Citigroup Inc. (Citigroup and, together with its subsidiaries, the Company, Citi or Citigroup) is a global diversified financial services holding company whose businesses provide a broad range of financial services to consumer and corporate customers. Citigroup has more than 200 million customer accounts and does business in more than 100 countries. Citigroup was incorporated in 1988 under the laws of the State of Delaware.

The Company is a bank holding company within the meaning of the U.S. Bank Holding Company Act of 1956 registered with, and subject to examination by, the Board of Governors of the Federal Reserve System (FRB). Some of the Company’s subsidiaries are subject to supervision and examination by their respective federal and state authorities. At December 31, 2008, the Company had approximately 134,400 full-time and 4,100 part-time employees in the United States and approximately 188,400 full-time employees outside the United States.

During 2008, the Company benefited from substantial U.S. government financial involvement, including (i) raising an aggregate of $45 billion through the sale of Citigroup non-voting perpetual, cumulative preferred stock and warrants to purchase common stock to the U.S. Department of the Treasury, (ii) entering into a loss-sharing agreement with various U.S. government entities covering $301 billion of Company assets, and (iii) issuing $5.75 billion of senior unsecured debt guaranteed by the Federal Deposit Insurance Corporation (FDIC) (in addition to $26.0 billion of commercial paper and interbank deposits of Citigroup’s subsidiaries guaranteed by the FDIC outstanding at the end of 2008). In connection with these programs and agreements, Citigroup is required to pay consideration to the U.S. government, including in the form of dividends on the preferred stock and other fees. In addition, Citigroup has agreed not to pay common stock dividends in excess of $0.01 per share per quarter for three years (beginning in 2009) or to repurchase its common stock without the consent of U.S. government entities. For additional information on the above, see “TARP and Other Regulatory Programs” on page 44.

On January 16, 2009, the Company announced a realignment, for management and reporting purposes, into two businesses: Citicorp, primarily comprised of the Company’s Global Institutional Bank and the Company’s international regional consumer banks; and Citi Holdings, primarily comprised of the Company’s brokerage and asset management business, local consumer finance business, and a special asset pool. Citigroup believes that the realignment will optimize the Company’s global businesses for future profitable growth and opportunities and will assist in the Company’s ongoing efforts to reduce its balance sheet and simplify its organization. See “Outlook for 2009—Changes to Citi’s Organizational Structure” on page 7.

On February 27, 2009, the Company announced an exchange offer of its common stock for up to $27.5 billion of its existing preferred securities and trust preferred securities at a conversion price of $3.25 per share. The U.S. government will match this exchange up to a maximum of $25 billion of its preferred stock at the same conversion price. These transactions are intended to increase the Company’s tangible common equity (TCE) and will require no additional U.S. government investment in Citigroup. See “Outlook for 2009” on page 7.

The principal executive offices of the Company are located at 399 Park Avenue, New York, New York 10022, telephone number 212 559 1000. Additional information about Citigroup is available on the Company’s Web site at www.citigroup.com. Citigroup’s recent annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, as well as the Company’s other filings with the Securities and Exchange Commission (SEC) are available free of charge through the Company’s Web site by clicking on the “Investors” page and selecting “All SEC Filings.” The SEC Web site contains reports, proxy and information statements, and other information regarding the Company at www.sec.gov.

Certain reclassifications have been made to the prior periods’ financial statements to conform to the current period’s presentation.

Certain statements in this Form 10-K, including, but not limited to, statements made in “Management’s Discussion and Analysis,” particularly in the “Outlook” discussions, are “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from those included in these statements due to a variety of factors including, but not limited to, those described under “Risk Factors” beginning on page 47.

2008 IN SUMMARY

Citigroup reported a $32.1 billion loss from continuing operations ($6.42 per share) for 2008. The results were impacted by continued losses related to the disruption in the fixed income markets, higher consumer credit costs, and a deepening of the global economic slowdown.

The net loss of $27.7 billion ($5.59 per share) in 2008 includes the results and sales of the Company’s German retail banking operations and CitiCapital (which were reflected as discontinued operations), as well as a $9.568 billion Goodwill impairment charge based on the results of its fourth quarter of 2008 goodwill impairment testing. The goodwill impairment charge was recorded in North America Consumer Banking, Latin America Consumer Banking and EMEA Consumer Banking.

During 2008, the Company benefited from substantial U.S. government financial involvement, including (i) raising an aggregate $45 billion in capital through the sale of Citigroup non-voting perpetual, cumulative preferred stock and warrants to purchase common stock to the U.S. Department of the Treasury (UST), (ii) entering into a loss-sharing agreement with various U.S. government entities covering $301 billion of Company assets, and (iii) issuing $5.75 billion of senior unsecured debt guaranteed by the Federal Deposit Insurance Corporation (FDIC) (in addition to $26.0 billion of commercial paper and interbank deposits of Citigroup’s subsidiaries guaranteed by the FDIC outstanding as of December 31, 2008). In connection with these programs and agreements, Citigroup is required to pay consideration to the U.S. government, including in the form of dividends on the preferred stock and other fees. In addition, Citigroup has agreed not to pay common stock dividends in excess of $0.01 per share per quarter for three years (beginning in 2009) or to repurchase its common stock without the consent of U.S. government entities. For additional information on the above, see “TARP and Other Regulatory Programs” on page 44.

In addition to the equity issuances to the UST under TARP, Citigroup raised $32 billion of capital in private and public offerings during 2008.

In addition, on January 16, 2009, the Company announced a realignment, for management and reporting purposes, into two businesses: Citicorp, primarily comprised of the Company’s Global Institutional Bank and the Company’s regional consumer banks; and Citi Holdings, primarily comprised of the Company’s brokerage and asset management business, local consumer finance business, and a special asset pool. Citigroup believes that the realignment will optimize the Company’s global businesses for future profitable growth and opportunities and will assist in the Company’s ongoing efforts to reduce its balance sheet and simplify its organization. See “Outlook for 2009” on page 7.

On February 27, 2009, the Company announced an exchange offer of its common stock for up to $27.5 billion of its existing preferred securities and trust preferred securities at a conversion price of $3.25 per share. The U.S. government will match this exchange up to a maximum of $25 billion of its preferred stock at the same conversion price. These transactions are intended to increase the Company’s tangible common equity (TCE) and will require no additional U.S. government investment in Citigroup. See “Outlook for 2009” on page 7.

During 2008, the Company also completed 19 strategic divestitures which were designed to strengthen our franchises.

Revenues of $52.8 billion decreased 33% from 2007, primarily driven by significantly lower revenues in ICG due to write-downs related to subprime

CDOs and leveraged lending and other fixed income exposures. Revenues outside of ICG declined 6%. The Company’s revenues outside North America declined 4% from 2007.

Net interest revenue grew 18% from 2007, reflecting the lower cost of funds, as well as lower rates outside the U.S. The lower cost of funds more than offset the decrease in the asset yields during the year. Net interest margin in 2008 was 3.06%, up 65 basis points from 2007 (see the discussion of net interest margin on page 82). Non-interest revenue decreased $34 billion from 2007, primarily reflecting subprime and fixed income write-downs.

Although the Company made significant progress in reducing its expense base during the year, operating expenses increased 19% from the previous year with lower operating expenses being offset by a $9.568 billion goodwill impairment charge, higher restructuring/ repositioning charges and the impact of acquisitions. Excluding the goodwill impairment charge, expenses have declined for four consecutive quarters, due to lower incentive compensation accruals and continued benefits from re-engineering efforts. Headcount was down 52,000 from December 31, 2007.

The Company’s equity capital base and trust preferred securities were $165.5 billion at December 31, 2008. Stockholders’ equity increased by $28.2 billion during 2008 to $141.6 billion, which was affected by capital issuances discussed above, and the distribution of $7.6 billion in dividends to common and preferred shareholders. Citigroup maintained its “well-capitalized” position with a Tier 1 Capital Ratio of 11.92% at December 31, 2008.

Total credit costs of $33.3 billion included NCLs of $19.0 billion, up from $9.9 billion in 2007, and a net build of $14.3 billion to credit reserves. The build consisted of $10.8 billion in Consumer ($8.2 billion in North America and $2.6 billion in regions outside North America), $3.3 billion in ICG and $249 million in GWM (see “Credit Reserves” on page 11 for further discussion). The Consumer loan loss rate was 3.75%, a 149 basis-point increase from the fourth quarter of 2007. Corporate cash-basis loans were $9.6 billion at December 31, 2008, an increase of $7.8 billion from year-ago levels. This increase is primarily attributable to the transfer of non-accrual loans from the held-for-sale portfolio to the held-for-investment portfolio during the fourth quarter of 2008. The allowance for loan losses totaled $29.6 billion at December 31, 2008, a coverage ratio of 4.27% of total loans.

The effective tax rate (benefit) of (39)% in 2008 primarily resulted from the pretax losses in the Company’s Securities and Banking business taxed in the U.S. (the U.S. is a higher tax-rate jurisdiction). In addition, the tax benefits of permanent differences, including the tax benefit for not providing U.S. income taxes on the earnings of certain foreign subsidiaries that are indefinitely invested, favorably affected the Company’s effective tax rate.

At December 31, 2008, the Company had increased its structural liquidity (equity, long-term debt and deposits) as a percentage of assets from 62% at December 31, 2007 to approximately 66% at December 31, 2008. Citigroup has continued its deleveraging, reducing total assets from $2,187 billion at December 31, 2007 to $1,938 billion at December 31, 2008.

At December 31, 2008, the maturity profile of Citigroup’s senior long-term unsecured borrowings had a weighted average maturity of seven years. Citigroup also reduced its commercial paper program from $35 billion at December 31, 2007 to $29 billion at December 31, 2008.

Recently, Robert Rubin, Sir Win Bischoff and Roberto Hernández Ramirez announced they would not stand for re-election at Citigroup’s 2009 Annual Meeting of Stockholders. On February 23, 2009, Richard Parsons became the Chairman of the Company.

OUTLOOK FOR 2009

We enter the challenging environment of 2009 after a difficult and disappointing 2008. While numerous risks remain, the Company has made progress in decreasing the risks arising from its balance sheet and building capital to generate future earnings. As examples, and as more fully disclosed throughout this MD&A:

Changes to Citi’s Organizational Structure

On January 16, 2009, given the economic and market environment, Citi announced the acceleration of the implementation of its strategy to focus on its core businesses. As a result of its proposed realignment, Citigroup will be comprised of two businesses, Citicorp and Citi Holdings. Citigroup believes that the realignment will optimize the Company’s global businesses for future profitable growth and opportunities and will assist in the Company’s ongoing efforts to reduce its balance sheet and simplify its organization. Citigroup’s plan is to transition to this structure as quickly as possible, taking into account the interests of all stakeholders, including customers and clients, debt holders, preferred and common stockholders, employees, and the communities it serves. The Company recognizes that major legal vehicle restructuring changes such as the realignment will require regulatory approvals and the resolution of tax and other issues. Citigroup has, however, managed the Company consistent with this structure since February 2009 and management reporting will reflect this structure starting with the second quarter of 2009.

Citicorp

Citicorp, a global bank for businesses and consumers, will have two primary underlying businesses: the Global Institutional Bank serving corporate, institutional, public sector and private banking clients; and Citigroup’s regional consumer banks which provide traditional banking services, including branded cards as well as small and middle market commercial banking. It is anticipated that Citicorp will focus on its unique competitive advantage of having a strong presence in the fastest-growing areas of the world.

Citi Holdings

Citi Holdings will have three primary segments: brokerage and asset management, local consumer finance and a special asset pool. Citigroup continues to believe that many of Citi Holdings’ businesses are attractive long-term businesses with strong market positions, but they do not sufficiently enhance the capabilities of Citigroup’s core businesses. Citi Holdings will continue to focus on risk management and credit quality as it seeks to build value in these businesses.

Exchange Offer and U.S. Government Exchange

On February 27, 2009, Citigroup announced an exchange offer of its common stock for up to $27.5 billion of its existing preferred securities and trust preferred securities at a conversion price of $3.25 per share. The U.S. government will match this exchange up to a maximum of $25 billion of its preferred stock at the same conversion price. As announced, the transactions will increase the Company’s tangible common equity (TCE). The transactions will require no additional U.S. government investment in Citigroup and will not change the Company’s overall strategy or operations. In addition, the transactions will not change the Company’s Tier 1 Capital Ratio of 11.9% as of December 31, 2008. In connection with the transactions, Citigroup will suspend dividends on its preferred securities (other than its trust preferred securities) and, as a result, on its common stock. Full implementation of the proposed exchange offer is subject to approval of Citigroup’s shareholders and participation by holders of Citigroup’s preferred stock and trust preferred securities, which cannot be guaranteed. See also “Risk Factors” on page 47.

Our Goals in 2009

• Returning to profitability

• Risk reduction and mitigation

• Implementation and management of TARP and TARP funds

• Expense reduction

• Headcount reduction

• Asset reduction

• Implementing organizational changes/management realignment

Economic Environment

Citigroup’s financial results are closely tied to the global economic environment. The global markets are experiencing the impact of a significant U.S. and international economic downturn. This is restricting the Company’s growth opportunities both domestically and internationally. Should economic conditions not improve or further deteriorate, the Company could experience continued revenue pressure across its businesses and increased costs of credit. In addition, continuing deterioration of the U.S. or global real estate markets could adversely impact the Company’s revenues, including additional losses on subprime and other exposures, additional losses on leveraged loan commitments and cost of credit, including increased credit losses in mortgage-related and other activities. Further adverse rating actions by credit rating agencies in respect of structured credit products or other credit-related exposures, or of monoline insurers, could result in revenue reductions in those or similar securities. See “Risk Factors” on page 47 for a further discussion of these risks.

EVENTS IN 2008

Certain significant events during 2008 had, or could have, an effect on Citigroup’s current and future financial condition, results of operations, liquidity and capital resources. These events are summarized below and discussed in more detail throughout this MD&A.

TARP AND OTHER REGULATORY PROGRAMS

Issuance of $25 Billion of Perpetual Preferred Stock and a Warrant to Purchase Common Stock under TARP

On October 28, 2008, Citigroup raised $25 billion through the sale of non-voting perpetual, cumulative preferred stock and a warrant to purchase common stock to the UST as part of the UST Troubled Asset Relief Program (TARP) Capital Purchase Program. All of the proceeds were treated as Tier 1 Capital for regulatory purposes.

Additional Issuance of $20 Billion of Perpetual Preferred Stock and a Warrant to Purchase Common Stock under TARP

On December 31, 2008, related to the U.S. Government Loss-Sharing Agreement described below, Citigroup raised an additional $20 billion through the sale of non-voting perpetual, cumulative preferred stock and a warrant to purchase common stock to the UST as part of TARP. All of the proceeds were treated as Tier 1 Capital for regulatory purposes.

U.S. Government Loss-Sharing Agreement

On January 15, 2009, Citigroup entered into a definitive agreement providing for loss sharing by the UST, FDIC and the Federal Reserve Bank of New York on a $301 billion portfolio of Citigroup assets (valued as of November 21, 2008). In consideration for this loss-sharing agreement, Citigroup issued $7.3 billion of non-voting perpetual, cumulative preferred stock and a warrant to purchase common stock to the UST and the FDIC. Of the issuance, $3.5 billion will be treated as Tier 1 Capital for regulatory purposes.

Use of TARP Proceeds

Citigroup has established a formal process for its use of the TARP proceeds which is directed by senior executives and emphasizes expanding the flow of credit and strengthening the financial system in the United States, consistent with the objectives of TARP. Citigroup’s first quarterly progress report regarding its implementation and management of TARP was issued on February 3, 2009. See “TARP and Other Regulatory Programs” on page 44.

FDIC’s Temporary Liquidity Guarantee Program

Under the terms of the FDIC’s guarantee program, the FDIC will guarantee, until the earlier of its maturity or June 30, 2012, certain qualifying senior unsecured debt issued by certain Citigroup entities between October 14, 2008 and June 30, 2009 (proposed to be extended to October 30, 2009), in amounts up to 125% of the qualifying debt for each qualifying entity. The FDIC will charge Citigroup a fee ranging from 50 to 100 basis points in accordance with a prescribed fee schedule for any new qualifying debt issued with the FDIC guarantee. At December 31, 2008, Citigroup had issued $5.75 billion of long-term debt that is covered under the FDIC guarantee, with $1.25 billion maturing in 2010 and $4.5 billion maturing in 2011. In January and February 2009, Citigroup and its affiliates issued an additional $14.9 billion in senior unsecured debt under this program.

In addition, Citigroup, through its subsidiaries, also had $26.0 billion in commercial paper and interbank deposits backed by the FDIC outstanding as of December 31, 2008. FDIC guarantees of commercial paper (and interbank deposits) cease to be available after June 30, 2009 (proposed to be extended to October 30, 2009), and the FDIC charges a fee ranging from 50 to 100 basis points in connection with the issuance of those instruments.

Lowering of Quarterly Dividend to $0.01 Per Share

In accordance with various TARP programs, commencing in 2009, Citigroup has agreed not to pay common stock dividends in excess of $0.01 per share per quarter for three years without the consent of the UST, FDIC and the Federal Reserve Bank of New York.

On January 20, 2009, Citigroup declared a $0.01 quarterly dividend on the Company’s common stock. This dividend was paid on February 22, 2009 to stockholders of record on February 2, 2009.

For additional details on each of these programs, see “TARP and Other Regulatory Programs” beginning on page 44 for further discussion.

PRIVATE AND PUBLIC ISSUANCES OF PREFERRED AND COMMON STOCK

During the first quarter of 2008, Citigroup issued $12.5 billion of 7% convertible preferred stock in a private offering, $3.2 billion of 6.5% convertible preferred stock in public offerings, and $3.715 billion of 8.125% non-convertible preferred stock in public offerings.

In the second quarter of 2008, Citigroup raised $8.0 billion of capital through public offerings of non-convertible preferred stock and issued approximately $4.9 billion of common stock.

In total, the Company raised $32.3 billion in capital in private and public offerings during 2008, excluding issuances to the UST under TARP. See Note 21 on page 172 for further information.

Subprime-Related Direct Exposures

In 2008, Securities and Banking (S&B) recorded losses of $14.3 billion pretax, net of hedges, on its subprime-related direct exposures. The Company’s remaining $14.1 billion in U.S. subprime net direct exposure in S&B at December 31, 2008 consisted of (i) approximately $12.0 billion of net exposures to the super senior tranches of CDOs, which are collateralized by asset-backed securities, derivatives on asset-backed securities or both, and (ii) approximately $2.1 billion of subprime-related exposures in its lending and structuring business. In 2007, Citigroup recorded losses of $18.3 billion pretax, net of hedges, on subprime-related direct exposures. See “Exposure to U.S. Real Estate” on page 68 for a further discussion of such exposures and the associated losses recorded.

Monoline Insurers Credit Valuation Adjustment (CVA)

During 2008, Citigroup recorded a pretax loss on CVA of $5.736 billion on its exposure to monoline insurers. CVA is calculated by applying forward default probabilities, which are derived using the counterparty’s current credit spread, to the expected exposure profile. In 2007, the Company recorded pretax losses of $967 million. The majority of the exposure relates to hedges on super senior positions that were executed with various monoline insurance companies. See “Direct Exposure to Monolines” on page 70 for a further discussion.

Highly Leveraged Loans and Financing Commitments

Due to the continued dislocation of the credit markets and reduced market interest in higher risk/higher yield instruments that began during the second half of 2007, liquidity in the market for highly leveraged financings has been very limited. This resulted in the Company’s recording pretax losses of $4.892 billion on funded and unfunded highly leveraged finance exposures in 2008 and $1.487 billion in 2007.

Citigroup’s exposure to highly leveraged financings totaled $10.0 billion at December 31, 2008 ($9.1 billion in funded and $0.9 billion in unfunded commitments), reflecting a decrease of $33.2 billion from December 31, 2007. See “Highly Leveraged Financing Commitments” on page 71 for further discussion.

Alt-A Mortgage Securities

In 2008, Citigroup recorded pretax losses of approximately $3.812 billion, net of hedges, on Alt-A mortgage securities held in S&B. For these purposes, Alt-A mortgage securities are non-agency residential mortgage-backed securities (RMBS) where (i) the underlying collateral has weighted average FICO scores between 680 and 720 or (ii) for instances where FICO scores are greater than 720, RMBS have 30% or less of the underlying collateral composed of full documentation loans.

The Company had $12.6 billion in Alt-A mortgage securities at December 31, 2008, which decreased from $22.0 billion at December 31, 2007. Of the $12.6 billion, $1.1 billion was classified as Trading account assets, on which $2.201 billion of fair value losses, net of hedging, was recorded in earnings, and $11.5 billion was classified as HTM investments, on which $1.611 billion of losses were recorded in earnings due to other-than-temporary impairments.

Auction Rate Securities (ARS)

In 2008, Citigroup recorded pretax losses of approximately $1.733 billion on Auction Rate Securities (ARS). At December 31, 2008, the Company’s exposure to ARS totaled $8.8 billion including both legacy positions and ARS purchased under the ARS settlement agreement with the federal and state regulators (see “Other Items” on page 13). Of the $8.8 billion, $5.5 billion is classified as held to maturity and $3.3 billion as available for sale (AFS). The $8.8 billion comprises $3.7 billion of student loan ARS, $3.2 billion of preference share ARS backed by municipal or other taxable securities, $1.4 billion of municipal ARS, and $0.5 billion of ARS backed by other ABS.

Commercial Real Estate

S&B’s commercial real estate exposure is split into three categories: assets held at fair value; held to maturity/held for investment; and equity. During 2008, pretax losses of $2.6 billion net of hedges were booked on exposures recorded at fair value. See “Exposure to Commercial Real Estate” on page 69 for a further discussion.

Structured Investment Vehicles (SIVs)

On December 13, 2007, Citigroup announced a commitment to provide support facilities to its Citi-advised SIVs for the purpose of resolving the uncertainty regarding the SIVs’ senior debt ratings. As a result of this commitment, the Company consolidated the SIVs’ assets and liabilities onto Citigroup’s Consolidated Balance Sheet as of December 2007. This resulted in an increase of assets of $59 billion.

On February 12, 2008, Citigroup finalized the terms of these support facilities, which took the form of a commitment to provide $3.5 billion of mezzanine capital to the SIVs. The mezzanine capital facility was increased by $1.0 billion to $4.5 billion, with the additional commitment funded during the fourth quarter of 2008. During the period to November 18, 2008, Citigroup recorded $3.3 billion of trading account losses on SIV assets.

To complete the wind-down of the SIVs, Citigroup committed to purchase all remaining assets out of the SIV legal vehicles at fair value, with a trade date of November 18, 2008. Citigroup funded the purchase of the assets by assuming the obligation to pay amounts due under the medium-term notes issued by the SIVs as the notes mature. The assets purchased from the SIVs and the liabilities assumed by the Company were previously recognized at fair value on the Company’s balance sheet due to the consolidation of the SIV legal vehicles in December 2007.

The net cash funding provided by Citigroup for the asset purchase was $0.3 billion. As of December 31, 2008, the balance for these repurchased SIV assets totaled $16.6 billion, of which $16.5 billion is classified as held to maturity. See “Structured Investment Vehicles” on page 15 for a further discussion.

Credit Valuation Adjustment on Citi’s Liabilities for Which Citi Has Elected the Fair Value Option

Under SFAS 157, the Company is required to use its own-credit spreads in determining the current value for its derivative liabilities and all other liabilities for which it has elected the fair value option. When Citi’s credit spreads widen (deteriorate), Citi recognizes a gain on these liabilities because the value of the liabilities has decreased. When Citi’s credit spreads narrow (improve), Citi recognizes a loss on these liabilities because the value of the liabilities has increased.

During 2008, the Company recorded a gain of approximately $4.6 billion on its fair value option liabilities due to the widening of the Company’s credit spreads. $2.49 billion of this gain was due to a change in methodology for estimating the credit valuation adjustment implemented in the fourth quarter. As of December 31, 2008, the Company estimates the market value of the liabilities by incorporating the Company’s credit spreads observed in the bond market (cash spreads). Prior to that date, the Company incorporated the Company’s credit default swaps spreads in the valuation of these liabilities. For further discussion regarding this change, see “Significant Accounting Policies and Significant Estimates” on page 18.

CREDIT RESERVES

During 2008, the Company recorded a net build of $14.3 billion to its credit reserves. The build consisted of $10.8 billion in Consumer ($8.2 billion in North America and $2.6 billion in regions outside of North America), $3.3 billion in ICG and $249 million in GWM.

The $8.2 billion build in North America Consumer included additional reserves for the increased number of loan modification adjustments to customer loans across all product lines. The higher credit costs primarily reflected a weakening of leading credit indicators, including higher delinquencies on first and second mortgages, unsecured personal loans, credit cards and auto loans. Reserves also increased due to trends in the U.S. macroeconomic environment, including the housing market downturn and rising unemployment rates.

The $2.6 billion build in regions outside of North America was primarily driven by deterioration in Mexico, Brazil, the U.K., Spain, Greece and India.

The build of $3.3 billion in ICG primarily reflects a weakening in overall portfolio credit quality, as well as loan loss reserves for specific counterparties.

As the environment for consumer credit continues to deteriorate, the Company has taken additional actions to manage risks, such as tightening underwriting criteria and selectively reducing credit lines. However, credit losses are expected to rise through 2009 and it is likely that the Company’s loss rates may exceed their historical peaks.

The total allowance for loan losses and unfunded lending commitments totaled $30.5 billion at December 31, 2008.

GOODWILL

Based on the results of goodwill impairment testing as of December 31, 2008, Citigroup recorded a pretax charge of approximately $9.6 billion ($8.7 billion after tax) in the fourth quarter of 2008 for goodwill impairments related to its North America Consumer Banking, Latin America Consumer Banking and EMEA Consumer Banking reporting units. This charge resulted in the write-off of the entire amount of goodwill allocated to those reporting units. However, this charge did not result in a cash outflow or negatively affect Tier 1 and Total Regulatory Capital Ratios, Tangible Capital or the Company’s liquidity position.

The primary cause for the goodwill impairment in the above reporting units was the rapid deterioration in the financial markets as well as in the global economic outlook particularly during the period beginning mid-November and through year end December 2008. This deterioration further weakened the near-term prospects for the financial services industry. These and other factors, including the increased possibility of further government intervention, also resulted in the decline in the Company’s market capitalization from approximately $90 billion at July 1, 2008 and approximately $74 billion at October 31, 2008 to approximately $36 billion at December 31, 2008. See “Significant Accounting Policies and Significant Estimates” on page 18 for a further discussion of goodwill.

COST REDUCTION INITIATIVES

During the past two years, Citigroup has undergone several cost reduction initiatives.

2008 Re-Engineering Projects

In the fourth quarter of 2008, the Company recorded restructuring charges of $1.797 billion pretax related to the implementation of a company-wide re-engineering plan. This initiative will generate a reduction in headcount of approximately 20,600. These charges are reported in the Restructuring line on the Company’s Consolidated Statement of Income, and are recorded in each segment.

In addition, during 2008, several businesses initiated their own re-engineering projects to reduce expenses. A total expense of $1.732 billion was incurred generating a reduction in headcount of 16,807. These repositioning charges are reported in the lines Compensation and benefits and Premises and equipment on the Company’s Consolidated Statement of Income. These charges were recorded in the individual segments.

Structural Expense Review

In 2007, the Company completed a review of its structural expense base in a company-wide effort to create a more streamlined organization, reduce expense growth, and provide investment funds for future growth initiatives. As a result of this review, a pretax restructuring charge of $1.4 billion was recorded in Corporate/Other during the first quarter of 2007. Additional charges of $151 million (net of changes in estimates) were recognized in subsequent quarters throughout 2007 and a net release of $31 million was recorded in 2008 due to a change in estimates. These charges are reported in the Restructuring line on the Company’s Consolidated Statement of Income.

Separate from these restructuring charges were additional repositioning expenditures of $539 million incurred for re-engineering initiatives taken on by several businesses to further reduce expenses beyond the company-wide initiatives. These repositioning charges are included in the lines Compensation and benefits and Premises and equipment on the Company’s Consolidated Statement of Income. These charges were recorded in the individual segments.

DIVESTITURES

Sale of Citigroup’s German Retail Banking Operations

On December 5, 2008, Citigroup sold its German retail banking operations to Credit Mutuel for Euro 5.2 billion in cash. The German retail bank’s operating net earnings accrued in 2008 through the closing. The sale resulted in an after-tax gain of approximately $3.9 billion, including the after-tax gain on the foreign currency hedge of $383 million recognized during the fourth quarter of 2008, and was recorded in Discontinued Operations. In addition, a foreign currency hedge gain of $211 million was recorded in the third quarter of 2008.

The sale does not include the corporate and investment banking business or the Germany-based European data center.

See Note 3 on page 136 for further discussion regarding this sale.

Sale of CitiCapital

On July 31, 2008, Citigroup sold substantially all of CitiCapital, the equipment finance unit in North America, to GE Capital. An after-tax net loss of $305 million ($506 million pretax) was recorded in 2008 in Discontinued Operations on the Company’s Consolidated Statement of Income.

See Note 3 on page 136 for further discussion regarding this sale.

Sale of Upromise Cards Portfolio

During 2008, Global Cards sold substantially all of the Upromise Cards portfolio to Bank of America for an after-tax gain of $127 million ($201 million pretax). The portfolio sold had balances of approximately $1.2 billion of credit card receivables.

Divestiture of Diners Club International

On June 30, 2008, Citigroup completed the sale of Diners Club International (DCI) to Discover Financial Services, resulting in an after-tax gain of approximately $56 million ($111 million pretax).

Citigroup will continue to issue Diners Club cards and support its brand and products through ownership of its many Diners Club card issuers around the world.

Sale of CitiStreet

On July 1, 2008, Citigroup and State Street Corporation completed the sale of CitiStreet, a benefits servicing business, to ING Group in an all-cash transaction valued at $900 million. CitiStreet is a joint venture formed in 2000 which, prior to the sale, was owned 50% each by Citigroup and State Street. The transaction closed on July 1, 2008 and generated an after-tax gain of $222 million ($347 million pretax).

Sale of Citigroup Global Services Limited

In 2008, Citigroup sold all of its interest in Citigroup Global Services Limited (CGSL) to Tata Consultancy Services Limited (TCS) for all-cash consideration of approximately $515 million, resulting in an after-tax gain of $192 million ($263 million pretax). CGSL was the Citigroup captive provider of business process outsourcing services solely within the Banking and Financial Services sector.

In addition to the sale, Citigroup signed an agreement with TCS for TCS to provide, through CGSL, process outsourcing services to Citigroup and its affiliates in an aggregate amount of $2.5 billion over a period of 9.5 years.

Sale of Citigroup Technology Services Limited

On December 23, 2008, Citigroup announced an agreement with Wipro Limited to sell all of Citigroup’s interest in Citi Technology Services Ltd., Citigroup’s India-based captive provider of technology infrastructure support and application development, for all-cash consideration of approximately $127 million. A substantial portion of the proceeds from this sale will be recognized over the period in which Citi has a service contract with Wipro Limited. This transaction closed on January 20, 2009 and a loss of approximately $7 million was booked at that time.

Sale of Citi’s Nikko Citi Trust and Banking Corporation

Citigroup has executed a definitive agreement to sell all of the shares of Nikko Citi Trust and Banking Corporation to Mitsubishi UFJ Trust and Banking Corporation (MUTB). At the closing, MUTB will pay all-cash consideration of 25 billion yen, subject to certain purchase price adjustments. The sale is expected to close on or around April 1, 2009, pending regulatory approvals and other closing conditions, and result in an estimated after-tax gain of $53 million ($89 million pretax).

OTHER ITEMS

Auction Rate Securities Settlement

On August 7, 2008, Citigroup announced an agreement in principle with state and federal regulators under which it agreed to offer to purchase the failed ARS of its retail clients for par value. This agreement resulted in a $926 million loss being recorded in 2008.

The loss comprises: (1) fines of $100 million ($50 million to the State of New York and $50 million to the other state regulatory agencies); (2) losses of $425 million, recorded at the time of the announcement, reflecting the estimated difference between the fair value and par value of the securities to be purchased; and (3) an incremental loss of $401 million due to the decline in value of these ARS since the time of announcement. The securities purchased by Citigroup under this agreement have a notional value of $6.1 billion. The purchase commitment for the remaining undelivered securities is estimated to be approximately $1.0 billion as of December 31, 2008. The pretax losses of $926 million have been divided equally between S&B and GWM, both in North America.

Income Taxes

The Company recorded an income tax benefit for 2008. The Company’s effective tax rate (benefit) on continuing operations was (38.9)% in 2008. The 2008 effective tax rate is higher than 35% because of the impact of indefinitely invested international earnings and other permanent differences on the pretax loss. The 2008 tax rate included a $994 million tax benefit related to the restructuring of the legal vehicles in Japan.

Sale of Redecard Shares

In the first quarter of 2008, Citigroup sold approximately 46.8 million Redecard shares, which decreased Citigroup’s ownership in Redecard from approximately 23.9% to approximately 17%. An after-tax gain of $426 million ($661 million pretax) was recorded in the Global Cards business in Latin America.

Lehman Brothers Holding, Inc. Bankruptcy and Related Matters

On September 15, 2008, Lehman Brothers Holding, Inc. (“LBHI” and, together with its subsidiaries, “Lehman”) filed for Chapter 11 bankruptcy in U.S. Federal Court. A number of LBHI subsidiaries have subsequently filed bankruptcy or similar insolvency proceedings in the U.S. and other jurisdictions. Lehman’s bankruptcy caused Citigroup to terminate cash management and foreign exchange clearance arrangements, close out approximately 40,000 Lehman foreign exchange, derivative and other transactions and quantify other exposures. Citigroup expects to file claims in the relevant Lehman bankruptcy proceedings, as appropriate.

Visa Restructuring and Litigation Matters

During 2008, Citigroup recorded a $723 million increase to pretax income resulting from events surrounding Visa. These events included: (i) a $359 million gain on the redemption of Visa shares primarily recorded in U.S. Consumer; (ii) a $108 million gain from an adjustment of the regional share allocation related to the fourth quarter 2007 Visa reorganization, primarily recorded in International Consumer; (iii) a $157 million reduction of litigation reserves that were originally booked in the fourth quarter of 2007 primarily in U.S. Consumer; and (iv) a gain on the sale of Visa shares of $99 million.

Write-Down of Intangible Asset Related to Old Lane

As a result of Old Lane Partners, L.P. and Old Lane Partners GP, LLC notifying their investors that they would have the opportunity to redeem their investments in the hedge fund, without restriction effective July 31, 2008, ICG recorded a pretax write-down of $202 million on intangible assets related to this multi-strategy hedge fund during the first quarter of 2008. By April 2008, substantially all unaffiliated investors had notified Old Lane of their intention to redeem their investments. See Note 19 on page 166 for additional information.

Write-Down of Intangible Asset Related to Nikko Asset Management

During the fourth quarter of 2008, Citigroup performed an impairment analysis of Japan’s Nikko Asset Management fund contracts which represent the rights to manage and collect fees on investor assets and are accounted for as indefinite-lived intangible assets. As a result, an impairment loss of $937 million pretax ($607 million after-tax) was recorded in ICG.

Nikko Cordial

Citigroup began consolidating Nikko Cordial’s financial results and the related minority interest on May 9, 2007, when Nikko Cordial became a 61%-owned subsidiary. Later in 2007, Citigroup increased its ownership stake in Nikko Cordial to approximately 68%. Nikko Cordial results are included in Citigroup’s Securities and Banking and Global Wealth Management businesses.

On January 29, 2008, Citigroup completed the acquisition of the remaining Nikko Cordial shares that it did not already own by issuing 175 million Citigroup common shares (approximately $4.4 billion based on the exchange terms) in exchange for those remaining Nikko Cordial shares. The share exchange was completed following the listing of Citigroup’s common shares on the Tokyo Stock Exchange on November 5, 2007.

Transaction with Banco de Chile

In 2007, Citigroup and Quiñenco entered into a definitive agreement to establish a strategic partnership that combines Citigroup operations in Chile with Banco de Chile’s local banking franchise to create a banking and financial services institution with approximately 20% market share of the Chilean banking industry. The transaction closed on January 1, 2008.

Under the agreement, Citigroup sold its Chilean operations and other assets in exchange for an approximate 32.96% stake in LQIF, a wholly owned subsidiary of Quiñenco that controls Banco de Chile. This investment is accounted for under the equity method of accounting. As part of the overall transaction, Citigroup also acquired the U.S. branches of Banco de Chile for approximately $130 million. The new partnership calls for active participation by Citigroup in the management of Banco de Chile including board representation at both LQIF and Banco de Chile. In addition, as part of the definitive agreement, Citigroup and Quiñenco agreed on certain transactions that could increase Citigroup’s stake in LQIF to approximately 50%. Specifically, Quiñenco has a put that would require Citigroup to buy an additional approximately 8.5% stake in LQIF. Citigroup has a call on, or the option to buy, this increased ownership percentage as well. Further,

Citigroup has an option to buy an additional approximately 8.5% in LQIF, resulting in a potential 50% ownership stake in LQIF. Each of these potential additional acquisitions will be exercisable in 2010.

SUBSEQUENT EVENT

Joint Venture with Morgan Stanley

On January 13, 2009, Citigroup reached a definitive agreement to sell its Smith Barney business, which includes Smith Barney in the U.S., Smith Barney in Australia and Quilter in the U.K., to a joint venture to be formed with Morgan Stanley in exchange for a 49% stake in the joint venture and an upfront cash payment of $2.7 billion from Morgan Stanley. The joint venture, to be called Morgan Stanley Smith Barney, will combine the sold businesses with Morgan Stanley’s Global Wealth Management Group. It will not include Citi Private Bank, Nikko Cordial Securities or Citigroup’s bank branch-based financial advisors.

The joint venture’s combined businesses have more than 20,000 financial advisors, 1,000 offices, $1.7 trillion in client assets at December 31, 2008, $14.9 billion in 2008 pro forma combined revenues, and $2.8 billion in 2008 pro forma combined pretax profit.

Upon closing, and following the cash payment of $2.7 billion from Morgan Stanley to Citigroup, Morgan Stanley will own 51% and Citi will own 49% of the joint venture. Morgan Stanley and Citi will have various purchase and sale rights for the joint venture, but Citi is expected to retain the full amount of its stake at least through year three and to continue to own a significant stake in the joint venture at least through year five.

The transaction, which is subject to and contingent upon regulatory approvals and other customary closing conditions, is expected to close in the third quarter of 2009. At closing, and based on current estimates of the fair value of the joint venture, the Company estimates that it will recognize a pretax gain of approximately $9.5 billion (approximately $5.8 billion after tax) and will generate approximately $6.5 billion of tangible common equity.

EVENTS IN 2007

CREDIT RESERVES

During 2007, the Company recorded a net build of $6.9 billion to its credit reserves. The build consisted of $6.2 billion in Consumer ($5.0 billion in North America Consumer and $1.2 billion in regions outside North America), $562 million in ICG and $100 million in GWM.

The $5.0 billion build in North America Consumer reflected a weakening of leading credit indicators including delinquencies on first and second mortgages and deterioration in the housing market (approximately $3.0 billion), a downturn in other economic trends including unemployment and GDP, as well as the impact of housing market deterioration, affecting all other portfolios ($1.3 billion), and a change in the estimate of loan losses inherent in the portfolio, but not yet visible in delinquency statistics (approximately $700 million).

The $1.2 billion build in regions outside North America included a change in estimate of loan losses inherent in the portfolio but not yet visible in delinquency statistics (approximately $600 million), along with volume growth and credit deterioration in certain countries. With the exception of Mexico, Japan and India, the international consumer credit environment remained generally stable.

The build of $562 million in ICG primarily reflected a slight weakening in overall portfolio credit quality, as well as loan loss reserves for specific counterparties. The loan loss reserves for specific counterparties include $327 million for subprime-related direct exposures.

INCOME TAXES

The Company recorded an income tax benefit for 2007. The effective tax rate of (321.9)% primarily resulted from the pretax losses in the Company’s S&B and North America Consumer Banking businesses (the U.S. is a higher tax jurisdiction). In addition, the tax benefits of permanent differences, including the tax benefit for not providing U.S. income taxes on the earnings of certain foreign subsidiaries that are indefinitely invested, favorably affected the Company’s effective tax rate.

STRUCTURED INVESTMENT VEHICLES (SIVs)

On December 13, 2007, Citigroup announced its decision to commit to provide a support facility that would resolve uncertainties regarding senior debt repayment facing the Citi-advised Structured Investment Vehicles (SIVs). As a result of the Company’s commitment, which was not legally required, Citigroup consolidated the assets and liabilities of the SIVs as of December 31, 2007. This resulted in an increase of assets of $59 billion.

ACQUISITIONS

North America

Acquisition of ABN AMRO Mortgage Group

In 2007, Citigroup acquired ABN AMRO Mortgage Group (AAMG), a subsidiary of LaSalle Bank Corporation and ABN AMRO Bank N.V. AAMG is a national originator and servicer of prime residential mortgage loans. As part of this acquisition, Citigroup purchased approximately $12 billion in assets, including $3 billion of mortgage servicing rights, which resulted in the addition of approximately 1.5 million servicing customers. Results for AAMG are included in Citigroup’s North America Consumer Banking business from March 1, 2007 forward.

Acquisition of Old Lane Partners, L.P.

In 2007, the Company completed the acquisition of Old Lane Partners, L.P. and Old Lane Partners, GP, LLC (Old Lane). Old Lane was the manager of a global, multi-strategy hedge fund and a private equity fund with total assets under management and private equity commitments of approximately $4.5 billion. Results for Old Lane are included within ICG from July 2, 2007 forward.

Acquisition of BISYS

In 2007, the Company completed its acquisition of BISYS Group, Inc. (BISYS) for $1.47 billion in cash. Citigroup completed the sale of the Retirement and Insurance Services Divisions of BISYS, making the net cost of the transaction to Citigroup approximately $800 million. Citigroup retained the Fund Services and Alternative Investment services businesses of BISYS, which provides administrative services for hedge funds, mutual funds and private equity funds. Results for BISYS are included in Citigroup’s Transaction Services business from August 1, 2007 forward.

Acquisition of Automated Trading Desk

In 2007, Citigroup completed its acquisition of Automated Trading Desk (ATD), a leader in electronic market making and proprietary trading, for approximately $680 million ($102.6 million in cash and approximately 11.17 million shares of Citigroup common stock). Results for ATD are included in Citigroup’s Securities and Banking business from October 3, 2007 forward.

Latin America

Acquisition of Grupo Financiero Uno

In 2007, Citigroup completed its acquisition of Grupo Financiero Uno (GFU), the largest credit card issuer in Central America, and its affiliates, with $2.2 billion in assets. The results for GFU are included in Citigroup’s Global Cards and Latin America Consumer Banking businesses from March 5, 2007 forward.

Acquisition of Grupo Cuscatlán

In 2007, Citigroup completed the acquisition of the subsidiaries of Grupo Cuscatlán for $1.51 billion ($755 million in cash and 14.2 million shares of Citigroup common stock) from Corporacion UBC Internacional S.A. Grupo. The results of Grupo Cuscatlán are included from May 11, 2007 forward and are recorded in Latin America Consumer Banking.

Asia

Acquisition of Bank of Overseas Chinese

In 2007, Citigroup completed its acquisition of Bank of Overseas Chinese (BOOC) in Taiwan for approximately $427 million. Results for BOOC are included in Citigroup’s Asia Consumer Banking, Global Cards and Securities and Banking businesses from December 1, 2007 forward.

EMEA

Acquisition of Quilter

In 2007, the Company completed the acquisition of Quilter, a U.K. wealth advisory firm, from Morgan Stanley. Quilter’s results are included in Citigroup’s Smith Barney business from March 1, 2007 forward. Quilter is being disposed of as part of the sale of Smith Barney to Morgan Stanley described in Subsequent Events.

Acquisition of Egg

In 2007, Citigroup completed its acquisition of Egg Banking plc (Egg), a U.K. online financial services provider, from Prudential PLC for approximately $1.39 billion. Results for Egg are included in Citigroup’s Global Cards and EMEA Consumer Banking businesses from May 1, 2007 forward.

Purchase of 20% Equity Interest in Akbank

In 2007, Citigroup completed its purchase of a 20% equity interest in Akbank, the second-largest privately owned bank by assets in Turkey for approximately $3.1 billion. This investment is accounted for using the equity method of accounting.

Sabanci Holding, a 34% owner of Akbank shares, and its subsidiaries have granted Citigroup a right of first refusal or first offer over the sale of any of their Akbank shares in the future. Subject to certain exceptions, including purchases from Sabanci Holding and its subsidiaries, Citigroup has otherwise agreed not to increase its percentage ownership in Akbank.

OTHER ITEMS

Sale of MasterCard Shares

In 2007, the Company recorded a $367 million after-tax gain ($581 million pretax) on the sale of approximately 4.9 million MasterCard Class B shares that had been received by Citigroup as a part of the MasterCard initial public offering completed in June 2006. The gain was recorded in the following businesses:

Redecard IPO

In 2007, Citigroup (a 31.9% shareholder in Redecard S.A., the only merchant acquiring company for MasterCard in Brazil) sold approximately 48.8 million Redecard shares in connection with Redecard’s initial public offering in Brazil. Following the sale of these shares, Citigroup retained approximately 23.9% ownership in Redecard. An after-tax gain of approximately $469 million ($729 million pretax) was recorded in Citigroup’s 2007 financial results in the Global Cards business.

Visa Restructuring and Litigation Matters

In 2007, Visa USA, Visa International and Visa Canada were merged into Visa Inc. (Visa). As a result of that reorganization, Citigroup recorded a $534 million (pretax) gain on its holdings of Visa International shares primarily recognized in the Consumer Banking business. The shares were then carried on Citigroup’s balance sheet at the new cost basis. In addition, Citigroup recorded a $306 million (pretax) charge related to certain of Visa USA’s litigation matters primarily recognized in the North America Consumer Banking business.

ACCOUNTING CHANGES

Adoption of SFAS 157—Fair Value Measurements

The Company elected to adopt SFAS No. 157, Fair Value Measurements (SFAS 157), as of January 1, 2007. SFAS 157 does not determine or affect the circumstances under which fair value measurements are used, but defines fair value, expands disclosure requirements around fair value and specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

For some products or in certain market conditions, observable inputs may not be available. For example, during the market dislocations that occurred in the second half of 2007, and continued throughout 2008, certain markets became illiquid, and some key inputs used in valuing certain exposures were unobservable. When and if these markets are liquid, the valuation of these exposures will use the related observable inputs available at that time from these markets.

Under SFAS 157, Citigroup is required to take into account its own credit risk when measuring the fair value of derivative positions as well as other liabilities for which it has elected fair value accounting under SFAS 155 Accounting for Certain Hybrid Financial Instruments (SFAS 155) and SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159), after taking into consideration the effects of credit-risk mitigants. The adoption of SFAS 157 has also resulted in some other changes to the valuation techniques used by Citigroup when determining the fair value of derivatives, most notably changes to the way that the probability of default of a counterparty is factored in, and the elimination of a derivative valuation adjustment which is no longer necessary under SFAS 157. The cumulative effect at January 1, 2007 of making these changes was a gain of $250 million after tax ($402 million pretax), or $0.05 per diluted share, which was recorded in the 2007 first quarter earnings within the S&B business.

SFAS 157 also precludes the use of block discounts for instruments traded in an active market, which were previously applied to large holdings of publicly traded equity securities, and requires the recognition of trade-date gains related to certain derivative trades that use unobservable inputs in determining their fair value. Previous accounting guidance allowed the use of block discounts in certain circumstances and prohibited the recognition of day-one gains on certain derivative trades when determining the fair value of instruments not traded in an active market. The cumulative effect of these changes resulted in an increase to January 1, 2007 Retained earnings of $75 million.

Adoption of SFAS 159—Fair Value Option

In conjunction with the adoption of SFAS 157, the Company also adopted SFAS 159, as of January 1, 2007. SFAS 159 provides for an election by the Company, on an instrument-by-instrument basis for most financial assets and liabilities to be reported at fair value with changes in fair value reported in earnings. After the initial adoption, the election is made at the time of the acquisition of a financial asset, financial liability or a firm commitment, and it may not be revoked. SFAS 159 provides an opportunity to mitigate volatility in reported earnings that resulted prior to its adoption from being required to apply fair value accounting to certain economic hedges (e.g., derivatives) while having to measure the assets and liabilities being economically hedged using an accounting method other than fair value.

Under the SFAS 159 transition provisions, the Company elected to apply fair value accounting to certain financial instruments held at January 1, 2007 with future changes in value reported in earnings. The adoption of SFAS 159 resulted in an after-tax decrease to January 1, 2007 retained earnings of $99 million ($157 million pretax). See Note 27 to the Consolidated Financial Statements on page 202 for additional information.

Note 1 to the Consolidated Financial Statements on page 122 contains a summary of the Company’s significant accounting policies, including a discussion of recently issued accounting pronouncements. These policies, as well as estimates made by management, are integral to the presentation of the Company’s financial condition. While all of these policies require a certain level of management judgment and estimates, this section highlights and discusses the significant accounting policies that require management to make highly difficult, complex or subjective judgments and estimates, at times regarding matters that are inherently uncertain and susceptible to change. Management has discussed each of these significant accounting policies, the related estimates and its judgments with the Audit and Risk Management Committee of the Board of Directors. Additional information about these policies can be found in Note 1 to the Consolidated Financial Statements on page 122.

VALUATIONS OF FINANCIAL INSTRUMENTS

The Company holds fixed income and equity securities, derivatives, retained interests in securitizations, investments in private equity and other financial instruments. In addition, the Company purchases securities under agreements to resell and sells securities under agreements to repurchase. The Company holds its investments, trading assets and liabilities, and resale and repurchase agreements on the balance sheet to meet customer needs, to manage liquidity needs and interest rate risks, and for proprietary trading and private equity investing.

Substantially all of these assets and liabilities are reflected at fair value on the Company’s balance sheet. In addition, certain loans, short-term borrowings, long-term debt and deposits as well as certain securities borrowed and loaned positions that are collateralized with cash are carried at fair value. In total, approximately 33.2% and 38.9% of assets, and 19.9% and 23.1% of liabilities, are accounted for at fair value as of December 31, 2008 and 2007, respectively.

When available, the Company generally uses quoted market prices to determine fair value, and classifies such items within Level 1 of the fair value hierarchy established under SFAS 157 (see “Events in 2007—Accounting Changes” above). If quoted market prices are not available, fair value is based upon internally developed valuation models that use, where possible, current market-based or independently sourced market parameters, such as interest rates, currency rates, option volatilities, etc. Where a model is internally developed and used to price a significant product, it is subject to validation and testing by independent personnel. Such models are often based on a discounted cash flow analysis.

Items valued using such internally generated valuation techniques are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though some readily observable inputs are used in the valuation.

As seen during the second half of 2007, the credit crisis has caused some markets to become illiquid, thus reducing the availability of certain observable data used by the Company’s valuation techniques. This illiquidity continued through 2008. When or if liquidity returns to these markets, the valuations will revert to using the related observable inputs in verifying internally calculated values. For additional information on Citigroup’s fair value analysis, see “Managing Global Risk” and “Balance Sheet Review” on page 78.

Recognition of Changes in Fair Value

Changes in the valuation of the trading assets and liabilities, as well as all other assets (excluding available-for-sale securities) and liabilities carried at fair value are recorded in the Consolidated Statement of Income. Changes in the valuation of available-for-sale securities, other than write-offs, generally are recorded in Accumulated other comprehensive income (loss), which is a component of Stockholders’ equity on the Consolidated Balance Sheet. A full description of the Company’s related policies and procedures can be found in Notes 1, 26, 27 and 28 to the Consolidated Financial Statements on pages 122, 192, 202 and 205, respectively.

Evaluation of Other-than-Temporary Impairment

The Company conducts periodic reviews to identify and evaluate each investment that has an unrealized loss, in accordance with FASB Staff Position No. 115-1, The Meaning of Other-Than Temporary Impairment and Its Application to Certain Investments (FSP FAS 115-1). An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in Accumulated other comprehensive income (AOCI) for available-for-sale securities, while such losses related to held-to-maturity securities are not recorded, as these investments are carried at their amortized cost (less any permanent impairment). For securities transferred to held-to-maturity from Trading account assets, amortized cost is defined as the fair-value amount of the securities at the date of transfer. For securities transferred to held-to-maturity from available-for-sale, amortized cost is defined as the original purchase cost, plus or minus any accretion or amortization of interest, less any impairment recognized in earnings.

Regardless of the classification of the securities as available-for-sale or held-to-maturity, the Company has assessed each position for credit impairment.

For a further discussion, see Note 16 to the Consolidated Financial Statements on page 158.

Key Controls over Fair-Value Measurement

The Company’s processes include a number of key controls that are designed to ensure that fair value is measured appropriately, particularly where a fair-value model is internally developed and used to price a significant product. Such controls include a model validation policy requiring that valuation models be validated by qualified personnel independent from those who created the models and escalation procedures to ensure that valuations using unverifiable inputs are identified and monitored on a regular basis by senior management.

CVA Methodology

SFAS 157 requires that Citi’s own credit risk be considered in determining the market value of any Citi liability carried at fair value. These liabilities include derivative instruments as well as debt and other liabilities for which the fair-value option was elected. The credit valuation adjustment (CVA) is recognized on the balance sheet as a reduction in the associated liability to arrive at the fair value (carrying value) of the liability.

Citi has historically used its credit spreads observed in the credit default swap (CDS) market to estimate the market value of these liabilities. Beginning in September 2008, Citi’s CDS spread and credit spreads observed in the bond market (cash spreads) diverged from each other and from their historical relationship. For example, the three-year CDS spread narrowed from 315 basis points (bps) on September 30, 2008, to 202 bps on December 31, 2008, while the three-year cash spread widened from 430 bps to 490 bps over the same time period. Due to the persistence and significance of this divergence during the fourth quarter, management determined that such a pattern may not be temporary and that using cash spreads would be more relevant to the valuation of debt instruments (whether issued as liabilities or purchased as assets). Therefore, Citi changed its method of estimating the market value of liabilities for which the fair-value option was elected to incorporate Citi’s cash spreads. (CDS spreads continue to be used to calculate the CVA for derivative positions, as described on page 92.) This change in estimation methodology resulted in a $2.5 billion pretax gain recognized in earnings in the fourth quarter of 2008.

The CVA recognized on fair-value option debt instruments was $5,446 million and $888 million as of December 31, 2008 and 2007, respectively. The pretax gain recognized due to changes in the CVA balance was $4,558 million and $888 million for 2008 and 2007, respectively.

The table below summarizes the CVA for fair-value option debt instruments, determined under each methodology as of December 31, 2008 and 2007, and the pretax gain that would have been recognized in the year then ended had each methodology been used consistently during 2008 and 2007 (in millions of dollars).

ALLOWANCE FOR CREDIT LOSSES

Management provides reserves for an estimate of probable losses inherent in the funded loan portfolio on the balance sheet in the form of an allowance for loan losses. In addition, management has established and maintains reserves for the potential credit losses related to the Company’s off-balance- sheet exposures of unfunded lending commitments, including standby letters of credit and guarantees. These reserves are established in accordance with Citigroup’s Loan Loss Reserve Policies, as approved by the Audit and Risk Management Committee of the Company’s Board of Directors. The Company’s Chief Risk Officer and Chief Financial Officer review the adequacy of the credit loss reserves each quarter with representatives from the Risk and Finance staffs for each applicable business area.

During these reviews, the above-mentioned representatives covering the business area having classifiably managed portfolios (that is, portfolios

where internal credit-risk ratings are assigned, which are primarily ICG, the commercial lending businesses of Consumer Banking and Global Wealth Management) and modified consumer loans where a concession was granted due to the borrowers’ financial difficulties, and present recommended reserve balances for their funded and unfunded lending portfolios along with supporting quantitative and qualitative data. The quantitative data include:

In addition, representatives from both the Risk Management and Finance staffs that cover business areas that have delinquency-managed portfolios containing smaller homogeneous loans (primarily the non-commercial lending areas of Consumer Banking) present their recommended reserve balances based upon leading credit indicators including delinquencies on first and second mortgages and deterioration in the housing market, a downturn in other economic trends including unemployment and GDP, changes in the portfolio size, and a change in the estimated loan losses inherent in the portfolio but not yet visible in the delinquencies (change in estimate of loan losses). This methodology is applied separately for each individual product within each different geographic region in which these portfolios exist.

This evaluation process is subject to numerous estimates and judgments. The frequency of default, risk ratings, loss recovery rates, the size and diversity of individual large credits, and the ability of borrowers with foreign currency obligations to obtain the foreign currency necessary for orderly debt servicing, among other things, are all taken into account during this review. Changes in these estimates could have a direct impact on the credit costs in any quarter and could result in a change in the allowance. Changes to the reserve flow through the Consolidated Statement of Income on the lines Provision for loan losses and Provision for unfunded lending

commitments. For a further description of the loan loss reserve and related accounts, see “Managing Global Risk” and Notes 1 and 18 to the Consolidated Financial Statements on pages 51, 122 and 165, respectively.

SECURITIZATIONS

The Company securitizes a number of different asset classes as a means of strengthening its balance sheet and accessing competitive financing rates in the market. Under these securitization programs, assets are sold into a trust and used as collateral by the trust to obtain financing. The cash flows from assets in the trust service the corresponding trust securities. If the structure of the trust meets certain accounting guidelines, trust assets are treated as sold and are no longer reflected as assets of the Company. If these guidelines are not met, the assets continue to be recorded as the Company’s assets, with the financing activity recorded as liabilities on Citigroup’s balance sheet.

Citigroup also assists its clients in securitizing their financial assets and packages and securitizes financial assets purchased in the financial markets. The Company may also provide administrative, asset management, underwriting, liquidity facilities and/or other services to the resulting securitization entities and may continue to service some of these financial assets.

Elimination of QSPEs and Changes in the FIN 46(R) Consolidation Model

The FASB has issued an exposure draft of a proposed standard that would eliminate Qualifying Special Purpose Entities (QSPEs) from the guidance in FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 140). While the proposed standard has not been finalized, if it is issued in its current form it will have a significant impact on Citigroup’s Consolidated Financial Statements as the Company will lose sales treatment for certain assets previously sold to a QSPE, as well as for certain future sales, and for certain transfers of portions of assets that do not meet the proposed definition of “participating interests.” This proposed revision could become effective on January 1, 2010.

In connection with the proposed changes to SFAS 140, the FASB has also issued a separate exposure draft of a proposed standard that proposes three key changes to the consolidation model in FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (FIN 46(R)). First, the revised standard would include former QSPEs in the scope of FIN 46(R). In addition, FIN 46(R) would be amended to change the method of analyzing which party to a variable interest entity (VIE) should consolidate the VIE (such consolidating entity is referred to as the “primary beneficiary”) to a qualitative determination of power combined with benefits or losses instead of the current risks and rewards model. Finally, the proposed standard would require that the analysis of primary beneficiaries be re-evaluated whenever circumstances change. The existing standard requires reconsideration only when specified reconsideration events occur.

The FASB is currently deliberating these proposed standards, and they are, accordingly, still subject to change. Since QSPEs will likely be eliminated from SFAS 140 and thus become subject to FIN 46(R) consolidation guidance and because the FIN 46(R) method of determining which party must consolidate a VIE will likely change should this proposed standard become effective, the Company expects to consolidate certain of the currently unconsolidated VIEs and QSPEs with which Citigroup was involved as of December 31, 2008.

The Company’s estimate of the incremental impact of adopting these changes on Citigroup’s Consolidated Balance Sheets and risk-weighted assets, based on December 31, 2008 balances, our understanding of the proposed changes to the standards and a proposed January 1, 2010 effective date, is presented below. The actual impact of adopting the amended standards as of January 1, 2010 could materially differ.

The pro forma impact of the proposed changes on GAAP assets and risk-weighted assets, assuming application of existing risk-based capital rules, at January 1, 2010 (based on the balances at December 31, 2008) would result in the consolidation of incremental assets as follows:

The table reflects (i) the estimated portion of the assets of QSPEs to which Citigroup, acting as principal, has transferred assets and received sales treatment as of December 31, 2008 (totaling approximately $822.1 billion), and (ii) the estimated assets of significant unconsolidated VIEs as of December 31, 2008 with which Citigroup is involved (totaling approximately $288.0 billion) that would be consolidated under the proposal. Due to the variety of transaction structures and level of the Company’s involvement in individual QSPEs and VIEs, only a subset of the QSPEs and VIEs with which the Company is involved are expected to be consolidated under the proposed change.

A complete description of the Company’s accounting for securitized assets can be found in Note 1 to the Consolidated Financial Statements on page 122.

GOODWILL

Citigroup has recorded on its Consolidated Balance Sheet Goodwill of $27.1 billion (approximately 1.4% of assets) and $41.1 billion (approximately 1.9% of assets) at December 31, 2008 and December 31, 2007, respectively. The December 31, 2008 balance is net of a $9.6 billion goodwill impairment charge recorded as a result of testing performed as of December 31, 2008. The impairment is composed of $5.1 billion pretax charge ($4.5 billion after tax) related to North America Consumer Banking, $4.3 billion pretax charge ($4.1 billion after tax) related to Latin America Consumer Banking, and $0.2 billion pre-tax charge ($0.1 billion after tax) related to EMEA Consumer Banking.

The primary cause for the goodwill impairment in the above reporting units was the rapid deterioration in the financial markets as well as in the global economic outlook particularly during the period beginning mid-November through year end 2008. This deterioration further weakened the near-term prospects for the financial services industry. These and other factors, including the increased possibility of further government intervention, also resulted in the decline in the Company’s market capitalization from approximately $90 billion at July 1, 2008 and approximately $74 billion at October 31, 2008 to approximately $36 billion at December 31, 2008.

The following summary describes Citigroup’s process for accounting for goodwill and testing for impairment.

Goodwill is allocated to the reporting units at the date the goodwill is initially recorded. Once goodwill has been allocated to the reporting units, it generally no longer retains its identification with a particular acquisition, but instead becomes identified with the reporting unit as a whole. As a result, all of the fair value of each reporting unit is available to support the value of goodwill allocated to the unit. As of December 31, 2008, the Company operated in four core business segments as discussed on page 138. Goodwill impairment testing is performed at the reporting unit level, one level below the business segment.

The changes in the management structure during 2008 resulted in the creation of new business segments. As a result, commencing with the third quarter of 2008, the Company identified new reporting units as required under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). Goodwill affected by the change was reallocated from the previous seven reporting units to ten new reporting units, using a relative fair value approach. The ten new reporting units, which remain unchanged at December 31, 2008, are Securities and Banking, Global Transaction Services, International Wealth Management, N.A. Wealth Management, North America Consumer Banking, N.A. Cards, EMEA Consumer Banking, Latin America Consumer Banking, Asia Consumer Banking and International Cards.

Under SFAS 142, the goodwill impairment analysis is done in two steps. The first step requires a comparison of the fair value of the individual reporting unit to its carrying value including goodwill. If the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and no further analysis is necessary. If the carrying value of the reporting unit exceeds the fair value, there is an indication of potential impairment and a second step of testing is performed to measure the amount of impairment, if any, for that reporting unit.

When required, the second step of testing involves calculating the implied fair value of goodwill for each of the affected reporting units. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit determined in step one over the fair value of the net assets and identifiable intangibles as if the reporting unit were being acquired. If the amount of the goodwill allocated to the reporting unit exceeds the implied fair value of the goodwill in the pro forma purchase price allocation, an impairment charge is recorded for the excess. An impairment charge recognized cannot exceed the amount of goodwill allocated to a reporting unit and cannot be reversed subsequently even if the fair value of the reporting unit recovers.

Goodwill impairment testing involves management judgment, requiring an assessment of whether the carrying value of the reporting unit can be supported by the fair value of the individual reporting unit using widely accepted valuation techniques, such as the market approach (earnings multiples and/or transaction multiples) and/or discounted cash flow methods (DCF). In applying these methodologies the Company utilizes a number of factors, including actual operating results, future business plans, economic projections and market data. A combination of methodologies is used and weighted appropriately for reporting units with significant adverse changes in business climate. Management may engage an independent valuation specialist to assist in the Company’s valuation process.

Prior to 2008, the Company primarily employed the market approach for estimating fair value of the reporting units. As a result of significant adverse changes during 2008 in certain of the Company’s reporting units and the increase in financial sector volatility primarily in the U.S., the Company engaged the services of an independent valuation specialist to assist in the Company’s valuation of the following reporting units—Securities and Banking, North America Consumer Banking, Latin America Consumer Banking and N.A. Cards. The DCF method was incorporated to ensure reliability of results. The Company believes that the DCF method, using management projections for the selected reporting units and an appropriate risk-adjusted discount rate is most reflective of a market participant’s view of fair values given current market conditions. For the reporting units where both methods were utilized in 2008, the resulting fair values were relatively consistent and appropriate weighting was given to outputs from both methods.

The DCF method used at the time of each impairment test used discount rates that the Company believes adequately reflected the risk and uncertainty in the financial markets generally and specifically in the internally generated cash flow projections. The DCF method employs a capital asset pricing model in estimating the discount rate. The Company continues to value the remaining reporting units where it believes the risk of impairment to be low using primarily the market approach.

The Company prepares formal three-year Strategic Plans for its businesses and presents the plans to the Board of Directors. The Company used the 2008 Strategic Plan as a basis for its annual goodwill impairment test performed as of July 1, 2008. These projections incorporated certain external economic projections developed at the point in time the Strategic Plan was developed. The financial forecasts were updated for the interim impairment tests as of October 31, 2008 and December 31, 2008 (as discussed below) to reflect current economic conditions. For those interim impairment tests, the Company utilized revised economic projections incorporating the rapidly deteriorating market outlook.

As discussed above, management tests goodwill for impairment annually as of July 1. The Company is also required to test goodwill for impairment whenever events or circumstances make it more likely than not that impairment may have occurred, such as a significant adverse change in the business climate, a decision to sell or dispose of all or a significant portion of a reporting unit or a significant decline in the Company’s stock price. The results of the July 1, 2008 test validated that the fair values exceeded the carrying values for all reporting units. Based on negative macro-economic and Citigroup-specific events, Citigroup performed two goodwill impairment tests during the fourth quarter of 2008. The first test, performed as of October 31, 2008, validated that the fair value of all reporting units was in excess of the associated carrying values and, therefore, that there was no indication of goodwill impairment. In mid-January, management determined that another goodwill impairment test was needed using data as of December 31, 2008, due to the rapid deterioration in the financial markets as well as in the global economic outlook particularly during the period beginning mid-November and through year end December 2008.

Based on the updated goodwill impairment test performed using data as of December 31, 2008, there was an indication of impairment principally due to the decline in fair value of the Company’s North America Consumer Banking, Latin America Consumer Banking and EMEA Consumer Banking reporting units. The primary cause for the decline in the fair values in the above reporting units was the rapid deterioration in the financial markets as well as in the global economic outlook particularly during the period beginning mid-November through year end 2008. Accordingly, the second step of testing was performed for those reporting units. Based on the results of the second step, the Company recorded a $9.6 billion pretax ($8.7 billion after tax) goodwill impairment charge in the fourth quarter of 2008. This charge resulted in the write-off of the entire amount of goodwill allocated to those reporting units.

The testing for goodwill impairment is conducted at a reporting unit level. Since none of the Company’s reporting units are publicly traded, individual reporting unit fair value determinations cannot be directly correlated to the Company’s stock price. The sum of the fair values of the reporting units significantly exceeds the overall market capitalization of the Company. However, the Company believes that it is not meaningful to reconcile the sum of the fair values of the Company’s reporting units to its market capitalization due to several factors. These factors, which do not directly impact the individual reporting unit fair values, include the increased possibility of further government intervention, unprecedented levels of volatility in stock price and short-selling. In addition, the market capitalization of Citigroup reflects the execution risk in a transaction involving Citigroup due to its size. However, the individual reporting unit’s

fair values are not subject to the same level of execution risk or a business model which is perceived to be complex.

While no impairment was noted in step one of our Securities and Banking reporting unit impairment test at October 31, 2008 and December 31, 2008, goodwill present in that reporting unit may be particularly sensitive to further deterioration in economic conditions. Under the market approach for valuing this reporting unit, the earnings multiples and transaction multiples were selected from multiples obtained using data from guideline companies and acquisitions. The selection of the actual multiple considers operating performance and financial condition such as return on equity and net income growth of Securities and Banking as compared to the guideline companies and acquisitions. For the valuation under the income approach, the Company utilized a discount rate which it believes reflects the risk and uncertainty related to the projected cash flows, and selected 2013 as the terminal year. In 2013, the value was derived assuming a return to historical levels of core-business profitability for the reporting unit, despite the significant losses experienced in 2008. This assumption is based on management’s view that this recovery will occur based upon various macro-economic factors such as the recent U.S. government stimulus actions, restoring marketplace confidence and improved risk-management practices on an industry-wide basis. Furthermore, Company-specific actions such as its recently announced realignment of its businesses to optimize its global businesses for future profitable growth, will also be a factor in returning the Company’s core Securities and Banking business to historical levels.

Small deterioration in the assumptions used in the valuations, in particular the discount rate and growth rate assumptions used in the net income projections, could significantly affect the Company’s impairment evaluation and, hence, results. If the future were to differ adversely from management’s best estimate of key economic assumptions and associated cash flows were to decrease by a small margin, the Company could potentially experience future material impairment charges with respect to the goodwill remaining in our Securities and Banking reporting unit. Any such charges by themselves would not negatively affect the Company’s Tier 1 and Total Regulatory Capital Ratios, Tangible Capital or the Company’s liquidity position.

The goodwill allocated to this reporting unit was approximately $9.8 billion as of December 31, 2008.

INCOME TAXES

The Company is subject to the income tax laws of the U.S., its states and municipalities and the foreign jurisdictions in which the Company operates. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of these inherently complex tax laws. The Company must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions, both domestic and foreign.

Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit.

The Company treats interest and penalties on income taxes as a component of income tax expense.

Deferred taxes are recorded for the future consequences of events that have been recognized in the financial statements or tax returns, based upon enacted tax laws and rates. Deferred tax assets (DTAs) are recognized subject to management’s judgment that realization is more likely than not.

Although realization is not assured, the Company believes that the realization of the recognized net deferred tax asset of $44.5 billion is more likely than not based on expectations as to future taxable income in the jurisdictions in which it operates and available tax planning strategies, as defined in SFAS 109, that could be implemented if necessary to prevent a carryforward from expiring. The Company’s net deferred tax asset (DTA) of $44.5 billion consists of approximately $36.5 billion of net U.S. Federal DTAs, $4 billion of net state DTAs and $4 billion of net foreign DTAs. Included in the net federal DTA of $36.5 billion are deferred tax liabilities of $4 billion that will reverse in the relevant carryforward period and may be used to support the DTA. The major components of the U.S. Federal DTA are $10.5 billion in foreign tax credit carryforwards, $4.6 billion in a net operating loss carryforward, $0.6 billion in a general business credit carryforward, $19.9 billion in net deductions which have not yet been taken on a tax return, and $0.9 billion in compensation deductions which reduced additional paid-in capital in January, 2009 and for which SFAS 123(R) did not permit any adjustment to such DTA at December 31, 2008 because the related stock compensation was not yet deductible to the Company. In general, the Company would need to generate approximately $85 billion of taxable income during the respective carryforward periods to fully realize its federal, state and local DTAs.

As a result of the losses incurred in 2008, the Company is in a three-year cumulative pretax loss position at December 31, 2008. A cumulative loss position is considered significant negative evidence in assessing the realizability of a DTA. The Company has concluded that there is sufficient positive evidence to overcome this negative evidence. The positive evidence includes two means by which the Company is able to fully realize its DTA. First, the Company forecasts sufficient taxable income in the carryforward period, exclusive of tax planning strategies, even under stressed scenarios. Secondly, the Company has sufficient tax planning strategies, including potential sales of businesses and assets that could realize the excess of appreciated value over the tax basis of its assets, in an amount sufficient to fully realize its DTA. The amount of the deferred tax asset considered

realizable, however, could be significantly reduced in the near term if estimates of future taxable income during the carryforward period are significantly lower than forecasted due to further decreases in market conditions.

Based upon the foregoing discussion, as well as tax planning opportunities and other factors discussed below, the U.S. and New York State and City net operating loss carryforward period of 20 years provides enough time to utilize the DTAs pertaining to the existing net operating loss carryforwards and any NOL that would be created by the reversal of the future net deductions which have not yet been taken on a tax return.

The U.S. foreign tax credit carryforward period is 10 years. In addition, utilization of foreign tax credits is restricted to 35% of foreign source taxable income in that year. Due to the passage of the American Jobs Creation Act of 2004, overall domestic losses that the Company has incurred of approximately $35 billion are allowed to be reclassified as foreign source income to the extent of 50% of domestic source income produced in subsequent years and are in fact sufficient to cover the foreign tax credits being carried forward. As such, the foreign source taxable income limitation will not be an impediment to the foreign tax credit carryforward usage as long as the Company can generate sufficient domestic taxable income within the 10-year carryforward period. Regarding the estimate of future taxable income, the Company has projected its pretax earnings based upon the “core” businesses that the Company intends to conduct going forward, as well as Smith Barney and Primerica Financial Services. These “core” businesses have produced steady and strong earnings in the past.

The Company has taken steps to ring-fence certain legacy assets to minimize any losses from the legacy assets going forward. During 2008, the “core” businesses have been negatively affected by the large increase in consumer credit losses during this sharp economic downturn cycle. The Company has already taken steps to reduce its cost structure. In addition, its funding structure has been changed by the issuance of preferred stock, which is funded by non-tax deductible dividends, as opposed to debt type securities, which are funded by tax deductible interest payments. Taking these items into account, the Company is projecting that it will generate sufficient pretax earnings within the 10-year carryforward period alluded to above to be able to fully utilize the foreign tax credit carryforward, in addition to any foreign tax credits produced in such period.

The Company has also examined tax planning strategies available to it in accordance with SFAS 109 which would be employed, if necessary, to prevent a carryforward from expiring. These strategies include repatriating low taxed foreign earnings for which an APB 23 assertion has not been made, accelerating taxable income into or deferring deductions out of the latter years of the carryforward period with reversals to occur after the carryforward period (e.g., selling appreciated intangible assets and electing straight-line depreciation), holding onto AFS debt securities with losses until they mature and selling certain assets which produce tax exempt income, while purchasing assets which produce fully taxable income. In addition, the sale or restructuring of certain businesses, such as the announced Smith Barney joint venture with Morgan Stanley with an estimated pretax gain of $9.5 billion, can produce significant taxable income within the relevant carryforward periods.

See Note 11 to the Consolidated Financial Statements on page 152 for a further description of the Company’s tax provision and related income tax assets and liabilities.