Citi's inventoryIn its third-quarter earnings, Citi disclosed the value of its ?level three? assets compared against two other SFAS 157-defned levels of fair value accounting. The corporation adopted SFAS 157 and 159 last January.
? Residual interests from the securitization of US credit card receivables (IO Strip) ? A residual interest from a securitization is an asset that represents a retained beneficial interest in the future cash flows created by the securitization that qualifies as a sale.
? Mortgage servicing rights ? A mortgage servicing right (MSR) arises from a contract to service mortgage loans under which Citigroup is obligated to perform specific loan administration functions (i.e., send bills, deposit payments, update account balances, follow up on delinquent accounts) and is compensated with contractually specified servicing fees. A MSR asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing mortgage loans are expected to more than adequately compensate Citigroup for performing the servicing. MSRs may either be purchased from an existing servicer or created through the sale of a loan to an investor with servicing retained.
? Private equity investments managed by CAI and CMB ? Private equity involves the purchase of an ownership stake in a company which is privately held. The securities are not listed on an exchange. In addition, there may be transfer restrictions on private equities.
? Asset-backed commercial paper (ABCP) ? ABCP is short-term debt issued by a special-purpose entity (SPE). The SPE issuer uses proceeds from the issuance to purchase asset-backed securities. Repayment of ABCP is dependent on collections from these investments or the issuance of new ABCP. This inventory is classified as Level 3 due to illiquidity in the ABCP market during the 2007 third quarter.
? Loans classified as trading assets ? Loans pending securitization or loans purchased in connection with the Company's trading activities where prices are unobservable during the period are classified as Level 3.
? Structured credit products ? Structured credit products include synthetic CDOs and other complex derivatives. Synthetic CDOs are not collateralized by a physical portfolio of assets like bonds or loans. Instead, synthetic CDOs gain credit exposure to a portfolio of fixed income assets through the use of credit default swaps. Only structured credit products where key inputs, such as correlation, are not observable are classified as Level 3.
In a recent SEC document, Citi listed types of assets that end up listed as ?Level 3? ? assets with valuation drivers and inputs that are ?unobservable?: