Citigroup Inc. announced its plans to control seven "structured investment vehicles" the bank advises to help them repay their debts.
Citigroup will provide support for its seven SIVs investing totaling $49 billion (EUR 33.4 billion) and incorporating them into its balance sheet. Previously the bank did not plan to bring SIVs onto its books.
Banks like Citigroup established SIVs, complex investment funds that are sold to other investors. SIVs sell short-term debt like term notes and commercial paper and then use borrowed money to buy mortgage, credit card debt and bank that yield higher returns.
The funds profit off management fees and the spread between how much they collect on the investments and how much it costs them to borrow.
SIVs jumped to the forefront of this year's credit crisis when many of the investments they held, particularly mortgage investments, lost a lot of value as demand for risky debt shriveled.
This triggered concern that lenders would be unwilling to keep lending to SIVs. The viability of a SIV hinges on its ability to continue borrowing short-term money. If it is unable to renew loans, it has to find new sources of cash or liquidate its investments to repay lenders.
Moody's Investors Service and Standard & Poor's - two of the three major credit-rating agencies - were considering downgrading the ratings on several of the world's roughly 30 SIVs, including the seven Citigroup created.
Citigroup will bring the SIVs onto its balance sheet in order to protect their credit ratings and give them time to sell their assets, the bank said.
After Citi's announcement, Moody's downgraded Citigroup's long-term credit rating to "Aa3" from "Aa2," and lowered Citibank's Bank Financial Strength Rating to "B" from "A-," citing the view that Citigroup's capital ratios will remain low.
The company's Tier 1 capital ratio - its ratio of cash to debt for regulatory purposes - was about 7.3 percent as of Sept. 30. Citi said adding the SIVs to the company's balance sheet would reduce the ratio by 0.16 percentage point but it still expects to return to its targeted ration of 7.5 percent in the first half of 2008.
The bank said it expects its SIVs to be able to meet their liquidity needs, which total $35 billion ( EUR 24 billion), through the end of next year. Citigroup expects to provide "little or no" financing.
"After considering a full range of funding options, this commitment is the best outcome for Citi and the SIVs," said Vikram Pandit, who was named Citigroup's chief executive officer Tuesday.
Other banks have made similar moves. HSBC Holdings PLC said last month that it would put two funds with mortgage exposure on its balance sheet and spend $35 billion ( EUR 24 billion) to bail them out.