Citigroup to take $49 billion of SIV assets onto its balance sheet
By Our Corporate Bureau | 14 Dec 2007
The world's largest banking company Citigroup announced on Thursday 13 December that it will take $49 billion worth of assets from several special investment vehicles (SIVs) that have been hurt by the sub-prime mortgage meltdown onto its own balance sheet. Analysts have warned that the move that could cut deeply into the Wall Street giant's capital base.
The move may also put paid to US Treasury Secretary Henry Paulson's bid to create a rescue fund for SIVs. Interest in the fund has waned after a number of the largest banks decided they couldn't wait for the fund to become operational, and moved to bail out their own SIVs.
SIVs are funds that use money borrowed under short-term agreements - usually commercial paper - to buy longer-term, higher yielding debt investments. Taking advantage of the boom in US real estate markets, several US financial institutions floated SIVs over the past few years whose assets included sub-prime mortgage-related assets.
But after the real estate bubble burst and credit markets tightened owing to the resulting instability in the sub-prime mortgage market, SIVs have struggled to secure financing. This has sparked concerns that they may have to sell their assets in a weak market.
''Our team has made great progress managing the SIVs in a very difficult environment. After considering a range of funding options, this commitment is the best outcome for Citi and the SIVs,'' Citigroup's newly appointed CEO Vikram Pandit said in a statement.
The company said SIV assets have shed more than 40 per cent of their value since August, with their total value falling from $87 billion to $49 billion at present, while ''maintaining the overall high credit quality of the portfolio''. Liquidity requirements will now be met by ''orderly asset reductions'', Citigroup's announcement said.
But this will put additional pressure on the banking giant's capital levels. Citigroup said its Tier 1 capital ratio - the core indicator of a bank's financial stability - could come down by as much as 16 basis points as a result of the bailout.
This could mean a reduced dividend payment, among other moves to shore up its capital, but the company did not talk about capital-saving moves in its statement. Last month, British banking giant HSBC moved $35 billion worth of assets from its SIVs onto its balance sheet.