SEC Company Response from CITIGROUP INC (C, C-PN) (CIK 0000831001) (C) — Nov 18, 2011
CITIGROUP INC (C, C-PN) (CIK 0000831001)
Date: Nov. 18, 2011 · CIK: 0000831001 · Accession: 0001104659-11-065207
AI Filing Summary & Sentiment
File numbers found in text: 001-09924, 333-173683
Referenced dates: October 26, 2011
Letter
VIA EDGAR CORRESPONDENCE Securities and Exchange Commission Filed May 5, 2011 Form 10-Q for Fiscal Quarter Ended June 30, 2011 Filed August 5, 2011 File No. 001-09924
Dear Ms. Hunsaker:
Enhancement of Citigroup Inc.’s (“Citigroup” or “Citi”) disclosures is an objective that we share with the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC” or “Commission”) and one that we consider in all our filings. This letter sets forth the responses of Citigroup to the comments of the Staff contained in the Staff’s letter dated October 26, 2011.
FOIA Confidential Treatment Requested by Citigroup Inc.
For your convenience, the text of the Staff’s comments is set forth in bold below, followed in each case by our response.
General
1. Please file a legality opinion for your Form S-8 (File No. 333-173683) that does not contain a statement regarding the General Counsel — Human Resources not being admitted to practice law in Delaware.
Citi notes for the Staff that on November 7, 2011, a legality opinion was filed with Post-Effective Amendment No. 1 to our Form S-8 (File No. 333-173683) that does not contain a statement regarding the General Counsel — Human Resources not being admitted to practice law in Delaware.
Form 10-Q for the Quarterly Period ended March 31, 2011
Note 23. Contingencies, page 171
2. We note your response to prior comment 13. Please confirm that in future filings that discuss the Consent Orders you will include an assessment of the impact that the undertakings set forth in the Consent Orders will have on Citi. If at the time of such future filings you continue to believe that the annual cost of compliance with the Consent Orders will not have a material impact on the results of operations or financial condition of your consumer mortgage business or Citigroup, please disclose such belief.
Citi confirms for the Staff that, to the extent we discuss the Consent Orders in our future filings, we will include an assessment of the impact of the undertakings set forth in the Consent Orders on Citi; specifically, whether or not the annual cost of compliance with the Consent Orders will have a material impact on the results of operations or financial condition of Citi or its consumer mortgage business.
Form 10-Q for the Quarterly Period ended June 30, 2011
General
3. News articles reported that in May, Citigroup was the target of a data breach that affected over 360,000 credit card accounts. We note that your quarterly report for
FOIA Confidential Treatment Requested by Citigroup Inc.
the period ended June 30, 2011 did not address the data breach or its impact on the company. Please provide us with an analysis supporting your apparent conclusion that no additional disclosure was needed in your SEC filings. Please address in your analysis the materiality of the data breach, both from a financial standpoint and from a reputational risk standpoint, and whether you intend to provide disclosure in future filings.
As noted by the Staff, on May 10, 2011, Citi identified a high volume of attempts to access credit card accounts in its “Account Online” system (this is a system that enables customers to manage their credit card accounts, e.g., pay bills, view statements and check due dates). It was determined that a data breach had occurred which resulted in unauthorized access to 360,083 Citi credit card account numbers.
Consistent with Citi’s policies and procedures in such instances, systemic alerts were placed on all compromised accounts. These alerts monitor suspicious activity and queue the account for a fraud risk review if suspicious authorizations are detected. Customers whose accounts were a part of the breach were notified and, after a risk analysis, the majority of the affected accounts were closed and new cards were reissued; 89% of the reissued cards were activated.
By the close of the second quarter 2011, all compromised accounts were identified and substantially all fraud losses were determined. The 360,083 compromised accounts represented 0.33% of the total 107.5 million North America consumer credit card accounts (both Citi-branded and retail partner cards) at April 30, 2011. Unauthorized charges occurred on approximately 1.5% of the 360,083 accounts, resulting in an estimated $4.4 million in fraud losses related to this incident. Such amount represented approximately [***] of Citi’s estimated 2011 annual North America consumer credit card fraud expense. Operational remediation costs (such as customer notification, service calls and providing identity theft protection) were less than $1 million.
Thus, from a financial standpoint, the data breach did not have a material impact on Citi’s North America credit card businesses. With regard to reputational risk, Citi believes that the high activation rate of the reissued credit cards clearly indicates that no meaningful reputational damage or loss of client confidence occurred, and there were no investor questions relating to the incident. Accordingly, for these reasons, Citi did not deem the incident to warrant disclosure in its second quarter 2011 Form 10-Q and Citi does not intend to provide disclosure on this particular matter in future filings.
[***] The following information has been redacted in accordance with Citigroup’s request for confidential treatment.
FOIA Confidential Treatment Requested by Citigroup Inc.
As with other operational and financial risks, Citi will continue to monitor data breach and other cybersecurity risks and incidents and evaluate the need for disclosure based on the respective quantitative and qualitative factors, including those set forth in the Staff’s guidance on cybersecurity matters issued on October 13, 2011.
North America Consumer Mortgage Lending, page 50
4. We note your disclosure on page 52 related to foreclosures in process and the impact these have had on your lending portfolios and operations. Specifically, we note that the lengthening of the foreclosure process has inflated the amount of 180+ day delinquencies in mortgage statistics and 90+ day delinquencies in consumer non-accrual loans statistics. We also note that the lengthening of the foreclosure process has caused a “build” in nonaccrual assets on the balance sheet. To the extent reasonably possible, please tell us and revise future filings to provide more quantitative information about the impact of foreclosures in process on your lending statistics and non-accrual loans and non-accrual assets. Please also consider including a footnote to your related delinquencies and nonaccrual loans and non-accrual assets tabular disclosure that addresses the impact of foreclosures in process to each relevant statistic and/or balance, as appropriate and discuss whether you have observed any geographic trends.
We note for the Staff that, on page 54 of our third quarter 2011 Form 10-Q, similar to the several prior quarters, we continued to include the following disclosure on the implications of the lengthening of the foreclosure process, including the fact that the lengthening of the foreclosure process is particularly pronounced in the judicial states:
“In addition, as previously disclosed, while Citi’s active foreclosures in process continued to decrease during the third quarter of 2011, foreclosures in process for two years or more continued to increase, particularly in judicial states (i.e., those states that require foreclosures to be processed via court approval). Combined with continued pressure on home prices, high unemployment rates and continued uncertainty surrounding potential governmental actions or requirements with respect to mortgages, the lengthening of the foreclosure process:
FOIA Confidential Treatment Requested by Citigroup Inc.
(1) subjects Citi to increased “severity” risk, or the loss on the amount ultimately realized for property subject to foreclosure given the continued pressure on home prices in particular markets, thus potentially increasing Citi’s net credit losses;
(2) inflates the amount of 180+ day delinquencies in Citigroup’s mortgage statistics and Consumer non-accrual loans (90+ day delinquencies);
(3) creates a dampening effect on Citi’s net interest margin as non-accrual assets build on the balance sheet; and
(4) causes additional costs to be incurred given the longer process.”
For so long as material and relevant, we currently intend to include disclosure similar to the above in our future filings. The purpose of this disclosure has been, and continues to be, to emphasize to investors the various impacts that the lengthening of the foreclosure process, particularly in the judicial states, has on various aspects of Citi’s businesses: increased severity risk; loans remain in our delinquency statistics for longer periods; creates a dampening effect on net interest margin (which is already under pressure given the low interest rate environment, as we have also disclosed for several quarters); and, overall, increases the costs of foreclosure (e.g., maintenance of property, etc.).
We further supplementally advise the Staff that, as the Staff would likely expect, in the ordinary course of business, while Citi may begin the foreclosure process when loans are 90+ days delinquent (become non-accrual), and thus all such loans have the potential to become “foreclosures in process,” not all such loans are in fact “foreclosures in process” at a particular point in time. For example, for loans that become 90+ days delinquent, Citi may not refer the loan to the foreclosure process as we continue to work with the borrower as part of our loss mitigation activities. Moreover, a previously instituted foreclosure in process could later be placed on “hold” temporarily for similar reasons. Depending on the outcome of these loss mitigation efforts, we may begin or re-institute, as applicable, the foreclosure process on these loans.
Accordingly, we do not believe that the Staff’s suggested quantitative information on foreclosures in process would be helpful or relevant to our disclosure of the overall impacts associated with lengthening foreclosure timelines as such information would represent only a snapshot in time and would not necessarily accurately convey the impact of our foreclosures in process on our delinquency and other statistics. Rather, we believe the more meaningful information is the qualitative disclosure we have provided regarding the overall increase in the
FOIA Confidential Treatment Requested by Citigroup Inc.
length of time it takes to complete foreclosures, as illustrated by the increase in foreclosures in process for two years or more, especially in judicial states, that impacts Citi’s lending statistics. We agree, however, that this disclosure could be revised to make the above points more clear, and intend to consider this as part of the disclosure in our 2011 Annual Report on Form 10-K.
Value at Risk for Trading Portfolios, page 75
5. We note your response to prior comment 11 regarding your VAR methodology. In addition to your proposed future disclosure related to the number of VAR backtesting exceptions, please include the supplemental discussion regarding your expectations as to why the number of backtesting exceptions is lower than what would be statistically expected and the scenarios where the number of backtesting exceptions may be higher than you expect (i.e. in periods of unstable market conditions). Additionally, please expand your disclosure in future filings to discuss the rationale of diversification benefits and how that benefit is calculated.
In response to the Staff’s comment, Citigroup included the following disclosure on page 73 of its third quarter 2011 Form 10-Q regarding why the number of backtesting exceptions is lower than what would be statistically expected (as well as the number of back testing exceptions):
“Citigroup uses full Monte Carlo simulation, which Citi believes is conservatively calibrated to incorporate the greater of short-term (most recent month) and long-term (up to three years) market volatility. The Monte Carlo simulation involves approximately 300,000 market factors, making use of 180,000 time series, with market factors updated daily and model parameters updated weekly.
The conservative features of the VAR calibration contributes approximately a 20% add-on to what would be a VAR estimated under the assumption of stable and perfectly normally distributed markets. Under normal and stable market conditions, Citi would thus expect the number of days where trading losses exceed its VAR to be less than 2 or 3 exceptions per year; periods of unstable market conditions could increase the number of exceptions. During the last four quarters, there was one back testing exception where trading losses exceeded the VAR estimate at the Citigroup level.”
FOIA Confidential Treatment Requested by Citigroup Inc.
In addition, we included the following disclosure related to the changes to diversification benefits during the third quarter of 2011:
“The main driver of the impact due to position changes was a change in the risk profile of equity markets within S&B and the corollary loss of diversification benefits across the portfolio.”
In addition, Citigroup intends to provide disclosure similar to the following in its 2011 Annual Report on Form 10-K as a footnote to the disclosed VAR tables to discuss the rationale of diversification benefit:
“ ‘Diversification benefit’ equals the difference between the total VAR and the sum of the VARs tied to each individual risk type. The benefit reflects the fact that the risks within each and across risk types are not perfectly correlated and, consequently, the total VAR on a given day will be lower than the sum of the VARs relating to each individual risk type. The determination of the primary drivers of changes to the diversification benefit is made by an examination of the impact of both model parameter and position changes.”
We intend to continue to include these disclosures, updated or revised as necessary, in our future filings so long as appropriate.
Country and Cross-Border Risk, page 84
6. We note your response to prior comment 15 and your enhanced disclosure on page 84 of your Form 10-Q. We also note slide 27 of your third quarter earnings presentation which is provided on your website and illustrates your country risk exposure as of September 30, 2011. We continue to believe that disclosure of your gross exposure by country (i.e. Greece, Ireland, Italy, Portugal and Spain, aka GIIPS) would be beneficial to investors and is consistent with industry practice by other financial institutions. Accordingly, as previously requested, please revise your disclosure in future filings to present the gross exposure you have to each of these countries separately broken out by sovereigns, financial institutions, corporations and trading/AFS exposure. Additionally, please respond to the following and clarify future disclosures as appropriate:
FOIA Confidential Treatment Requested by Citigroup Inc.
In response to the Staff’s comment, we continue to believe that Citi’s disclosure of its gross and net exposure to the GIIPS, in the aggregate, (i) is appropriate in light of the comparative size of the exposures to Citi’s
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CORRESP 1 filename1.htm FOIA Confidential Treatment Requested by Citigroup Inc. John C. Gerspach Chief Financial Officer Citigroup Inc. 399 Park Avenue New York, NY 10022 November 18, 2011 VIA EDGAR CORRESPONDENCE Stephanie Hunsaker Securities and Exchange Commission 100 F Street, NE Mail Stop 4561 Washington, DC 20549-7553 Re: Citigroup Inc. Form 10-K for Fiscal Year Ended December 31, 2010 Filed February 25, 2011 Form 10-Q for Fiscal Quarter Ended March 31, 2011 Filed May 5, 2011 Form 10-Q for Fiscal Quarter Ended June 30, 2011 Filed August 5, 2011 File No. 001-09924 Dear Ms. Hunsaker: Enhancement of Citigroup Inc.’s (“Citigroup” or “Citi”) disclosures is an objective that we share with the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC” or “Commission”) and one that we consider in all our filings. This letter sets forth the responses of Citigroup to the comments of the Staff contained in the Staff’s letter dated October 26, 2011. 1 FOIA Confidential Treatment Requested by Citigroup Inc. For your convenience, the text of the Staff’s comments is set forth in bold below, followed in each case by our response. General 1. Please file a legality opinion for your Form S-8 (File No. 333-173683) that does not contain a statement regarding the General Counsel — Human Resources not being admitted to practice law in Delaware. Citi notes for the Staff that on November 7, 2011, a legality opinion was filed with Post-Effective Amendment No. 1 to our Form S-8 (File No. 333-173683) that does not contain a statement regarding the General Counsel — Human Resources not being admitted to practice law in Delaware. Form 10-Q for the Quarterly Period ended March 31, 2011 Note 23. Contingencies, page 171 2. We note your response to prior comment 13. Please confirm that in future filings that discuss the Consent Orders you will include an assessment of the impact that the undertakings set forth in the Consent Orders will have on Citi. If at the time of such future filings you continue to believe that the annual cost of compliance with the Consent Orders will not have a material impact on the results of operations or financial condition of your consumer mortgage business or Citigroup, please disclose such belief. Citi confirms for the Staff that, to the extent we discuss the Consent Orders in our future filings, we will include an assessment of the impact of the undertakings set forth in the Consent Orders on Citi; specifically, whether or not the annual cost of compliance with the Consent Orders will have a material impact on the results of operations or financial condition of Citi or its consumer mortgage business. Form 10-Q for the Quarterly Period ended June 30, 2011 General 3. News articles reported that in May, Citigroup was the target of a data breach that affected over 360,000 credit card accounts. We note that your quarterly report for 2 FOIA Confidential Treatment Requested by Citigroup Inc. the period ended June 30, 2011 did not address the data breach or its impact on the company. Please provide us with an analysis supporting your apparent conclusion that no additional disclosure was needed in your SEC filings. Please address in your analysis the materiality of the data breach, both from a financial standpoint and from a reputational risk standpoint, and whether you intend to provide disclosure in future filings. As noted by the Staff, on May 10, 2011, Citi identified a high volume of attempts to access credit card accounts in its “Account Online” system (this is a system that enables customers to manage their credit card accounts, e.g., pay bills, view statements and check due dates). It was determined that a data breach had occurred which resulted in unauthorized access to 360,083 Citi credit card account numbers. Consistent with Citi’s policies and procedures in such instances, systemic alerts were placed on all compromised accounts. These alerts monitor suspicious activity and queue the account for a fraud risk review if suspicious authorizations are detected. Customers whose accounts were a part of the breach were notified and, after a risk analysis, the majority of the affected accounts were closed and new cards were reissued; 89% of the reissued cards were activated. By the close of the second quarter 2011, all compromised accounts were identified and substantially all fraud losses were determined. The 360,083 compromised accounts represented 0.33% of the total 107.5 million North America consumer credit card accounts (both Citi-branded and retail partner cards) at April 30, 2011. Unauthorized charges occurred on approximately 1.5% of the 360,083 accounts, resulting in an estimated $4.4 million in fraud losses related to this incident. Such amount represented approximately [***] of Citi’s estimated 2011 annual North America consumer credit card fraud expense. Operational remediation costs (such as customer notification, service calls and providing identity theft protection) were less than $1 million. Thus, from a financial standpoint, the data breach did not have a material impact on Citi’s North America credit card businesses. With regard to reputational risk, Citi believes that the high activation rate of the reissued credit cards clearly indicates that no meaningful reputational damage or loss of client confidence occurred, and there were no investor questions relating to the incident. Accordingly, for these reasons, Citi did not deem the incident to warrant disclosure in its second quarter 2011 Form 10-Q and Citi does not intend to provide disclosure on this particular matter in future filings. [***] The following information has been redacted in accordance with Citigroup’s request for confidential treatment. 3 FOIA Confidential Treatment Requested by Citigroup Inc. As with other operational and financial risks, Citi will continue to monitor data breach and other cybersecurity risks and incidents and evaluate the need for disclosure based on the respective quantitative and qualitative factors, including those set forth in the Staff’s guidance on cybersecurity matters issued on October 13, 2011. North America Consumer Mortgage Lending, page 50 4. We note your disclosure on page 52 related to foreclosures in process and the impact these have had on your lending portfolios and operations. Specifically, we note that the lengthening of the foreclosure process has inflated the amount of 180+ day delinquencies in mortgage statistics and 90+ day delinquencies in consumer non-accrual loans statistics. We also note that the lengthening of the foreclosure process has caused a “build” in nonaccrual assets on the balance sheet. To the extent reasonably possible, please tell us and revise future filings to provide more quantitative information about the impact of foreclosures in process on your lending statistics and non-accrual loans and non-accrual assets. Please also consider including a footnote to your related delinquencies and nonaccrual loans and non-accrual assets tabular disclosure that addresses the impact of foreclosures in process to each relevant statistic and/or balance, as appropriate and discuss whether you have observed any geographic trends. We note for the Staff that, on page 54 of our third quarter 2011 Form 10-Q, similar to the several prior quarters, we continued to include the following disclosure on the implications of the lengthening of the foreclosure process, including the fact that the lengthening of the foreclosure process is particularly pronounced in the judicial states: “In addition, as previously disclosed, while Citi’s active foreclosures in process continued to decrease during the third quarter of 2011, foreclosures in process for two years or more continued to increase, particularly in judicial states (i.e., those states that require foreclosures to be processed via court approval). Combined with continued pressure on home prices, high unemployment rates and continued uncertainty surrounding potential governmental actions or requirements with respect to mortgages, the lengthening of the foreclosure process: 4 FOIA Confidential Treatment Requested by Citigroup Inc. (1) subjects Citi to increased “severity” risk, or the loss on the amount ultimately realized for property subject to foreclosure given the continued pressure on home prices in particular markets, thus potentially increasing Citi’s net credit losses; (2) inflates the amount of 180+ day delinquencies in Citigroup’s mortgage statistics and Consumer non-accrual loans (90+ day delinquencies); (3) creates a dampening effect on Citi’s net interest margin as non-accrual assets build on the balance sheet; and (4) causes additional costs to be incurred given the longer process.” For so long as material and relevant, we currently intend to include disclosure similar to the above in our future filings. The purpose of this disclosure has been, and continues to be, to emphasize to investors the various impacts that the lengthening of the foreclosure process, particularly in the judicial states, has on various aspects of Citi’s businesses: increased severity risk; loans remain in our delinquency statistics for longer periods; creates a dampening effect on net interest margin (which is already under pressure given the low interest rate environment, as we have also disclosed for several quarters); and, overall, increases the costs of foreclosure (e.g., maintenance of property, etc.). We further supplementally advise the Staff that, as the Staff would likely expect, in the ordinary course of business, while Citi may begin the foreclosure process when loans are 90+ days delinquent (become non-accrual), and thus all such loans have the potential to become “foreclosures in process,” not all such loans are in fact “foreclosures in process” at a particular point in time. For example, for loans that become 90+ days delinquent, Citi may not refer the loan to the foreclosure process as we continue to work with the borrower as part of our loss mitigation activities. Moreover, a previously instituted foreclosure in process could later be placed on “hold” temporarily for similar reasons. Depending on the outcome of these loss mitigation efforts, we may begin or re-institute, as applicable, the foreclosure process on these loans. Accordingly, we do not believe that the Staff’s suggested quantitative information on foreclosures in process would be helpful or relevant to our disclosure of the overall impacts associated with lengthening foreclosure timelines as such information would represent only a snapshot in time and would not necessarily accurately convey the impact of our foreclosures in process on our delinquency and other statistics. Rather, we believe the more meaningful information is the qualitative disclosure we have provided regarding the overall increase in the 5 FOIA Confidential Treatment Requested by Citigroup Inc. length of time it takes to complete foreclosures, as illustrated by the increase in foreclosures in process for two years or more, especially in judicial states, that impacts Citi’s lending statistics. We agree, however, that this disclosure could be revised to make the above points more clear, and intend to consider this as part of the disclosure in our 2011 Annual Report on Form 10-K. Value at Risk for Trading Portfolios, page 75 5. We note your response to prior comment 11 regarding your VAR methodology. In addition to your proposed future disclosure related to the number of VAR backtesting exceptions, please include the supplemental discussion regarding your expectations as to why the number of backtesting exceptions is lower than what would be statistically expected and the scenarios where the number of backtesting exceptions may be higher than you expect (i.e. in periods of unstable market conditions). Additionally, please expand your disclosure in future filings to discuss the rationale of diversification benefits and how that benefit is calculated. In response to the Staff’s comment, Citigroup included the following disclosure on page 73 of its third quarter 2011 Form 10-Q regarding why the number of backtesting exceptions is lower than what would be statistically expected (as well as the number of back testing exceptions): “Citigroup uses full Monte Carlo simulation, which Citi believes is conservatively calibrated to incorporate the greater of short-term (most recent month) and long-term (up to three years) market volatility. The Monte Carlo simulation involves approximately 300,000 market factors, making use of 180,000 time series, with market factors updated daily and model parameters updated weekly. The conservative features of the VAR calibration contributes approximately a 20% add-on to what would be a VAR estimated under the assumption of stable and perfectly normally distributed markets. Under normal and stable market conditions, Citi would thus expect the number of days where trading losses exceed its VAR to be less than 2 or 3 exceptions per year; periods of unstable market conditions could increase the number of exceptions. During the last four quarters, there was one back testing exception where trading losses exceeded the VAR estimate at the Citigroup level.” 6 FOIA Confidential Treatment Requested by Citigroup Inc. In addition, we included the following disclosure related to the changes to diversification benefits during the third quarter of 2011: “The main driver of the impact due to position changes was a change in the risk profile of equity markets within S&B and the corollary loss of diversification benefits across the portfolio.” In addition, Citigroup intends to provide disclosure similar to the following in its 2011 Annual Report on Form 10-K as a footnote to the disclosed VAR tables to discuss the rationale of diversification benefit: “ ‘Diversification benefit’ equals the difference between the total VAR and the sum of the VARs tied to each individual risk type. The benefit reflects the fact that the risks within each and across risk types are not perfectly correlated and, consequently, the total VAR on a given day will be lower than the sum of the VARs relating to each individual risk type. The determination of the primary drivers of changes to the diversification benefit is made by an examination of the impact of both model parameter and position changes.” We intend to continue to include these disclosures, updated or revised as necessary, in our future filings so long as appropriate. Country and Cross-Border Risk, page 84 6. We note your response to prior comment 15 and your enhanced disclosure on page 84 of your Form 10-Q. We also note slide 27 of your third quarter earnings presentation which is provided on your website and illustrates your country risk exposure as of September 30, 2011. We continue to believe that disclosure of your gross exposure by country (i.e. Greece, Ireland, Italy, Portugal and Spain, aka GIIPS) would be beneficial to investors and is consistent with industry practice by other financial institutions. Accordingly, as previously requested, please revise your disclosure in future filings to present the gross exposure you have to each of these countries separately broken out by sovereigns, financial institutions, corporations and trading/AFS exposure. Additionally, please respond to the following and clarify future disclosures as appropriate: 7 FOIA Confidential Treatment Requested by Citigroup Inc. In response to the Staff’s comment, we continue to believe that Citi’s disclosure of its gross and net exposure to the GIIPS, in the aggregate, (i) is appropriate in light of the comparative size of the exposures to Citi’s