From: Vikram Pandit
Subject: Capital Strength and Earnings Power
Sent: Mon Mar 09 21:12:44 2009

Dear Citi Colleagues,

After a broad sell off in the markets last week, I thought I would give you a quick update on our position.

Despite the steps we’ve taken to strengthen our capital base, I am, like you, disappointed with our current stock price and the broad-based misperceptions about our company and its financial position. I don’t believe it reflects the strengths of Citi; our newly strengthened capital base, our unique global franchise and most importantly, the quality of our people. These are unprecedented times in the markets, but over time, the markets will recognize the many strengths of Citi.

I believe there are two key issues to focus on — capital strength and earnings power.

First, on capital strength, as you know, the preferred exchange we announced nearly two weeks ago is expected to make Citi the strongest capitalized large U.S. bank as measured by tangible common equity (TCE) and Tier 1 ratios. While our Tier 1 ratio will remain at 11.9% as of December 31, 2008, assuming 100% participation in the exchange, our TCE could increase to as much as $81 billion. Despite this addition of tangible common equity, some people continue to question our capital strength because of our net deferred tax asset (DTA) and the quality of our assets.

* DTA: Even if near-term conditions deteriorate significantly, we expect to be able to realize the majority of our DTAs.

* Asset quality: The Fed will conduct stress tests for all large banks in coming weeks. We’ve done our own stress testing using assumptions that are more pessimistic than the Fed has outlined and we are confident about our capital strength.

* In addition, the Smith Barney joint venture and the conversion of mandatory convertibles is expected to add another $14 billion to our tangible common equity over time.

In addition to our strong capital position, I am most encouraged with the strength of our business so far in 2009. In fact, we are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007. In January and February alone, our revenues excluding externally disclosed marks were $19 billion. Our client businesses are strong: our deposits are relatively stable, our client-driven Securities and Banking businesses have been performing well, including our recent #1 rank in M&A, and we continue to provide credit to consumer and corporate customers. You have all done a very impressive job driving revenues and reducing our cost structure, and it is gratifying to see the results first hand.

I also appreciate how distracting the confusion in the markets and the media can be. In case you missed it, you should read the article in Friday’s Wall Street Journal Deal Journal entitled “Citi Woes Don’t Distract Its Investment Bankers” (http://www.citigroup.net/citigrouptoday/2009/inthepress/itp090309a.shtml). It was great to see you get the recognition you deserve and how you have remained focused on your clients and customers.

Lastly, I spent time last week talking to groups of colleagues and clients in Europe. It was good to hear from them. Not only did I learn a lot about what was on their minds, I was able to give them the full story of Citi and where we are today, including our full commitment to our global network and presence in over 100 countries, which is our key competitive differentiator. I would encourage each of you to continually engage with your colleagues and clients to ensure open lines of communication. To help in this effort, I have attached some important information points as an aid in your discussions. Please send me any feedback you may receive or any questions you are not able to answer.

Thank you again for your dedication. These are the times that will define us all.

Best regards,

Vikram

Here are the "talking points" (PDF). I must say that if I was Mr. Pandit's personal attorney, I would not have recommended sending out this memo, as it could be considered a disclosure or representation for securities law purposes. If I worked for Citi, I would be thrilled to receive this memo.

A few points - Citi's capital position is unchanged by what is described in this memo. There certainly should be a reduction in the need for preferred dividends as a result of the accounting and share conversions described above and that should certainly help Citi.

Citi says it has done its own stress testing that is tougher than those the government will do and that it is going to pass the government stress test. Let's hope this is true.

Citi also says that it has had its 2 best months since 2007, earning over 8 billion dollars in January and February. Let's hope THAT is meaningful (I am not a banker so I do not know if there is something equivalent to a EBITDA for banks) and true (earnings reports where "special items" are included are suspect to me, especially now).

Why do this if you are Citi? To create confidence in your company of course. What is the downside for Citi? If this does not work out, it is going to be hard to argue for more cash from the government. Pandit seems to realize that the next step is "temporary takeover" anyway. Why not roll the dice (see my post on Stiglitz below.)

In any event, let's hope this is really good news and that we have turned the corner of the financial crisis. Nothing would make us happier than seeing all of us doomsayers on the financial crisis be wrong.

Speaking for me only