Capital Markets

Maybe Citi Should Just Call Them “Sieves”

Citigroup acquires about $17.4b of its structured investment vehicles, which have fallen from $21.5b since Sept. 30.
Stephen TaubNovember 19, 2008

Citigroup said it has acquired about $17.4 billion of assets held in its troubled structured investment vehicles, or SIVs, in what it described as a nearly cashless transaction.

The value of these assets has fallen from $21.5 billion on Sept. 30, it added, with the decline primarily reflecting asset sales and maturities of $3 billion, and a decline in market value of $1.1 billion since the quarter’s end.

The transaction, which Citi will record as assets available-for-sale, would complete the wind-down of the Citi-advised SIVs, the bank said. As a result of the transaction, Citi’s GAAP assets will be reduced by about $6 billion and risk-weighted assets will be increased by about $2 billion.

The SIVs have been selling assets as part of an orderly asset-reduction plan to fund maturing debt obligations on a timely basis, and have reduced long-term assets from $87 billion at the end of July 2007 to $17 billion currently, Citi said. Citi previously said it has been providing financial support to the SIVs.

The current fair value of the support is $6.5 billion and is expected to be repaid upon completion of the transaction.

The transaction will result in the SIVs’ having sufficient funds to repay maturing senior debt obligations, the bank stressed.

Bloomberg News said that Citi invented SIVs in 1988. They became a hot button issue about 15 months ago, however, as one of the first major strains in credit markets stemming from record foreclosures on subprime mortgages, the wire service noted.

The news service said that the SIVs had been designed to sell short-term debt and buy longer-dated and higher-yielding assets, including bank bonds, mortgage-backed securities and collateralized debt obligations. The report noted that the short-term debt was favored by money-market funds as well as government investment pools that manage cash for schools and towns.

Problems surfaced when many of the buyers refused to roll over their investments as they became increasingly worried that the SIVs’ assets lost value as credit markets began to crumble last year.

Citi’s stock slipped below $8 in mid-Wednesday trading, its lowest level in more than a decade.