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Will Citigroup ever learn?

In a credit environment where CDO values are dropping like rocks and write-downs are sprouting all over Wall Street, one would think that Citigroup (C) would tread carefully when it comes to rolling out new debt products.

That, apparently, is not the case. The following is from Bloomberg:

"Citigroup has announced a new $165M CDO backed by 30 microfinance loans to entrepreneurs in 13 countries including Bosnia, Tajikistan, Mexico and El Salvador.

Citi will also invest in the lowest ranking, or equity, portion of the CDO along with International Finance Corp., a unit of the World Bank, according to Fitch Inc. Microlenders make loans to low-income borrowers in developing countries who may struggle to get credit from local banks.

The CDO will consist of six portions of debt, the highest is rated AA."

What the heck is Citi doing rolling out CDOs based on loans to people who wouldn't qualify for a sub-prime loan in this day and age? Is there a significant risk of default among the underlying loans? Isn't the risk further elevated given that micro-loans in developing countries are seldom secured by collateral?

Default risk is a critical part of any lending decision and microfinance or micro-lending is no exception. Micro-lending has a reputation as having historically high, some might say unexpectedly high, repayment rates. The information to support this, however, is limited.

Typically, companies get involved in supporting micro-finance as part of their corporate social responsibility (CSR) initiatives. To its credit, Citi has been active in helping many companies that provide micro-loans. It is understood that lenders like to securitize loans in order to receive an immediate return on the capital that has been disbursed to borrowers. Still, it is hard to understand why Citi feels the need to create this kind of CDO at this time. There must be other ways to support these microfinance lenders and provide aid to aspiring business people in developing countries.

In my view, now is when Citi should be demonstrating a more conservative investment philosophy. They have a certain amount of credibility to restore; billions of dollars worth of credibility, one might say. It makes you wonder if they've learned anything from the market turmoil seen in recent months.

Disclosure: author is long C in a retirement account

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