Citigroup made news last December when it decided to consolidate about $49 billion in SIV assets onto its balance sheet. In its most recent 10-K filing, released on Feb. 22, Citigroup revealed that it had consolidated significant interests in CDO assets.

According to the company's 10-K, it consolidated about $25 billion in asset-backed commercial paper (ABCP) assets in December 2007, which were used to fund certain CDOs written between 2003 and 2006. The consolidation was an alternative to exercising liquidity puts for those ABCP conduits.

Additional consolidations might be in the offing, Citigroup said, noting that it also held on to significant portions of super senior positions of certain CDO deals. The credit ratings and monetary values of these CDOS, however, have declined along with deteriorating market conditions.

"The super senior tranches now are exposed to a significant portion of the expected losses of the CDOs, based on current market assumptions," the company said. It might be necessary to consolidate those assets if the company has to take larger interests in the vehicles or if contractual obligations are changed to reallocate expected losses.

The commercial paper CDO consolidations are completely separate from the SIV consolidations that it completed last year, according to people familiar with the company. That has led some to worry about the company's exposures to risky securities, according to one buyside professional.

Consolidating ABCP assets represents a rapid unraveling of reversal of fortunes for the ABCP industry. Little more than a year ago, market sources were confident that the ABCP market would continue to expand without the need for outside liquidity support, on the strength of structured securities that were presumed to be very liquid. Such securities were expected to generate liquidity support for the vehicles that invested in them, eventually pushing such structures into the mainstream of the ABCP sector.

After the ABCP market destabilized last summer, adding exposure to the additional CDO debt was largely part of a strategy to lay low until the market improved, Citigroup explained.

The bank wrote liquidity puts into the terms of the CDOs as a benefit to its ABCP investors, said Citigroup. Under the terms of the liquidity puts, if the CDO was unable to issue commercial paper at a rate below a specified maximum, about Libor plus 40 basis points at the most, then the company had to fund the senior tranche of the CDO at a specified rate, according to Citigroup's filing. After the ABCP market destabilized in summer 2007, the company began to purchase outstanding paper and continued to do so as more paper matured.

By yearend the company had purchased all $25 billion of the commercial paper subject to the liquidity puts, said Citigroup.

"Owning the commercial paper was economically equivalent to its contractual obligation under the liquidity put, but holding the commercial paper was believed to provide some additional flexibility on funding third-party investors in the event of improved market conditions," according to the filing.

The actions resulted in a balance sheet increase of about $400 million, for accounting purposes, whereas previously the financial services company would have accounted for the assets under the rules pertaining to variable interest entities.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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