Citigroup’s 10-K filing makes it clear why regulators appear committed to (or perhaps are stuck with) a strategy of supporting the full capital structure (including holding company debt), rather than subjecting the bank to the Lehman treatment. Citigroup has a daunting $1.9 trillion of assets on the balance sheet alone (not counting off-balance sheet exposure). The balance sheet is essentially supported by an uneasy alliance between the U.S. government and the company’s depositors and other creditors, since the market value of the equity is so depressed. Deposits totaled $774 billion at year end, including nearly $500 billion outside the U.S. In a liquidation of a U.S. insured depositary institution, the 10-K notes that U.S. deposits would have priority over deposits outside the U.S., as well as over parent company claims. But we can’t imagine the new administration will want to precipitate an international crisis over whose-deposits-get-paid-off-first. There is $360 billion of long-term debt, including about $24 billion of TruPS-related junior subordinated debt and $34 billion of subordinated debt. At year-end, parent company liquidity, including unencumbered cash deposits at the broker-dealer, totaled $67 billion. But no cash hoard would be big enough right now, without the support of Uncle Sam. Investors are worried (with good reason) about the risk for more markdowns of loans, securities and the deferred tax asset ($44.5 billion). Moody’s lowered Citigroup’s senior and subordinated debt ratings last week, but left the short-term rating at P1 (under the assumption that “systemic support” is “most predictable” for short-term debt.) A downgrade in the C.P. rating would trigger an $11 billion funding requirement. As we discussed last week (see report dated 2/24/09), we see value in Citigroup’s senior debt (although the 5.5% notes due 2013 have tightened to T+604 from T+752 a week ago.

Here is something for all those who say we are permadoom sayers... Fresh from gimme credit, and we tend to agree. A full blown implosion of Citi would be the Mutual Assured Destruction to everyone with exposure to Citi, which is... well... everyone, whether it is by 1 or 6 degrees of separation. Betting on Citi's demise is ironically just like buying US Sovereign CDS: you have a high likelihood of being right, but if you are, the money you make (assuming someone honors the contract you are collecting under) will be worth just the paper it is written on.From GimmeCredit: