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Citigroup Statement on CEO Prince
November 5, 2007
The Board of Directors of Citigroup Inc. (NYSE: C) today announced that Robert E. Rubin, Chairman of the Executive Committee of Citi and a member of the Board of Directors, will serve as Chairman of the Board.

In addition, Sir Win Bischoff, Chairman of Citi Europe and a member of Citi's Business Heads, Operating and Management Committees, will serve as acting Chief Executive Officer. The Board also announced that Charles Prince, Chairman and Chief Executive Officer, has elected to retire from Citi. The Board has designated a special committee consisting of Mr. Rubin, Alain J.P. Belda, Richard D. Parsons, and Franklin A. Thomas to conduct the search for a new CEO.

Mr. Prince commented, "We have made strong progress in our strategy for building for the future, evidenced in the momentum we have achieved in most of our businesses. Nevertheless, it is my judgment that given the size of the recent losses in our mortgage- backed securities business, the only honorable course for me to take as Chief Executive Officer is to step down. This is what I advised the Board.

"It has been my privilege to lead this powerful diversified financial services company for the past four years and to be affiliated with the directors, shareholders and employees of Citi and its predecessor companies for the past 29 years. I am proud of the significant progress we have made in rapidly building and expanding the scope of our businesses internationally, strengthening our businesses domestically, and restoring excellent relationships with our regulators throughout the world."

Mr. Belda said, "Chuck has been an extraordinarily committed leader who took on many difficult issues that needed to be addressed and strengthened Citi's position for the future. He moved the company toward its higher margin businesses, investing in areas where we have key competitive advantages. He augmented our unrivaled international franchise through groundbreaking acquisitions and partnerships, greatly improved our technology, and invested in our people. We thank Chuck for his unwavering commitment to Citi, its employees and its shareholders. Citi has extraordinary people and the Board is committed to working together with them to see that Citi realizes its tremendous potential. We are fortunate that Chuck will continue to serve the Company in an advisory capacity while a search for his replacement is underway."

Mr. Rubin said, "The Board and I have tremendous respect for Chuck's leadership and his accomplishments over the years in helping to develop the Company's culture and direction and honing its formidable competitive advantages. Citi is a unique global institution with a strong capital base, industry-leading businesses and above all, tremendously talented employees, who are our most important asset. I intend to work closely with the Board, Win, and the operating and executive leadership to maintain the momentum of our business. We will continue to focus on taking the steps necessary to help our employees realize their full potential, serve our customers with distinction, and build superior value for all of our shareholders.

"We intend to complete our search for a new CEO as expeditiously as possible, reviewing qualified CEO candidates from outside as well as within our organization. In the interim, we have in Win an acting CEO who has had a distinguished and successful career in the financial industry, serving as Chairman of Schroders plc before joining Citi in 2000 with the acquisition of Schroders' investment banking business by a Citi predecessor company. Most recently, he has chaired our growing businesses in Europe, the Middle East and Africa.

"In addition, a new unit, the sole focus of which will be on managing the assets related to sub-prime mortgage securities and their resultant exposures, has been established. This unit will be separate from the other parts of our capital markets and banking business," Mr. Rubin said.

"As Acting CEO, I am pleased to be able to draw on the talents of our distinguished and committed Board and experienced management team. Together, we will see that our current plans are effectively executed and will continue to consider new ways to strengthen and grow our businesses," Sir Win said.


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Citi Struggles to Calculate Losses
Bank Could Increase
Its Write-Downs
By Billions More
November 5, 2007
When the market for mortgage securities entered a meltdown over the summer, financial firms holding billions of dollars of hard-to-trade assets used mathematical pricing models that were heavily dependent on credit ratings. When the credit-rating firms began a massive downgrade campaign last month, firms such as Citigroup Inc. and Merrill Lynch & Co. saw the value of their holdings plummet.

Citigroup's struggles to put an exact number on its losses demonstrate just how fallible the models can be, and how serious the consequences. Last night, Citigroup said that the downgrades will result in a reduction of fourth-quarter net income of $5 billion to $7 billion. That follows a third quarter when Citigroup recorded mortgage-related write-downs of $2.2 billion in the third quarter, including losses on subprime securities and fixed-income trading.


The latest update, much of it involving securities linked to subprime mortgages, follows a revision made late last month by Merrill Lynch that boosted third-quarter write-downs to $7.9 billion from an earlier estimate of about $4.5 billion. As a result, analysts are beginning to see Merrill's big hit as less of an anomaly than originally thought.

"We estimate that there's over $10 billion of write-downs in the fourth quarter for the industry for banks and brokers," said analyst Mike Mayo, who covers financial firms for Deutsche Bank. Mr. Mayo said his estimate is based on exposure to mortgage securities and includes Citigroup, Bear Stearns Cos., Morgan Stanley and Bank of America Corp. Citi's updated write-downs could be included in its coming quarterly filing with U.S. securities regulators.

The source of Citigroup's write-down is at least as significant as its size. The bank's estimate of its losses has changed so rapidly in large part because the models it used to value hard-to-trade securities relied heavily on credit ratings, according to people familiar with the models.

That made the bank highly vulnerable when, in October, ratings firms Moody's Investors Service and Standard & Poor's slashed, or put on watch for downgrade, the ratings on tens of billions of dollars in securities.

It is unlikely that Citigroup is alone. Ratings play a big role in valuation models used by many banks, investment funds and insurance companies. Meanwhile, the market for securities linked to subprime loans has deteriorated in recent weeks as defaults have confirmed some of analysts' most dire forecasts, increasing the likelihood of further ratings downgrades.

Citigroup's subprime exposure -- and source of its problems -- are two big buckets that together total $55 billion, the bank said. The first bucket totals $11.7 billion, including securities tied to subprime loans that were being held, or warehoused, until they could be added to debt pools for investors. The second, totaling $43 billion, covers so-called super-senior securities.

These highly rated super-senior securities are portions of collateralized debt obligations, or CDOs. CDOs are repackaged pools of lower-rated securities backed by subprime loans into pieces with different levels of risk and return. Analysts estimate that $60 billion in such super-senior tranches are sitting on the books of banks, insurers and investment funds.

The troubles stem back to the heyday of the U.S. housing boom, when Citi became one of the biggest players in the lucrative world of CDOs backed by subprime-linked bonds. Overall, Citi was the second-largest underwriter of CDOs in 2006, doing $34 billion in deals, according to data provider Dealogic.

As a result, Citi's holdings of subprime exposures varies from the actual loans to the most highly rated slices of CDOs, the bank said. They include securities the bank had warehoused to later package into CDOs, extended to the super-senior tranches of CDOs that Citi helped create. Banks often kept the super-senior pieces of CDOs, because their low returns made them unattractive to investors despite their extremely high ratings.

In a statement, Citigroup said the declines in the value of the bank's subprime exposure "followed a series of rating agency downgrades of subprime U.S. mortgage related assets and other market developments which occurred after the end of the third quarter."

When trading in the subprime-linked securities all but dried up amid this summer's credit-market turmoil, Citigroup and other banks suddenly faced the difficult task of putting a value on securities that investors no longer wanted to trade.

For lack of any market pricing, Citigroup used credit ratings as a key input in figuring out the value of the future payments they expected to receive on the securities, according to a person familiar with the bank's valuation models. For example, in valuing the payments on pieces of subprime-backed CDOs with the highest triple-A rating, the bank would look to how the market was valuing payments on corporate bonds with the same rating.

"In general, the industry standard model for pricing CDOs is not adequate in my view, which means that there's a lot of uncertainty about what they are worth," says Darrell Duffie, a finance professor at Stanford University's business school. "They can get better models but that's not something they can do overnight."

The problem with the ratings-based approach was that it ignored a key difference between corporate bonds and subprime-backed bonds: Defaults on the latter were growing at a fast rate, which would likely lead to ratings downgrades.

The downgrades began in earnest on Oct. 11 when, in a little-noticed announcement, Moody's Investors Service said it had slashed credit ratings on more than 2,000 bonds backed by subprime home loans that originally carried a total value of $33.4 billion. It also flagged bigger problems ahead, saying that 502 CDOs had direct exposure to the mortgage securities that had been downgraded.

Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com5 and David Reilly at david.reilly@wsj.com6

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