SEMINAR QUESTION 1
The article refers to $1.1 trillion of mysterious assets. The title of the article seems to imply
that the information was hidden from the public. Based on the information in the article
discuss whether this is a fair implication.
As implied by the article, many people were surprised by the amount of off-balance sheet
assets/liabilities assumed by Citigroup.
Some people quoted in the article said that it was disclosed but the disclosure was cryptic and
difficult to figure out.
Seminar leaders should allow students to debate whether it is ok to have off-balance sheet
assets/liabilities with inadequate disclosure.
If companies say that adequate disclosure exists, should they not just account for the off-
balance sheet asset/liabilities on the balance sheet as following their reasoning it would be
economically the same thing.
My personal opinion is that off-balance sheet treatments of assets and the liabilities that fund
them is to allow companies to recognize the revenues from such structures, while not
showing the liabilities of such structures to be on the balance sheet so that the company’s
leverage looks better than it actually is, i.e. to recognize the revenue on the financial
statements from such a structure, but not the debt that comes with it.
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SEMINAR QUESTION 2

Calculate the leverage ratio (in percent) according to the balance sheet as at 31 December
2007 and if these mysterious assets were brought back onto the balance sheet. [Hint: you may
think if that the off-balance sheet items as a t-account with $1.1 trillion in assets on the LHS
and $1.1 trillion in liability and zero equity on the RHS. Off-balance sheet asset are funded
almost entirely if not entirely by debt.]

(a) Leverage ratio (in percent) according to balance sheet as at 31 December 2007:

$113.6 / 2,187.63 = 5.19%
(b) Leverage ratio (in percent) if the mysterious assets were bought onto the balance sheet:
$113.6 / (2187.63+1100) = 3.46%
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(c) Discuss your concerns, if any, regarding the different inferences from the before/after
mysterious assets analysis.
From the balance sheet, we would infer that a fall in value of assets of 5.2% is required
before shareholders equity is wiped out.
But including the mysterious assets a much lesser value of a 3.46% fall in the value of assets
would be enough to wipe out shareholders equity.
Background: I prefer to use this version of the leverage ratio (E/A) expressed as a percentage
of equity portion of assets on the balance rather than the traditional multiple (A/E). It is in my
opinion more informative because it gives immediate and obvious information about how
much of the value of assets the company can afford to lose before equity is wiped out. It is
the preferred method of expressing a leverage ratio by regulators, especially for purposes of
checking the capital adequacy of financial institutions.

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SEMINAR QUESTION 3

The above Question 6 assumes that there are no potential losses embedded in the $1.1 trillion
in off-balance sheet assets. The following quote extracted from the article gives us some idea
of the challenge to shareholders, investors and analyst.

“It's impossible to predict what the losses might be from off-the-books assets or liabilities
because disclosures are thin relative to what is required for balance-sheet assets, said Neri
Bukspan, chief accountant for Standard & Poor's in New York.”

However, despite the difficulty we often need to make some assumptions to conduct
sensitivity analysis. Of course, we need to have some basis for our assumptions. The quote
below gives us such a basis.

“Now, as Citigroup prepares to announce second-quarter results July 18, those off-balance-
sheet assets, used by U.S. banks to expand lending without tying up capital, are casting a
shadow over earnings. Since last September, at least $100 billion of assets have flooded back
onto Citigroup's balance sheet, accompanied by more than $7 billion of losses.”

(a) Assume a similar loss percentage and recalculate the leverage ratio.
Leverage ratio (in percent) if the mysterious assets were bought onto the balance sheet:
Loss based on assumption 7/100 = 0.07
= 1,100*0.07
= 77b loss
Leverage ratio = (113.6 - 77) / (2187.63 + 1023) = 36.6/3210.63 = 1.14%
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(b) Write journal entries for impact of item in (a)
Dr Assets 1,023b
Dr Equity 77b
Cr Liability 1,100

This is a stylized journal entry assuming that we add back the whole off-balance sheet entity
as a single journal entry.
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