VideoAlso, as the world has changed, there has been concern about big, complicated, global companies, and we are one of the biggest and most complicated. Over time, people will get comfortable that a company this size can be managed very well for growth, and that we can continue to deliver quarter-on-quarter.
And we're hopeful that the geopolitical situation will settle down a bit. I think that will be helpful to the stock as well.
You think the geopolitical situation is hurting Citigroup's stock?
I think those are bigger overhangs than the specific issues from last year.
Citigroup sponsors major conduits for issuing asset-based commercial paper. What affect did FIN 46 [FASB's ruling on consolidation of variable interest entities] have on the special-purpose entities [SPEs] that serve as those conduits? You did not ultimately have to consolidate them onto your balance sheet.
Right. The Financial Accounting Standards Board scoped out qualifying SPEs, so things like our securitization vehicles for credit cards were [not changed by] FIN 46. I don't think there are abuses in those. [Qualified SPEs] help the U.S. capital markets operate more efficiently, and securitization of credit cards has been a very valuable part of the development of the capital markets.
Commercial-paper conduits were [not excluded from FIN 46.] We provide a service, essentially, for customers. They have assets, they want to get funded, and they want to issue commercial paper backed by those assets. We offer a way to intermingle various customers' assets and then offer [commercial paper backed by those assets] to the marketplace. We provide a service that's not that much different from a mutual fund.
According to FIN 46, we would have had to consolidate about $55 billion of customer assets under our balance sheet. I don't think it's reasonable for us to do that. So we asked, "Is there a way to structure these vehicles that meets the new FIN 46 requirements to keep the customers' assets off our balance sheet?" And we realized that we could restructure the assets by selling off some first-loss positions to outside, unaffiliated investors.
Because if outside investors hold the expected-loss tranche, FIN 46 defines them as the primary risk taker, and they must consolidate the assets on their balance sheet, correct?
Yes. And we have actually gone through—in detail—with the SEC, with the Federal Reserve, and with FASB the approach we're using for restructuring. So I think that's well understood at this point. As a result, we are not consolidating these customer assets on our balance sheet.
It must have been a pretty big scramble to do that by this summer's deadline.
Well, it's sort of a matter of course around here; when things change, you get out in front of them and address them.
Presumably, your cost of lending could have gone up, or the cost of borrowing could have gone up for your customers. Do you think that when FASB put FIN 46 together it gave adequate consideration to the potential economic impact?
I can't speculate on what FASB thought when it was issuing Fin 46. I would say that the commercial-paper market works very well. The commercial-paper conduits that we and other banks offer are a valuable service to customers.
Our fees are very small for the service we provide. You can't be in the business with that level of fees and justify having $55 billion of assets on the balance sheet as long as they are risk-weighted by the Fed. So either the fees would change dramatically, or we and others, I believe, would have gotten out of the business. That would have been a real shame, because this is an important funding mechanism for a number of our customers.
You mentioned that you spoke with FASB about your restructuring effort. But when this was all being hashed out, FASB chairman Bob Herz spoke at a Bond Market Association meeting and gave the impression that the economic impact on the banks was not FASB's concern; that the concern was "getting the accounting right." By continuing to keep the conduits off your balance sheet, do you feel nonetheless that you're operating within the spirit of FIN 46?
Yes. I think everything we've done fits within how FIN 46 was written. It addresses the structural requirements to have things off the balance sheet. We've reviewed those with everybody, so I believe it does.
And the ultimate cost impact of FIN 46?
It did increase the cost for us in the sense that we needed to restructure these things, which cost us some money. Essentially, we end up sharing our fees with outside investors, so our revenue will be lower than before. But the amount of revenue we get from commercial-paper conduits is—in the context of corporate investment-banking revenues—very small.
FIN 46 may also affect trust-preferred securities [TRUPS]—in this case by requiring that they be taken off your balance sheet. What impact would that have on Citigroup?
Trust-preferreds have been designated by the Federal Reserve as Tier 1 capital up to a certain amount [25 percent] of a bank's total Tier 1 capital. So it's an important way to get equity in Tier 1 capital as a bank holding company. The accounting—it's interesting, and I believe this was an unintended consequence of FIN 46—raises the question of whether you would have to deconsolidate TRUPS. We've written a letter to the SEC and we, as well as a number of accounting firms, believe FIN 46 will not cause a change in consolidation for the purpose of TRUPS. But it's an ongoing debate.
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