with all of us, that we have the right people in the right seats across the organization.

So these are my initial thoughts. Let me turn it over to Gary and I will conclude the call with some comments before we take your questions.

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Gary Crittenden - Citigroup Inc. - CFO Thank you, Vikram and good morning to everybody. Thank you for joining us and let me apologize in advance for the length of my prepared comments. There is a lot to cover today. I am going to turn to the slides that are now available to you on the website.

Slide 1 shows you the consolidated results that we have for the quarter. To summarize our fourth-quarter results, net revenues declined 70%, primarily on $17.4 billion in write-downs in fixed income on our direct subprime exposures, partially offset by continuing underlying growth in many of our other businesses. Expenses were up 18%. I will provide some detail on this later.

As Vikram mentioned, the reengineering plan for 2008 is underway and we are very focused on impacting expense levels at the Company. Cost of credit was up 231%, driven primarily by a substantial charge to increased loan-loss reserves and higher net credit losses in our US consumer business. These factors drove a loss of $9.8 billion for the quarter or a loss per share of $1.99. The full-year results, which are heavily affected by the fourth quarter, net revenues were down 9%, expenses were up 18%, the cost of credit was up 133% with approximately two-thirds of our increase in our US consumer business and our net income and earnings per share declined by 83%.

Now slide 2 shows the number of items which were significantly affecting results in the quarter. First, $18.1 billion from the write-down and credit costs on subprime-related direct exposures in our fixed income markets business. Our net super senior ABS CDO direct exposure was $29.3 billion and our gross direct subprime exposure related to the structuring and lending business was $8 billion at the end of the quarter.

Second, we had $5.1 billion in credit costs in our US consumer business, driven primarily by higher charges to loan-loss reserves reflecting accelerating delinquencies and losses during the quarter in our US mortgage portfolio and higher current and expected losses in our US cards and personal loan portfolio.

Third, a $539 million charge related to the headcount reductions and moves to lower-cost locations. In this first phase of our productivity plan this year, we expect to reduce headcount by approximately 4200 people.

Fourth, a $306 million pretax charge for Visa-related litigation exposure. Fifth, we had a $534 million pretax gain on Visa shares in our international consumer and transaction services business. Finally, a $313 million pretax gain on the sale of an ownership interest in Nikko Cordial Simplex Investment Advisors.

Turning to slide 3, this shows a five-quarter trend of some of the key drivers for our business. It is encouraging to see that, this quarter, drivers have grown at a fairly consistent pace with the second quarter of this year, which was the best quarter in our firm's history. Strong momentum continued to cross these drivers, especially in our international franchises. Drivers of net interest revenue showed strong growth, so average consumer loans were up 10% in the US and 30% internationally. Internationally, organic consumer loan growth was 18%. Average corporate loans were up 24%. Average consumer deposits were up 10% in the US and 21% internationally. Internationally, organic deposit growth was 9%.

Drivers of non-interest revenues also grew nicely. Credit card purchase sales were up 8% in the US and 37% internationally. Internationally, organic card purchase sales growth was 25%. International assets under management were up 24% in international consumer. Client capital under management in CAI was up 26%.

In our global wealth management business, assets under fee-based management grew 27% or 9% organically. In investment banking for the full-year 2007, we ranked number one in global debt underwriting, number three in announced and completed M&A and number three in global equity underwriting.

Now slide 4 shows the quarter-over-quarter revenue growth in each of our major businesses on the top half of the chart. The graph at the bottom of the page shows the full-year growth for 2007. In looking at the top half of the page, markets and banking

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© 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. FINAL TRANSCRIPT Jan. 15. 2008 / 8:30AM, C - Q4 2007 Citigroup Inc. Earnings Conference Call revenues reflect the write-downs and losses that I have mentioned already. Alternative investments revenue decline reflects sharply lower proprietary investment revenues, driven primarily by lower private equity gains and mark-to-market losses from changes in the market value of Legg Mason shares this quarter.

Offsetting these results was revenue growth in international consumer and global wealth management, driven by both organic and acquisitions -- organic growth and acquisitions. In addition, US consumer revenues were up 6%. The international revenue decline reflected about $4.4 billion of subprime related write-downs recorded in Europe and the Middle East. Acquisitions accounted for approximately 7% of our year-over-year revenue growth, offset completely by revenue reductions embedded in our business as usual activities, which declined by 77%.

For the full year, consolidated revenues declined 9% reflecting the severe market dislocation in the third and fourth quarters. We are pleased, however, to see double-digit growth rates in international consumer and global wealth management and mid-single digit growth in US consumer. In total, our international revenues grew 15% and our US revenues declined by 26%. Despite the declines in US revenues, we continue to re-weight Citi towards higher growth opportunities. Excluding the impact of acquisitions, revenues declined by 13%.

The bar graph on slide 5 shows the 11-quarter sequential trend of net interest margin for the Company. This quarter, net interest margin increased by 15 basis points sequentially and seven basis points over last year. The single largest driver of the increase was our actions to reduce lower-yielding assets from the balance sheet. In particular, lower-yielding assets -- lower-yielding purchase Fed funds and resale asset balances were down almost 15% sequentially with a similar decline in related liabilities.

Trading assets dropped almost 6% sequentially and trading account liabilities dropped 22%. As Vikram has mentioned, with the continued focus on enhancing asset productivity, we expect our efforts to drive bottom-line results.

Slide 6 shows the trend of our expense growth. Expenses in the quarter grew by 18% versus last year and foreign exchange accounted for 3% of the 18% increase. Acquisitions accounted for about half of the growth. Nikko was the main driver. With the remaining 9% of organic growth, there are two main components. This quarter, we took a $539 million pretax charge related to new headcount reductions, primarily in markets and banking. This charge reflects the execution of the first phase of our 2008 reengineering effort.

In addition, we took a $306 million pretax charge for Visa-related litigation exposure. Together, these two items accounted for 6% of the expense growth. The remaining 3% organic growth is composed of expenses related to branch buildout and more collectors in the consumer businesses and higher volume-related growth in businesses such as transaction services and global wealth management. Sequentially, we had 13% expense growth, of which 1% was from foreign exchange. Acquisitions accounted for one percentage point of the growth with the remaining 12% driven by organic growth.

Key components of the 12% of organic growth included six percentage points from two charges related to the headcount reductions and the Visa-related litigation exposure and six percentage points primarily related to a change in the accrual adjustment to our full-year compensation levels in our markets and banking business consistent with last year's fourth quarter. This quarter's adjustment reflected strong full-year performance in certain businesses, including equity markets, equity underwriting, advisory and global transaction services.

Now turning to credit -- I am sorry. As we had said earlier this year, on slide 7 now, a good way to track our progress on expense management would be to track headcount growth and the expense relative to revenues. On slide 7, you can see the trend in our headcount growth. Although the graph indicates significant year-on-year growth, this was driven primarily by acquisitions, which contributed 11 percentage points of the 15% of the year-over-year growth.

Excluding the acquisitions, from the first quarter of 2006 to the first quarter of 2007, our headcount grew by 9%. From the second quarter to the third quarter, our headcount grew by 5%. From the third quarter of 2006 to the third quarter of 2007, headcount grew by 5%. This quarter, we had 3% headcount growth, which includes 2% that is caused by de novo branch

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Turning to credit now, slide 8 shows the year-over-year growth components in our total cost of credit and the key drivers within each component. The total cost of credit in this quarter increased by $5.4 billion with $1.6 billion driven by higher net credit losses and $3.8 billion driven by loan-loss reserve build.

First, the higher net credit losses were driven primarily by our US consumer business where NCLs increased by $689 million. Consumer lending net credit losses were higher by $396 million over last year, primarily driven by losses in the consumer mortgage portfolio. In US cards, net credit losses were up by $156 million, reflecting higher write-offs, lower recoveries and higher average yield balances. While delinquency levels remain relatively stable, the increase in write-offs reflect higher bankruptcy filings and the impact of customers that are delinquent in advancing to write-offs at a higher rate.

Within our bank cards portfolio, approximately two-thirds of the losses occurred in five states -- California, Florida, Illinois, Arizona and Michigan. And the loss rates on customers with mortgages in those states increased by fourfold versus the loss rates in the rest of the country. Finally, in US retail distribution, net credit losses were higher by $142 million, reflecting higher loss rates in the personal loan and sales finance portfolios. Loss rates in the branch-originated mortgage business remained relatively stable, where face-to-face interaction with customers and long-standing relationships have historically resulted in lower losses.

The CitiFinancial real estate mortgage portfolio, for example, is comprised primarily of full documentation, fixed-rate loans with low loan-to-values. Second, the loan-loss reserve build of $3.8 billion was primarily driven by the US consumer reserve build of $3.3 billion. Approximately 73% or $2.4 billion of the US consumer build was in the consumer lending group, reflecting continued weakness in the mortgage portfolio and a higher expectation for losses in the auto portfolio. The auto portfolio is primarily subprime with loans sourced directly through dealers. I will discuss the mortgage portfolio in more detail in just a minute.

Approximately 15% of the US consumer build or $493 million was in US cards. While US cards delinquencies remain relatively stable, the build reflects recently observed trends, which point to an expectation of higher losses in the near term. As I mentioned, the rate at which delinquent customers advance to write-offs has increased. This is especially true in certain geographic areas where the impact of events in the housing market has been greatest driving higher loss rates. Bankruptcy filings have increased from historically low levels. These trends and other portfolio indicators led to a build in reserves for US cards in the quarter.

In US retail distribution, higher losses in personal loans and sales finance, portfolio growth and a generally weakening credit environment led to a $376 million build or 11% of the total US consumer build. Looking ahead, our reserve balances will continue to reflect the types of considerations I have just described.

Markets and banking credit costs increased by $905 million. This increase in net credit losses included $[535] million related to loans with subprime mortgage collateral included in the $18.1 billion figure that I previously mentioned. Credit costs also include a $284 million net charge to increase loan-loss reserves reflecting a slight weakening in overall portfolio credit quality. They also include loan-loss reserves set aside for specific counterparties, including $169 million related to our direct subprime exposures, which is also included in the $18.1 billion figure.

Now I am turning to page -- slide number 9. The top half of slide 9 shows consumer net credit losses and loan-loss reserves as a percentage of loans in the US consumer business. The bottom graph shows the same data for our international consumer business. The top graph demonstrates that, in US consumer, loan-loss reserves and NCLs as a percentage of the consumer loan portfolio have risen sharply, reflecting the factors I just discussed. The largest contributor to the increase is the US consumer mortgage portfolio.

In US consumer, loan-loss reserves as a percentage of loans have trended higher, but have remained below the peak in the first quarter of 2004. Since that peak, the ratio has consistently declined until the first quarter of this year when we started to see it

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© 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. FINAL TRANSCRIPT Jan. 15. 2008 / 8:30AM, C - Q4 2007 Citigroup Inc. Earnings Conference Call pick up. These declines were a reflection of a particularly favorable credit environment over the last couple of years. The increase now is a reflection of the current environment and the factors I described earlier, all of which warranted and an addition to our reserve level. With the addition to reserves in our US mortgage business, we are now at a 22-month coincident reserve coverage ratio for the entire real estate portfolio. Currently, we are at 20 months and 24 months of coincident reserve coverage in our first and second mortgage portfolios respectively.

As the bottom graph shows, the two credit ratios in international consumer have been fairly stable, excluding the second quarter. However, we continue to watch credit trends in the international market vigilantly. As a reminder, the second quarter's 53 basis point sequential decline in the NCL ratio was driven by a number of acquisitions, primarily Egg, that closed during the quarter. When impaired loans are acquired, they are booked on our balance sheet at their estimated net realizable value, which results in lower NCLs in the early months following the close of a transaction.

On slide 10, the two grids, which show the FICO and LTV distribution for the US consumer mortgage portfolio, are listed. The two graphs at the bottom show the 90 plus day delinquencies in each of the first and second mortgage portfolios. In the grids on the top half of the slide, there are two segments which have demonstrated the greatest weaknesses.

In first mortgages, we are experiencing higher losses from the loans which have FICO scores less than 620. This comprises roughly 15% or $23 billion of the first mortgage portfolio. In second mortgages, we are experiencing higher losses from loans with origination loan-to-value that are greater or equal to 90%, which comprise 34% or $20 billion of the second mortgage portfolio. We consider these two segments the higher risk segments of the portfolio.

The bottom graph shows that delinquencies have increased substantially, particularly since the beginning of September. The first mortgage delinquency trend shows that current delinquency levels are almost at their early 2003 peak. A further breakout of the below 620 segment in the yellow box indicates that delinquencies in this segment are three times higher than the overall first mortgage portfolio.

By contrast, delinquency rates in our second mortgage portfolio are at historically high levels, particularly in the 90% LTV segment -- 90% and higher LTV segment as shown in the yellow box. This segment has a delinquency rate twice as high as the rate for the overall second mortgage portfolio.

In general, first mortgages have higher delinquencies than second mortgages. This is driven by the fact that first mortgages include government guaranteed loans such as those to low and middle income families, which have sharply higher delinquencies due to the guarantee future. There is no equivalent product in the second mortgage portfolio.

On the other hand, second mortgages are much more likely to go directly from delinquency to charge-off without going into foreclosure, which explains why the loss deterioration in second mortgages has been more significant than for first mortgages. Our reserve actions for our mortgage portfolio primarily reflect this significant deterioration.

Slide 11 shows the decline in assets and moderating loan growth in the mortgage portfolio of the consumer lending grew. The effort is part of our program to reduce low-returning assets from the balance sheet. More broadly, it is part of risk mitigation efforts in this business.

As the chart shows, loan growth is at its lowest level in 12 quarters and assets declined by over $50 billion since the end of the first quarter 2007. Originations have declined steadily since the second quarter of 2007. We have taken a number of steps in the mortgage business to proactively address the issues related to our worst performing segments of the portfolio. We continue to take focused action to lower the volume of second mortgage origination through channels that have demonstrated a higher incidence of delinquency such as third-party correspondence.

In the fourth quarter of 2007, we exited the second mortgage correspondent business and reduced the number of brokers with whom we do business, maintaining relationships with only those brokers who produced strong, high-quality and profitable

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In addition, we are beginning to see the expected improvement in delinquencies for the newer originations as evidenced in first and early payment defaults. We are also actively working with distressed borrowers to find alternatives to foreclosure.

In addition to changing the mix of sourcing channels, we have eliminated a number of product offerings. For example, we no longer offer mortgage loans for investment properties on three and four-family homes. We have made numerous policy and process changes to mitigate losses. For example, we have reduced loan-to-values by an additional 5% in areas where housing prices have severely depreciated versus our normal criteria, which have also been tightened. We continue to tighten credit requirements across expanded products through higher FICOs, lower LTVs and increased documentation and verification requirements.

In 2007, we added over 1900 collections in our US consumer business, of which over 700 were for mortgages in the US consumer lending business. Organizationally, we have eliminated 500 front, middle and back-office positions in the second mortgage business for the full year, of which 365 were announced in the fourth quarter. The reductions reflect our view of the growth prospects and economic realities of that business.

Finally, we recently announced the formulation of an end-to-end US residential mortgage business that includes organizational servicing -- it includes origination, servicing and capital market securitization execution under one manager. This structure supports a comprehensive view of the mortgage business across the firm, will increase both the effectiveness and efficiency with which the business is managed, enhance risk management and allow us to better serve clients.

In the US cards business, we have taken a number of similar actions to address the increases in losses. We have tightened the underwriting criteria, raised minimum score requirements and expanded forbearance programs.

Now slide 12 shows the historical trend in a number of our key capital ratios and our return on common equity for the year. As the graph shows, all of our capital ratios have declined since the beginning of the year, driven primarily by acquisitions, organic asset growth and negative earnings in the fourth quarter.

Slide 13 provides a third to fourth-quarter progression in our key capital ratios. As we have said before, we target to keep our Tier 1 capital ratio above the 7.5% level and the TCE to risk-weighted managed assets ratio above the 6.5% level and we expect to return to those targeted levels by the end second quarter of 2008.

In the third quarter, we ended with a Tier 1 capital ratio of 7.3% and a TCE ratio of 5.9%. With the results of the quarter, the dividend payment, acquisitions and the SIV consolidation all depleting capital levels, we took several actions in the fourth quarter to build our capital position.

First, we issued $7.5 billion of upper deck equity units to the Abu Dhabi Investment Authority, which increased the Tier 1 ratio by 52 basis points and the TCE ratio by 35 basis points. Second, we issued $4.3 billion of enhanced trust preferred securities, which benefited the Tier 1 and TCE ratios by 34 and 24 basis points respectively. Finally, we continued to remove unproductive assets from the balance sheet, which added 36 basis points to the Tier 1 ratio and 25 basis points to the TCE ratio. As an example, in the fourth quarter, we sold $6.4 billion in mortgage-backed securities and the portfolio now stands at $19 billion, down from its $71 billion peak in the first quarter of 2007. Total GAAP assets were lower by $176 billion from September 30.

The actions in the quarter, while helpful, were overwhelmed by the negative impact from earnings. As we have managed through this challenging situation, we have carefully balanced our exposures with the opportunities we have to generate capital while maintaining our commitment to the current dividend. However, it has become increasingly clear that our valuation has become negatively affected by the lack of transparency of our capitalization and dividend policy.

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As a result, we are addressing this holistically to include the dividend policy, business divestitures, asset reductions and capital raising. While this is different from what we said last quarter, we believe it is the correct way to position the Company going forward to take advantage of opportunities or to guard against the risk of a downturn. So we are taking actions designed to restore these ratios to our stated targets.

We announced today that we have commitments to purchase $12.5 billion of convertible preferred stock, which adds an estimated 100 basis points to our Tier 1 ratio and 71 basis points to our TCE ratio. We are using stock as opposed to cash as consideration for the purchase of the remaining 32% of Nikko in a share-for-share exchange, which will add approximately $4.3 billion in common equity. Combined, today's equity issuance and the Nikko-related issuance will add an estimated 104 basis points to Tier 1 and 94 basis points to the TCE ratios.

In addition, we continue to focus on pursuing a disciplined approach to managing our balance sheet and deploying capital to the highest growth and return opportunities. You can expect us to continue to pursue divestiture of nonstrategic or low-returning assets. Finally, organic earnings growth and earnings from our acquisitions will continue to generate capital for the Company. Let me note that the accretion or dilution from these equity issuances will depend on your assumptions and whether the proceeds from the capital raising are reinvested at a certain rate of return or used to repay debt obligations.

In addition, we have quantified what we believe the most significant risk exposures are for the Company going forward. This list includes risks such as further decline in subprime markets, our outstanding leveraged finance commitments, potential downgrades in monoline credit ratings, consumer credit and a number of other items. The exposures to these areas were stress-tested against economic downturn with a variety of severity levels such as multiple recessionary scenarios. We looked at the impact of quantitative stresses such as substantial spread widening in some cases and in others, we applied a combination of data and judgment to events such as counterparty rating downgrades and bankruptcies. Taking all of these factors together, we determined the capital shortfall that would result in order to meet our targeted ratios by the end of the second quarter. Today's equity issuance addresses this potential capital shortfall under multiple scenarios.

As it regards to our dividend policy, we have announced today that we are reducing our dividend to $0.32 a share this quarter or approximately a 40% reduction. The dividend reduction reflects the approximate sizing of our dividend relative to our growth opportunities and the volatility of each of our businesses. After a careful analysis of our businesses, given the normal risk that we have on an ongoing basis, we were faced with two choices -- either increase the excess capital that we carried permanently to reflect the ongoing exposures of the Company or better align our payout ratio so as to be able to restore our targeted capital ratios in a reasonable timeframe after a capital-reducing event. We recommended a dividend policy change to the Board alongside the capital raise and they approved this change yesterday. When the Company returns to a more normalized level of earnings generation and capital ratios, we have the flexibility to supplement the dividend with share repurchases.

Now slide 14 shows the summary of the terms of today's equity issuance. As the terms indicate, today's privately placed equity issuance will generate $12.5 billion in proceeds in the form of a convertible, perpetual preferred stock at a 7% dividend yield, which is not tax deductible. There is a 20% conversion premium and the securities are non-callable for a period of seven years. We have provided a more expanded term sheet with the press release that we issued this morning.

In addition to this offering, we intend to offer public investors approximately $2 billion in newly issued convertible preferred securities for which the Company already has substantial commitment. And an additional offering of straight non-convertible preferred securities. These offerings respond to investor demand and will provide shareholders the opportunity to purchase securities similar to those in the private offering.

Slide 15 shows the pro forma impact of today's equity issuance and the Nikko share exchange for the fourth quarter on our two target ratios. The combined impact of these two specific capital rebuilding efforts on the Tier 1 and TCE ratios ahead of our stated -- put us ahead of our stated targets, putting us in a position of capital strength as we head into 2008.

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Now I will briefly take you through the results of each of our business lines. Slide 16 shows the results in our US consumer business. Record revenues were up 6% on continued momentum from our strategic actions. Excluding a $136 million pretax gain on the sale of MasterCard shares, revenues were up 4%. In US cards, GAAP revenues were flat, driven primarily by the impact of higher funding costs and higher credit costs flowing through the securitization trust. Higher funding costs are due to a significant widening of spreads in the asset-backed and commercial paper market. Higher credit costs reflect deterioration in the consumer credit environment. Managed revenues in US cards increased by 8% on a 4% growth in managed receivables. Our efforts to focus on growing non-promotional balances are making good progress. Purchase sales were up 8%. Both retail distribution and consumer lending revenues were higher on strong volume growth. Expenses in the US grew by 13%, reflecting the charge for Visa-related litigation exposure of $292 million. Excluding this, expenses were up 5%. Credit costs increased by $4.1 billion, driven by the factors I discussed earlier. The net loss is reflective of the higher credit costs.

Slide 17 shows the results in our international consumer business. Let me start with the gray zone this quarter. We had a loss in the Japan consumer finance business this quarter of $168 million. The revenues for this quarter include a $188 million charge to reserve as estimates for losses from refund claims increase. Revenues in the fourth quarter of 2006 included a $580 million charge to increase reserves. The fourth-quarter 2006 reserve build was predicated on our assumption that refund levels would plateau by the first quarter of 2008.

Currently, leading indicators of refund claims, such as the legal filings for these claims, are volatile and there has not been an observable leveling off of these claims. The current quarter reserve build of $188 million reflects our -- $168 million -- reflects our consumption that refund claims will level off sometime in the second half of 2008.

Expenses were lower by 54%, reflecting the absence this quarter of a $60 million restructuring charge taken in last year's fourth quarter. Additionally, since we have last year's fourth quarter, we have closed 84 branches and 279 automated loan machines and reduced direct staff by 1255. We continue to actively reposition the business to reflect the current environment.

Credit costs increased by 17% on higher NCLs. The Japanese consumer finance business environment remains difficult. Now let's put the Japanese consumer finance business aside and look at the results in the middle of the page. As you can see, excluding Japanese consumer finance, international consumer revenues are up 39%. Pretax income is up 76%, and net income is up 52%. Revenues for this quarter include two one-time items. First, a $570 million gain on Visa shares; second, a $313 million gain on the sale of our ownership in Nikko Cordial Simplex Investment Advisors.

Excluding these items in prior year gains from the Avantel sale, revenues were up 29% reflecting strong organic growth and the impact of acquisitions. International cards average net receivables grew by 53%. We launched eight new co-brand partnerships in the quarter, including the airline EasyJet in the UK and a fuel program with Shell in Malaysia. We now have 207 partnerships in 52 countries and continue to actively expand the partnership program.

Retail banking revenues were up 31%, or 32% excluding this quarter's Simplex, and last year's fourth quarter's Avantel gain, driven by strong loan deposit and investment product sales growth. Net income increased by 17%, reflecting continued investment spending and lower tax benefits this quarter.

Outside of Japan, consumer finance receivables were up 21% and received revenues were up 15%. International consumer expense growth of 24%, excluding Japan consumer finance, reflected the acquisitions that closed during the year and continued investment in our distribution network and the impact of foreign exchange.

We opened 431 retail branches and 79 consumer finance branches in 2007. Including and excluding Japan, revenues were a record, and the rate of revenue growth exceeded the rate of expense growth. And excluding the three one-time items from revenues, the business had positive operating leverage in the quarter. Outside of Japan, credit costs were up 35%, roughly in line with volume growth. For the total business, net income more than doubled on a reported basis and was up by 28%, excluding Japan consumer finance, the Visa share and Simplex gains and the prior year Avantel gains.

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Slide 18 shows our markets and banking business. Revenues were a negative $11.7 billion and we reported a loss of $11 billion. The main driver of the revenue decline was the write-down on subprime-related exposures in our fixed income markets business. Of the $18.1 billion total write-down, $17.4 billion was taken against revenues and $704 million in higher credit costs. As discussed earlier, after taking into account the write-down, our direct subprime exposure was $37 billion at the end of the quarter compared to $55 billion at the beginning of the quarter.

In leveraged lending, our commitments for highly leveraged transactions totaled $43 billion at the end of the quarter with $22 billion in funded and $21 billion in unfunded commitments. This compares to total commitments of $57 billion with $19 billion funded and $38 billion unfunded at the end of the third quarter. We had a net $135 million pretax write-down on these commitments.

Offsetting these declines, several businesses showed strong results in the quarter. In equity markets, the cash business generated record revenues and equity finance had the second-highest revenue quarter in its history. For the full year, equity markets generated record revenues, up 24%.

In our investment banking business, we had record revenue results in advisory and we advised on seven out of the top 10 deals in 2007. In global transaction services, revenues increased 44% to a record $2.3 billion, driven by higher customer volumes, stable net interest margins and the acquisition of The BISYS Group, which closed in August 2007.

Key revenue drivers continue to grow at strong double-digit rates with each of the three major businesses -- cash, securities fund services and trade -- posting record revenues. Expenses increased 20% versus last year. Lower compensation costs in securities and banking were offset by a $438 million charge related to net headcount reductions and moves to lower-cost locations, higher costs from acquisitions and foreign exchange and higher compensation costs and transaction services.

Record revenues in Latin America and the second-highest quarter in Asia reflected the strength of the franchise in those regions and the fact that market dislocations in the US, while affecting some markets, did not have widespread impact across the globe. The overall investment banking pipeline decreased during the quarter driven by a drop in leveraged finance activity and lower M&A pipeline after a record quarter. The equity underwriting and investment-grade pipelines remain strong.

Slide 19 shows the write-downs taken against each category of our direct subprime exposure. The total write-downs, including the related higher costs for the fourth quarter, were $18.1 billion, including $2.9 billion taken against the lending and structuring position of $11.7 billion and $14.3 billion against the net super senior direct exposure of $42.9 billion. The gross exposure was $53.4 billion.

First, on the $42.9 billion of net super senior direct exposures and the associated $14.3 billion write-down, these exposures are not subject to valuation based on observable transactions and were valued based on a discounted cash flow methodology. The methodology that we used has been refined and the inputs have been modified to reflect ongoing market deterioration. We used a proprietary model to calculate vectors for conditional prepayments to default rates and loss severity. A key factor in the model is the assumed housing price adjustments. Assumed housing price adjustment has been revised downward since our November 4 estimates. The overall level of housing price adjustments used in our valuation methodology is approximately 6.5% to 7% downward for each of the next two years.

Our methodology uses a series of factors to derive that adjustment, including projected national HPA, differences between subprime and other sectors of the mortgage market and the geographical concentration of the relevant mortgage pool. We also use other macroeconomic factors and borrower characteristics and loan features. We have incorporated adjustments to capture other subprime market factors such as fraud.

Our methodology produces projected cash flows, which we then run through a distribution waterfall for each transaction. Finally, we discount the projected cash flows by a number of factors, including a discount for each level of exposure to reflect factors such as liquidity premium and the uncertainty associated with structured investments.

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In addition, there was an incremental loss of $935 million primarily related to rating downgrades of hedge counterparties with subprime exposure, primarily monoline insurers. Second, the $11.7 billion of gross lending and structuring exposure was written down by $2.9 billion. Of the $2.9 billion, $2.6 billion related to CDO warehouse inventory and unsold tranches of ABS CDOs.

Over and above the technical analysis I have just described, the team has looked at several other factors, including the ABS index performance and continued rating agency downgrades. The combined effect of this analysis led to a total write-down of $18.1 billion, reducing our $55 billion direct subprime exposure to $37 billion at the end of the third quarter.

Slide 20 provides the vintage breakdown within each of the four major categories of our super senior direct subprime exposure. 58% of the portfolio was originated in 2005 or earlier, while 42% was after 2005. Of the ABCP exposure, these structures were essentially terminated towards the end of 2005, which is indicated in the fact that the vast majority of the collateral is of 2005 or earlier vintages. The CDOs, however, have a higher proportion of 2002 -- 2006 and 2007 vintage assets, reflective of the industry growth and our market participation in those two years.

Slide 21 shows our global wealth management business. Revenues were up 27% driven by strong customer activity, the impact of Nikko and the inclusion of the Quilter acquisition. Excluding Nikko, revenues were up 12% and were a record. Assets under fee-based management were up 27%, 9% excluding Nikko on strong flows in the fee-based business. Expenses were up 26% driven by an increase in compensation costs on higher revenues and the impact of acquisitions. Excluding Nikko, expenses were up 8%. In including and excluding Nikko, the rate of revenue growth exceeded the rate of expense growth. Strong revenue growth, good expense control and the impact of acquisitions drove an increase in net income of 27%.

Slide 22 shows the results in alternative investments and corporate and other. In alternative investments, revenue and net income declined reflecting lower proprietary investment revenues and mark-to-market losses from changes in the market value of Legg Mason shares this quarter. Client revenues were up 16% from a strong fourth quarter in 2006.

One point to note, as we announced on December 13, we consolidated the assets and liabilities of the Citi-advised SIVs onto our balance sheet. At the time of the announcement, the value of the assets and the liabilities was $62 billion with $2.5 billion of junior notes in the liabilities. The value of the assets and liabilities was $59 billion at the end of the fourth quarter, including $2.3 billion of junior notes. Corporate and other income increased slightly as higher funding costs were offset by lower taxes held at corporate.

Now to wrap up, the fourth-quarter results were driven by two main factors -- $18.1 billion in write-down on our direct subprime exposures and $5 billion of US consumer credit costs. These two items overwhelmed good progress in many of our businesses such as international consumer and wealth management and against many of our objectives such as enhancing asset productivity.

Now a few thoughts on 2008 as we closely watch the global economy. To start, let me state something that is obvious. The first half of this year will have a much more difficult comparison than the second half. Let me first address the areas where we continue to see risks and potential downside.

Starting with what we see in January, there are promising signs of good volumes in our markets and banking business after a particularly weak November and December. However, many parts of the fixed income market and many types of investment vehicles, such as CDOs, have shrunk dramatically and we are not optimistic that they will regain a foothold in the market.

We continue to watch credit very closely and our expectation based on the acceleration in mortgage delinquencies that I have discussed is that consumer credit in the US will continue to deteriorate. Overall, cost of credit, including NCLs and any incremental reserve builds, have and will continue to reflect the economic environment, credit performance in our portfolio and portfolio growth.

The situation in Japan consumer finance remains difficult and we continue to appraise or evaluate the prospects of that business. We have approximately $3.8 billion of exposure to monoline insurers with a little over one-third of our super senior subprime

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CDOs. The remainder is in the form of insurance on municipal bond positions where, to date, the mark-to-market impact has been limited. Finally, we continue to have $43 billion in highly leveraged loan commitments.

On the other hand, there are many strengths that are encouraging as we look towards the rest of the year. Our underlying business momentum is strong and we are well-positioned in many of the fastest-growing countries. We expect our broad presence and depth of client relationships to generate results. We expect to continue to expand our international franchise rapidly as many of the emerging markets continue so far to be largely unaffected by the US dislocation and are stable.

Credit conditions outside the US are stable. Domestically, our consumer businesses generated good volume growth with strong expense discipline as Smith Barney continues to translate its leading market position into strong financial results. We are making substantial progress on asset management. Our 2008 reengineering program is underway. We have executed the first phase and as we progress during the year, we expect to show discernible results from these actions. We renewed the strength of our capital base. We expect to be able to continue this growth momentum and take advantage of many new client and market opportunities across the franchise. That concludes the financial review of the quarter. Let me now turn it back to Vikram for his final remarks before we open it up to questions and answers.

Vikram Pandit - Citigroup Inc. - CEO Thanks, Gary. There is no doubt that we are in the midst of a very challenging environment. Our results in the future will be influenced by the economy, as well everybody else's. But we are working as hard as we can to lead with our front foot and capture opportunities for our shareholders. I am taking a clear-eyed view of our Company. This is a company with great promise. The breadth and depth and quality of our franchise around the world are unique. Citi is a unique company, unmatched in scale, expertise and brand and when you look at the major growth trends in financial services, our businesses are squarely positioned against these, especially in the international markets. I am going to have much more to say about that on Citi Day, which we intend to schedule in the near future.

I should not end without saying it is a privilege to work with the Board, Sir Win, Gary and the whole management team to help Citi regain its momentum and drive towards growth. I'm also looking forward to meeting you, our investors and analysts. I have had a chance to work with many of you over the years and I welcome your ideas.

Before I turn it over to your questions, let me make two more points. One, I want to thank Art for all he has done in the last few years as head of IR. He is considered by many to be the best in the business. After helping with the transition time in IR, Art will move into one of our businesses in a senior capacity and I look forward to working with Scott Freidenrich as he steps into his new role as head of Investor Relations.

Secondly, this has obviously been a very difficult quarter for us and there is no getting around that. However, we are facing forward. Given this environment, I am not going to make any promises. There are risks as outlined by Gary and so I will ask you to measure us on our actions and our performance. Our performance will be driven by a strong risk culture, the elimination of unproductive expenses, improvement of asset productivity and talent. By focusing on these priorities, we will drive shareholder value. Thank you and now Gary and I will be happy to take your questions. We are going to have plenty of time to talk about the strategic and other issues in the future. Obviously, a number of your questions are likely related to the financial results.

Art Tildesley - Citigroup Inc. - IR Operator, we are ready to begin the question-and-answer session. Before we do, if I may ask that everyone, if they could limit their questions to one question and one follow-up. We would appreciate that. Thanks. Operator?

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QUESTIONS AND ANSWERS Operator (OPERATOR INSTRUCTIONS). Guy Moszkowski, Merrill Lynch.

Guy Moszkowski - Merrill Lynch - Analyst Good morning. First of all, just to address the significant deterioration in credit quality in the US, especially in the real estate lending area, can you give us a sense for whether that deterioration accelerated significantly in December or was it pretty much consistent over the last three or four months?

Gary Crittenden - Citigroup Inc. - CFO Guy, I think it is fair to say that it has accelerated from month to month. You might recall at the end of the third quarter we talked about an acceleration towards the end of the third quarter and that really has continued. So the quarterly line is what you can actually see in the documents that we provided to you, but I think it also advanced as we went through the quarter.

Guy Moszkowski - Merrill Lynch - Analyst And you talked about how many months of reserves you now have relative to current loss rate, but how should we think about the reserve build that you did in the quarter relative to what the models are telling you that you should be expecting over the next year?

Gary Crittenden - Citigroup Inc. - CFO Well, what we try to do obviously is we try and capture the losses that are inherent in the portfolio and the reserving that we do. We did a lot of analysis on the portfolio and a relatively small portion of the portfolio is accounting for a large portion of the losses overall. Using that insight, we obviously have tried to capture what we expect to be losses that will evolve over time in the portfolio and so we have done what we believe is possible at this point to capture those future losses. Obviously, this is a very strong reserve level. I think on a relative basis and in absolute terms, it is a strong reserve level, but we think that is the appropriate level to be reserved at given the way the environment has deteriorated and the losses that we have observed.

Guy Moszkowski - Merrill Lynch - Analyst And if I can turn for a moment to the CDO exposure in the investment bank. So you are now carrying these exposures at around a one-third haircut to where you were carrying them at the end of the last quarter. How does the carrying value though relate to the initial or par value of the portfolio? And then sort of a sidebar question to that is as you described it, you initially said that there was really nothing observable that you could use to mark these and yet you did at the end say that you did somehow incorporate the ABX indices. So maybe you can clarify for us a little bit how you did that.

Gary Crittenden - Citigroup Inc. - CFO I don't know off the top of my head the exact par value. I do know that we took marks of about $1.9 billion or something like that in the third quarter. So if you added that onto the position, you would come relatively close to what the beginning par value was of these securities. But it was kind of roughly of that order of magnitude I would say.

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We -- obviously, I went through a process of describing the cash flow model. When you complete that whole exercise, one of the things that you normally do is you take a look at so what kind of a result would this give me against indices that are trading that in some way are reflective of securities that have similar types of ratings. There are inherent disadvantages or inherent problems with the use of the ABX indice as kind of a basis for doing valuation. But it is a useful crosscheck against our cash flow model. So that is what we did. After we ran the cash flow model, we checked it against those indices to see if we could uncover any inconsistencies.

Guy Moszkowski - Merrill Lynch - Analyst Okay, and then if I can, I would like to ask a final question, which is a way a little bit from the current results, but, Vikram, as you have spent the last several weeks beginning to review the businesses, what is coming together in your mind as sort of the framework that you will use for thinking about the retention or divestment of businesses or sub-businesses and can we get some flavor for whether you think there is really scope to simplify the Company materially?

Vikram Pandit - Citigroup Inc. - CEO Guy, you know we have got tremendous businesses positioned extremely well against a lot of the growth trends and I am going through a review of all of that. I think it is a little too early to comment on any of that. Suffice it to say that when you look at the franchises we have got around the world, we have a tremendous information [net] as an organization. We have an ability to move capital around. When you look at client needs and the complexity in the financial markets is increasing, we have got a unique capability of addressing complexity for our clients as we have the breadth and depth of products and services that they need. And when you look at, again, the secular growth trends in the financial services businesses around the world, a lot of our businesses, as I said before, are squarely positioned around that. And so there is a lot of thinking that is going into that, but I hope to talk a little bit more about that in the future, hopefully on Citi Day.

Guy Moszkowski - Merrill Lynch - Analyst Okay, thanks very much.

Operator Betsy Graseck, Morgan Stanley.

Betsy Graseck - Morgan Stanley - Analyst Vikram, it would also be helpful just to understand how you're thinking about prioritizing the investment opportunities that you have. I would think that in meeting with the folks in the field, you are getting lots of ideas for how to reinvest in the business and to grow from here and it would be helpful to understand how you're thinking about making those decisions.

Vikram Pandit - Citigroup Inc. - CEO I think that is a great question. You know where the growth is in financial services, Betsy, and there is nothing that I'm going to say that is going to come as a surprise to you. We are investing in said growth and whether it is narrow areas in our trading businesses or whether it is broader areas -- it is in emerging markets in the growth we see there -- you will find that we are extremely disciplined in making sure that the investment dollars are going to the right place and we're equally disciplined as we started the process to make sure that we are looking at businesses that are not growing and/or the returns are not adequate

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Betsy Graseck - Morgan Stanley - Analyst Okay. And obviously reinvesting in financial institution-related businesses comes, in some cases, with a requirement for capital. And since you are post the capital raising efforts that you announced this morning that you plan to be completed during this first quarter, you will be sitting with capital levels that are above minimal levels that the organization had outlined for itself in prior calls. It would be helpful to understand if, at this stage, post these capital raises, you feel you are in a position of excess capital such that the delta between your minimum and where you stand post capital raise would be able to get reinvested in a relatively short period of time.

Gary Crittenden - Citigroup Inc. - CFO (technical difficulty) our normal exposures in the business and as we have played for these recession scenarios that I talked a little bit in my prepared remarks, we want to be able to ensure that, in a stress scenario, we have sufficient capital to be able to do what we need to do. And so the way I would think about this is in a downside scenario, we believe we have worked hard to make sure that the capital formation that we have in place is good. Should that downside not materialize, then we have, just as you said, opportunities to put that capital to work in productive ways in client circumstances that are likely to be quite unique over the next couple of quarters. So kind of regardless of the outcome, we feel like it was the right amount of capital and that it would be put to good use.

Betsy Graseck - Morgan Stanley - Analyst I guess I missed the beginning part of your commentary, Gary. Did you indicate that you feel like you are just meeting your minimums at this stage or that you have some excess?

Gary Crittenden - Citigroup Inc. - CFO Well, in the deck, if you go back to the back part of the deck, it shows where we are in terms of our ratios and that would show that we are above the minimum, but I did go through and talk a little bit about the risk that we see in the environment and obviously there is a possibility of a downturn here and we have to be thoughtful about the prospects for a downturn and so it really depends. I mean this is obviously going to put us in a position that will allow us to exceed the capital ratios, assuming a fairly benign environment, but it also allows us, if the environment is much less friendly, to not have a capital issue down the road.

Betsy Graseck - Morgan Stanley - Analyst Okay, and just to be clear on the capital raise, $12.5 billion of private placement commitments already, $2 billion public offering in convertible preferred and then you have an additional offering of straight preferred, have you given any indication of the dollar amount associated with that?

Gary Crittenden - Citigroup Inc. - CFO We haven't yet. Obviously, it will be dictated in part by the demand in the marketplace.

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Betsy Graseck - Morgan Stanley - Analyst Okay, thanks.

Operator William Tanona, Goldman Sachs.

William Tanona - Goldman Sachs - Analyst Good morning. In terms of the follow-up on the last question, I actually didn't hear you in terms of the response there for the additional offerings of the straight preferreds.

Gary Crittenden - Citigroup Inc. - CFO We haven't sized the amount of the straight preferreds yet. That will be decided at the time we do the offering and will be based obviously on what we view the capital needs to be and what we think the demand in the marketplace is.

William Tanona - Goldman Sachs - Analyst Okay. And then in terms on that capital, as we think about all these capital raises that you have done, how should we think about the impact to earnings? As I think about the fourth quarter, you did the $7.5 billion in DECS obviously at 11%. Some of that was tax deductible, some wasn't. You added in the $4.3 billion of the enhanced trust preferreds. Now we have got the $12.5 billion in terms of the convertible preferreds at 7%. Is that straight 7% or is some of that tax deductible? And then in terms of what you think the rate might be on the $2 billion of the convertible preferreds you plan to offer to the public. Do you think that is going to be at similar rates to the 7% or the 11%? I am just trying to get a sense as to what the impact is going to be to earnings.

Gary Crittenden - Citigroup Inc. - CFO It is a lot of moving parts and we do have a good supplemental disclosure that we have provided around this particular offering that we are doing now and I think if you take that in conjunction with what we have already said about the ADIA offering, added together, it gives you a good feel for how these work.

The actual dilution associated with this is dependent on how the money is reinvested. If you assume that the money here is really used to pay down long-term debt, then obviously that has kind of a negative comparison associated with it because this is not tax deductible. The 7% is not tax deductible, so relative to our cost of long-term debt on an after-tax basis, it would be negative. If you assume we can deploy this capital at a higher return rate, something that would be reflective of our cost of capital or better, then at least some math would show that it is not particularly dilutive and in fact, in some circumstances, it would actually be accretive and those are estimates that you would actually need to make obviously on your own.

We have obviously considered all of this end to end in the context of the investment opportunities that we have and we think we have made the right trade-offs. As I mentioned in the early part of the call, we think the lack of transparency on our capital structure has had an impact on our trading over the last few weeks and this hopefully clarifies the capital structure issue in a pretty comprehensive way.

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William Tanona - Goldman Sachs - Analyst Okay. And then in terms of commercial real estate exposure, can you remind us again in terms of what your overall exposure is to that area, whether it is the overall CMBS portfolio or realistic that you might hold directly and then in terms of the hedging exposure that you talked on the CDOs, is that all to monolines, that $10 billion?

Gary Crittenden - Citigroup Inc. - CFO On the commercial real estate exposure, the part that we have that is held as direct loans is on page 16 of our supplement and at the end of the fourth quarter, it was $20.4 billion. The commercial real estate that we hold at the CMB I honestly don't have in front of me, but generally that is held in a trading account without substantial warehousing associated with it. And so again, I don't think that position in the overall scheme of the Company is a particularly large position. The $10 billion that you refer to in terms of hedged exposure is in part monolines, but not completely monoline. That is split among a number of different counterparties, but monolines obviously play a key role in the total.

William Tanona - Goldman Sachs - Analyst Okay, thank you.

Operator Mike Mayo, Deutsche Bank.

Mike Mayo - Deutsche Bank - Analyst Good morning. Can you talk some about the trade-off between pursuing growth and managing risk and as you pointed out, the credit card losses are up over 100 basis points in three months with unemployment only at 5% and mortgages getting worse. At the same time, short-term funding costs are higher over the last three months. So does that encourage you to pull back growth at all?

Vikram Pandit - Citigroup Inc. - CEO There are two different types of growth, Mike, and I think that's very important. There is growth because markets are growing, the growth as in emerging markets. We are seeing that in wealth management; we are seeing that in our services businesses, Latin America. It is in our international consumer businesses. So there are lots of places where the underlying demand for these products and services that we are offering are actually growing and growing in a way that is -- that reflects great returns on a risk-adjusted basis even if some of that growth may require some capital. That is a different concept versus trying to figure out what the growth is in some of the other businesses where you don't have the same top line and there is no intention we have of doing anything other in those businesses and make sure that we are there correctly on a risk-adjusted basis. And Gary talked about a number of things we are doing in some of those businesses. So our focus on growth is to make sure we are squarely there where the markets are growing and where we have a big opportunity, but we are focused on risk management. It's purely and clearly there to make sure that we have a simple, well-thought-out approach to making sure the risk-oriented businesses are tightly managed.

Mike Mayo - Deutsche Bank - Analyst Well, specifically, as it relates to US credit cards, the margin was down linked quarter. Is that an area where you might want to pull back or increase pricing or neither?

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Gary Crittenden - Citigroup Inc. - CFO Actually all of the above is happening, Mike. So we are tightening underwriting standards as you might guess. We are evaluating the open lines of credit that exist with current customers. We are doing cross reference work between customers where we have the mortgage position and where we hold the credit card and obviously, we are off of promotional balances essentially as we go through this fourth quarter. So this is a time -- as you no doubt have read -- there was a good article in the New York Times a couple of days ago about this. This is no doubt a time where, in the credit card business, you could make some substantial missteps if you weren't careful in watching the credit because there is some natural growth in outstandings that will take place. There's a bit of a substitution effect between home-equity loans and credit card loans and we are very aware of what those trade-offs are. This falls into the second category that Vikram just talked about. There is some growth that's good growth and there is other growth, which can be dangerous if it is done without the proper kind of risk parameters around it. But I think our team is very focused on these issues right now in the card business. Obviously, we have taken a bit of a reserve increase in the card business in this quarter, but we are very focused on what the risks are around the inherent or natural growth that is going to happen in that business over the next year.

Mike Mayo - Deutsche Bank - Analyst And then more generally on reengineering, last year, we heard about the reengineering project and I appreciate the change in management. When might we hear about reengineering and what are your plans for restructuring headcount in 2008?

Gary Crittenden - Citigroup Inc. - CFO So I think here is the way to think about it. So last year, we announced a large charge in the first quarter and 17,000 headcount reduction and a significant charge associated with it and we set aside a separate line item on the P&L to reflect that. You notice with this charge that we just took with 4200 heads, it flowed right into the income statement and we took it on a normal line item and I think that is reflective of how our view is going to evolve or is evolving around reengineering. This is our job now and forever. It's never going to change. Every single quarter, we have to get more and more productive. That is the only way that we free up the P&L dollars that we are going to need to drive the top-line growth of the business.

And so rather than a once-and-done effort, Mike, what I hope you hear over time is a continual stream of efforts that we are making to reduce headcounts in nonproductive areas and redeploy some of that benefit in driving the top line into business and advertising new product development technology, that kind of thing, as well as in margin improvement. And so this really is more a shift in tone than anything else and this, as both Vikram and I mentioned, represents the first installment in 2008.

We are very focused on the remaining program, which is an aggressive program, for the remainder of 2008 and obviously we have to get position for what we need for 2009 by the time we are in about the middle of 2008. So this is an ongoing process where I think hopefully you will see steady improvement and I would think about it somewhat akin to what you have seen on the asset side.

On the asset side, we had years and years, quarter after quarter of growth and now you have seen a bending in that growth in a reduction of $176 billion in assets, in GAAP assets this quarter underlining a more focused effort over time to make our assets more productive and we are going to try and apply that same kind of discipline to the way we think about expenses.

Mike Mayo - Deutsche Bank - Analyst All right. Thank you.

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Operator Meredith Whitney, Oppenheimer.

Meredith Whitney - Oppenheimer - Analyst Good morning, Gary. I have two take quick questions. The first is, I am trying to get my arms around 2008 run rate for share count outstanding and I am coming up with about 900 million in additional shares from Nikko, Abu Dhabi, the capital raise today. Is that in the ballpark?

Gary Crittenden - Citigroup Inc. - CFO We decided not to disclose exactly what the calculation is. You obviously know the total amount of the offerings that we have done and based on the total amount, you can derive what you think the proper share count is, that that is going to translate into. It obviously requires a whole series of assumptions in order to get to that number and we thought it best left to those who're doing the estimates.

Meredith Whitney - Oppenheimer - Analyst Okay. And then my second question is related to getting back to the CDO marks and just in terms of the logic and the parameters that you use in analyzing that. And so if I presume that you didn't take any marks prior to the third quarter and then look at what would be the marks going into this quarter and I know there are a lot of moving parts here, my biggest question revolves around the mezz portion because you, yourself, said that you don't expect a rebound in that market. So it seems as if you your carrying value is about $0.43 on the dollar, is above where the strike prices are or if there is a strike price, where the market has indicated.

Gary Crittenden - Citigroup Inc. - CFO So let me not confirm the $0.43 on the dollar. But obviously we have taken the reductions that we think are appropriate and it is heavily a function of what the vintages are in the portfolio itself. So if you go to page 20 in the deck, you see 48% of the mezzanine securities that we have are vintages that were before 2005 and 52% is 2006 and 2007. So it is hard to exactly make equal the positions of each of the major companies.

Now one of the things that we obviously have done in our own processes is after we have taken the marks that we have taken and concluded our values, we have compared those values to those who have recently announced with same types of collateral and I think, at least from our perspective, these appear to be pretty much in the range with others who are doing independent work on their portfolios. But as I said, the key thing here is the quality of the underlying collateral that really drives the position. I mean at the end of the day, this all gets extremely complex when you start looking at what the proper subprime deflator is for the housing prices, what the actual geographic ownership is that we have and then the underlying collateral and the quality of the underlying collateral and when it was actually developed. As you might guess, the model is very, very extensive. It tries to get at what we believe the real, most appropriate answer is.

The way I would think about this is that it is very difficult to forecast exactly where all this is going to go and we certainly could have additional risk as we go into the first quarter and the second quarter of next year, but we have tried to be thoughtful about that in terms of the total amount of capital that we have raised and so it is hard for anyone to say exactly where all this is headed, but we have tried to think through various scenarios that go beyond the scenarios that we have taken here and factor that into the amount of capital that we have put together with this step over the last couple of weeks.

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Meredith Whitney - Oppenheimer - Analyst Okay. And one just quick follow-up on your vision of where real estate prices are going nationally. Should we just use your economist outlook on that or are you using something separate?

Gary Crittenden - Citigroup Inc. - CFO Well, what we did is our economists did an average real estate price reduction for the country and that was kind of the basic number that we started with. Then we hired an outside firm with expertise in this area to help us then customize that deflator for subprime and then we took the step further of trying to further customize that deflator for the markets in which we have our individual CDO ownership and that was the thing that resulted in the assumption of between 6.5% and 7% reduction in 2008, 6.5% to 7% reduction in 2009. So we have done the best job that we think we possibly could to in terms of making this deflator specific for the ownership that we have and that is reflected obviously in the underlying cash flows.

Meredith Whitney - Oppenheimer - Analyst Okay and that matches with the loss assumptions for your own portfolio, your loan portfolio?

Gary Crittenden - Citigroup Inc. - CFO Yes, it has -- that is how it was created. So it ties directly to the ownership that we have.

Meredith Whitney - Oppenheimer - Analyst Excellent. Okay. Thanks, Gary.

Operator Glenn Schorr, UBS.

Glenn Schorr - UBS - Analyst Hi, Gary. Have you disclosed the size of what your Alt-A portfolio would be? And then could you just tell us what your cumulative loss assumptions are on both the high LTV firsts and high LTV seconds?

Gary Crittenden - Citigroup Inc. - CFO So on the Alt-A, we haven't split that out as a separate category. If it were a category that we anticipated that would be a substantial risk, I would have put it on the list of risks that I stepped down through at the end of the conversation. So we don't -- given the size of the position and the risk associated with it, we would not put it in the category that went on that list of other issues that I had enumerated. And then on the LTV question, I'm afraid I just missed it.

Glenn Schorr - UBS - Analyst Just what you are assuming your cum losses would be. You have basically about $50 billion between the first and second mortgages that you showed us on slide 10 that are 98% LTVs and above. Given your predictions for home price depreciation over the next two years, I would be concerned on LTVs of 90% or above because your assumptions mean that you would be

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Gary Crittenden - Citigroup Inc. - CFO Yes. So here is the way I'd think about it. First of all, the 6.5% relates to the specific markets in which we have CDO ownership and is different than where we have mortgages. So those are not necessarily exactly the same. And so we have to think about those as two kind of separate valuation exercises.

As I mentioned on the phone -- mentioned on the call, most of the losses that we are seeing relate to kind of one of two parameters. In the first mortgage portfolio, it has to do with the FICO scores of 620 or lower and that is over $20 billion of the portfolio and in the second mortgage portfolio, most of the losses have to do with where we have LTVs that are greater than 90%. So the loss kind of experience is different than what you are talking about -- prime mortgages or subprime mortgages.

Within that group, obviously we have seen most of the losses. So if you look on the little chart that we use to describe the performance over time of those first and second portfolios, you see what the loss rates are for those higher FICO scores. So in second mortgages, if you look at the 90 days past due, it is about two times the rate of those mortgages that have LTVs that are better than 90%. And on the FICO score where the FICO score on first mortgages is below or is above -- I'm sorry -- is below 620, it is roughly three times the loss rate. And so I don't know if that helps you calibrate, but obviously we come to the same conclusion you do that there is -- this is a focused problem in a very specific set of loans that had certain origination characteristics and that had these FICO scores or these loan-to-values.

And as we have created the reserve, we have customized the reserve. We are thinking about the losses associated with those categories and based on that, we concluded that we already had losses inherent in the portfolio that will manifest themselves over the next while that needed to be reserved for properly today and that is the way we have thought about it.

Glenn Schorr - UBS - Analyst Got it. And I think people would be interested in a follow-up -- I know I am -- on the Alt-A side. It's good news it is not in your substantial risk bucket. Is that a function of size or you just don't think that area is going to have the same deterioration we have seen in other credit buckets?

Gary Crittenden - Citigroup Inc. - CFO It is a function of size.

Glenn Schorr - UBS - Analyst Okay, that's cool. Last question is on the international side. We haven't seen big reserves building there. As a matter of fact, in the card business, loss ratios have fallen. The question is how realistic is it for us to assume, whether it be consumer or corporate for the international markets, that this [day] be [coupled]?

Gary Crittenden - Citigroup Inc. - CFO I think that's obviously something that you would have to look at in order to be comfortable with what the answer is. If you look on page 18 of the supplement, as you rightly say, our actual loss rates have remained actually dead flat and actually improved a little bit over the last little while. That said, I don't think anyone here is complacent about the potential risk that exists outside the US. So we are very focused in managing our exposures, particularly in Mexico, in the UK, in India and Australia.

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We are very focused on those four markets in particular and doing the same kinds of things that I had mentioned earlier in terms of looking at credit very carefully, ensuring that we are managing line sizes appropriately, looking at our underwriting standards. Those kind of action steps are being taken, which may, in fact, have the impact of slowing loan growth somewhat outside the United States as we go into 2008 or complete the rest of this year. So we anticipate that there is still some risk of loss out there in the international markets even though in the underlying numbers today, you would be hard to find it.

Glenn Schorr - UBS - Analyst Got it. Okay, thanks.

Operator Richard Bove, Punk, Ziegel.

Richard Bove - Punk, Ziegel - Analyst Hi, I am wondering if you could go back into the calculations under the discounted cash flow model and the marks and I am wondering what the interest rate assumptions were, whether you used some base rate to come up with the interest rate assumption for the discounting mechanism and whether you are assuming that that interest rate is going to move higher or lower because presumably, if it moves lower, there will be some write-up of the things you have just written down.

Gary Crittenden - Citigroup Inc. - CFO It's a very good question, Dick. The way we have looked at this is this is a little bit complicated, but we have looked at the downgrades that have taken place on the CDOs broadly in the universe of CDOs and so where we, for example, had a CDO that might have been rated AAA or AA and in the universe, if AAs and AAAs have generally been downgraded, we have assumed, even though if our particular CDO might not been downgraded, that were it reviewed, it would be held at a lower kind of credit rating. So it might be held at -- instead as a AA, a BBB or something like that.

We then have selected the analogous CLO discount rate at the bid end of the spectrum to be the underlying factor at which we discounted the cash flows. The thinking here being that it is a structured product that has similar kinds of characteristics and would be a good proxy for what the proper discount rate would be. And as CDOs have gotten downgraded, that has contributed to the increase in our discount rate and obviously to the increase in the total amount of loss that we have taken. And frankly, no one around here has had a discussion about whether or not that might go the other direction because we have been so focused on ensuring that we did the right thing with the valuation this quarter.

You do raise a very important question though and I hope this is clear to everyone that there is always a difference between the accounting valuation and the true cash flows associated with these products. So we have had virtually very small actual cash flow impairment on the super senior structures. It doesn't mean that the underlying securities are not or have not been impaired, but because of the retiering of the cash flows and the waterfalls, the actual cash flows have remained in tact all during this whole process.

Now obviously that is unlikely to stay completely true over the life of these products, but it does raise an interesting question about what the eventual cash flow recovery will be of these products relative to the cash flow or relative to the cash flow model valuations that we have done right now and we will all know the answer to this three years from today, but it certainly is at a point today where the proper accounting valuation is different than the current ongoing cash flow experienced by the more senior structures that we hold in the CDOs.

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Richard Bove - Punk, Ziegel - Analyst But it is not inappropriate to believe that if either housing prices don't fall as much as expected or there is a rating upgrade based upon actual cash flows or interest rates were to go lower that there will be a markup, which could be relatively substantial in size of these things that were marked down against today.

Gary Crittenden - Citigroup Inc. - CFO Those are all -- that's a good list of the considerations that one would think through. But to be perfectly honest, we just haven't focused on that at all, but those are some of the considerations that would go into thinking about the valuation.

Richard Bove - Punk, Ziegel - Analyst The second question would relate to the cash flow indication that you just mentioned and that is, to my knowledge, the $26 billion that has been taken either in write-downs or in loan loss provision are all non-cash charges. I think I heard it said that the equity raises will put the relevant ratios above what they were targeted to be let's say three months ago. Given the fact that there is no significant cash charge here, given the fact that the Company is going to wind up with perhaps some excess capital, I find it difficult to understand why you would cut the dividend.

In addition, since by cutting the dividend, you have knocked, at least today, $5 billion off the value of the stock, I am wondering where do the shareholders show up in this whole calculation? You've lost 40% of his dividend, his stock price is down $5 billion in value, and from what I think I heard you say, if there is no prospect of the dividend going back up again, there is going to be share repurchases as opposed to replacing the dividend. So how does the stockholder benefit by this?

Gary Crittenden - Citigroup Inc. - CFO Let me talk first of all, Dick, about the way we have thought about the dividend and just give you a little bit more color around that. So if you took the kind of a normalized situation -- so if you go back over the last few years and we have had say a $20 billion earnings level and you assumed a 55% payout ratio or something like that, that gave you 45% of that capital essentially to allow the business to grow and to take care of any shocks that might happen in the system assuming that we ran the Company right at the kind of targeted ratios that we have, right at 6.5% in TCE and 7.5% in terms of our Tier 1 ratio. That is basically the assumption that you made. That essentially, even under that scenario, gives you relatively little capital to rebuild your capital in the event of a shock scenario and obviously one of the things that I have to, as part of my job, think about all the time is what is the implications of the Company of having a shock scenario happen and we have just experienced one of those. We have just been through that and we have obviously taken the charge associated with that in this quarter. And that kind of an event could happen at some point down the road.

If it did happen at some point down the road, the proper way I think to manage this would be to do one of two things -- either to hold significant additional excess capital -- so even in the event of a shock, you are able to recover relatively quickly -- or alternatively, to reduce the payout ratio that would reflect what you believe the growth prospects of the business and the inherent exposures of the Company to be. Those are kind of the opposing trade-offs that we have as an organization and having thought through very carefully the amount of excess capital that we would need to hold the return on capital implications associated with that and looked at the trade-off of that relative to the payout ratio given the businesses that we are in and the inherent volatility that we think exists in those businesses, we tried to make the right long-term decision.

So this was not a -- this decision was not made for the next quarter or the quarter after that. It was a recommendation that we made looking forward overtime, trying to consider the growth prospects of the Company and as I say, the inherent exposures

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Now there is no doubt that this is a short-term difficult decision for us, but we felt, in the context of the uncertainty that exists in the environment, as well as the growth opportunities that exist in front of us, that both the capital raise made a lot of sense for us, as well as a dividend policy that positions us appropriately to rebound in the event of an exposure event down the road.

Richard Bove - Punk, Ziegel - Analyst A final thought on that and that is that I think I heard a number of times said that the dividend was being sized relative to the growth prospects of the Company. So if I assume a 40% payout ratio and a dividend of about 28, presumably the Company is setting out a 320 if you will, ability to show earnings over some timeframe, which would be substantially lower than let's say the $1.25 inherent in the second-quarter numbers. So is the Company, in fact, saying that its earning capacity is substantially less and because it's earning capacity at substantially less, shareholders should take a $5 billion one-day hit in their holdings and a 40% reduction in their dividends?

Gary Crittenden - Citigroup Inc. - CFO Dick, obviously, we don't give forecasts for where we think the future is going to go. We also carefully did not talk about a payout ratio here. We didn't think about it necessarily in terms of a specific payout ratio. We thought about it in terms of the capital formation and our ability to respond relatively quickly to a stress scenario in the environment. And it doesn't -- I mean it mathematically calculates into a payout ratio, but that is not the way we derived it.

Richard Bove - Punk, Ziegel - Analyst Okay. Thank you.

Operator David Hilder, Bear Stearns.

David Hilder - Bear Stearns - Analyst Good morning. Just one question on the timing of the headcount reductions. Have those actually taken place?

Gary Crittenden - Citigroup Inc. - CFO They are in process right now, David.

David Hilder - Bear Stearns - Analyst And so you should see some benefit in the first-quarter expenses?

Gary Crittenden - Citigroup Inc. - CFO Yes, we will see -- yes, the answer is yes.

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David Hilder - Bear Stearns - Analyst Okay. And then secondly, if you could provide any finer detail on what would qualify as non-core assets prone to divestiture or balance sheet reductions in the near term?

Gary Crittenden - Citigroup Inc. - CFO Well, I think the ones that we have most recently done kind of give you an idea of that. So we had sold down a portion of our ReadyCARD ownership, which is a merchant servicing business that we had part ownership in Brazil. That is an example of it. We sold the Simplex Investment Advisors, which was a real estate investment advisory firm in Japan that we just sold our percentage of the ownership in and I think frankly, if you flip through the supplement, you would probably come up with a list that is pretty close to the list that we have of those things that aren't directly related to the kinds of things that we do that would be on our short-term list of actions that we would take to supplement the cash flow generation or the capital generation that we have just done.

David Hilder - Bear Stearns - Analyst Thanks very much.

Art Tildesley - Citigroup Inc. - IR Thank you, everyone, for joining us today. We realize this has been a long call. Any other questions you have, please give us a call at Investor Relations, we would be happy to help with those. Otherwise, operator, this concludes this call.

Operator Ladies and gentlemen, this does concluded Citi's fourth-quarter and full-year 2007 earnings review. You may now disconnect.

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