And the ultimate cost impact of FIN 46?
It did increase the cost for us in the sense that we needed to restructure these things, which cost us some money. Essentially, we end up sharing our fees with outside investors, so our revenue will be lower than before. But the amount of revenue we get from commercial-paper conduits is—in the context of corporate investment-banking revenues—very small.
FIN 46 may also affect trust-preferred securities [TRUPS]—in this case by requiring that they be taken off your balance sheet. What impact would that have on Citigroup?
Trust-preferreds have been designated by the Federal Reserve as Tier 1 capital up to a certain amount [25 percent] of a bank’s total Tier 1 capital. So it’s an important way to get equity in Tier 1 capital as a bank holding company. The accounting—it’s interesting, and I believe this was an unintended consequence of FIN 46—raises the question of whether you would have to deconsolidate TRUPS. We’ve written a letter to the SEC and we, as well as a number of accounting firms, believe FIN 46 will not cause a change in consolidation for the purpose of TRUPS. But it’s an ongoing debate.
Bottom line, is there potential for a big financial impact? Your 10Q says you would be well capitalized regardless of the outcome.
It won’t matter to us in terms of capitalization. Some smaller banks could feel some pressure. But the Federal Reserve has said that for the time being, it will grandfather in any existing TRUPS for Tier 1 capital purposes. From the Fed’s perspective, the nature of the instrument hasn’t changed, regardless of how it is accounted for. It has said that those who have issued new TRUPS since FIN 46 came out will also receive Tier 1 capital treatment. We issued $500 million in trust-preferreds a couple of weeks ago. We checked with the Fed in advance and it said yes, they will receive Tier 1 capital treatment.
The conflicts between the Fed and the SEC seem to increase as FASB moves ahead to try to simplify accounting….
[Laughing] Simplify accounting!
Maybe that’s the wrong phrase. As FASB tries to change GAAP to react to some of the excesses of recent years, accounting changes aimed at regular companies often conflict with the complicated financial mechanisms in place at banks. And that increasingly seems to put the Fed and the SEC at odds. As CFO of Citigroup, it sounds as though you often end up in the middle, writing letters and trying to explain the issues to both regulators.
FASB has been writing a number of staff papers on a number of issues, partly in response, as you said, to the excesses and abuses that have occurred. I think fixing abuses is good; no question about that. But as FASB comes up with new interpretations or rules, it is important that there be a very serious dialogue with us and others in the industry to make sure that we end up with only intended consequences. A lot of these things aren’t as simple as they might appear. Some of them have more-complicated application for financial-services firms. We are trying very hard to make sure that we’re involved in that dialogue. Eliminating abuse? Terrific. But we need to be careful of potential unintended consequences.