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Citicorp: Risk managers?

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If I were a Citigroup shareholder or a Citigroup employee (hopefully you know who you are), I would find this an unsettling exchange:

(From the Citigroup Business Update Call on November 5, 2007 via Seeking Alpha)

Guy Moszkowski – Merrill Lynch

…Maybe you can comment for us as a follow up on the dependence or lack thereof in any of the vehicles that you have exposure to on guarantees or credit support from the mono line insurers like MBIA or AMBAC that have obviously had some pretty significant credit spread blow outs?

Gary Crittenden [Citibank CFO]

We haven’t quantified what that exposure is. (emphasis ours) They obviously are important counterparties for us in a number of different instruments. I think you raised an important point which is all that I have talked about today are our direct exposures and there’s obviously potentially secondary and tertiary exposures that potentially could exist for the company that are not part of what we have talked about today. This is really the direct exposure that we have. But I would assume virtually everyone else that is a significant financial institution have counterparty exposure to the monoline.(emphasis ours)

You may be going “What the heck? This is gobbelygook to me”. And rightly so.

The business risks that the large money center banks have are REALLY complicated. They are so complicated in fact that Citibank has not gotten around to quantifying them. The justification is that everyone else did it too.

The problem is that just because a risk is difficult to put a number on doesn’t make it insubstantial. A risk may be indirect but until you give it a ballpark number, you have no way of knowing whether it is a second order, third order or first order risk.

The subtext is that if everyone has the same exposure, these are not really risks that you need to deal with because there will have to be a bailout to avoid financial system collapse.

I feel perfectly at ease now with the current situation. How about you?

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