William J. Sweet, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
1440 New York Ave., NW
Washington, DC 20005-2111

Dear Mr. Sweet:

This letter is in response to your inquiry on behalf of Citigroup Inc. regarding the capital status of two tranches of ten-year subordinated debt it issued in October and November of 2000 in the amount of $4.25 billion. Citigroup recently notified the Board that, due to inadvertence, the subordinated debt included several acceleration events. Although Citigroup believes it is extremely unlikely these events will occur, the acceleration provisions cause the subordinated debt to not meet the criteria required for Tier 2 capital under the Board's capital adequacy guidelines contained in 12 CFR 225 Appendix A, as clarified in a Board interpretation contained in 12 CFR 250.166. As stated in that interpretation, in order for subordinated debt to meet the minimum five-year maturity requirement under the guidelines, it must not contain provisions permitting acceleration of payment upon occurrence of any event other than bankruptcy. The debt Citigroup issued permitted acceleration upon failure to pay interest or upon breach of certain administrative covenants.

Citigroup has indicated that it regrets the issuance and has assured the Board that all future issuances of subordinated debt will conform strictly to the published rules and interpretations when regulatory capital is claimed. The issuance in this case resulted from reliance on an indenture entered into by Traveler's Group prior to its acquisition of Citicorp, which was included in a securities registration statement filed with the Securities and Exchange Commission. The subordinated debt was issued under this registration statement.

Citigroup will remedy the flaws in the debt issue that permit acceleration upon breach of administrative covenants by committing to the Board to conduct its business in a manner that assures compliance with the covenants. Independent auditors will review such compliance, and Citigroup will provide the Federal Reserve with a semi-annual report certifying compliance.

Citigroup will further remedy the provision permitting acceleration upon nonpayment of interest by placing funds for interest payments in escrow. Should Citigroup not pay timely interest to the trustee for it to pass on to debt holders, funds would be withdrawn from the escrow account. Citigroup believes that through this arrangement, an event of nonpayment of interest could not arise, thus rendering inoperative the acceleration rights debt holders have under this provision. Citigroup's independent auditors will provide the Federal Reserve with a semi-annual report on the funding of the escrow account.

In view of the five-year minimum maturity required of Tier 2 subordinated debt, the escrow account Citigroup will fund for payment of interest will be in an amount equal to the present value of five years of interest on the debt outstanding. This present value amount must be maintained in full for the first five years of the debt's life. In the last five years of the debt's life, the present value of the escrow amount may be amortized by 20 percent each year, consistent with the discount applicable to subordinated debt included in Tier 2 during the last five years of life. The funds held in escrow must maintain an average weighted credit quality of AA, consistent with the debt rating of Citigroup at the time the issuance was made, and must be in the form of cash, cash equivalents, or bonds of at least investment grade.

Citigroup will also reflect in its Tier 1 capital the effect of paying out interest from the escrow account, which would make such funds unavailable to senior creditors. For this purpose, Citigroup must deduct from its Tier 1 capital an amount equal on a present value basis to one full year's interest on the subordinated debt. This deduction may be reduced to six months of interest when the debt has a remaining life of eighteen months and will not be required in the final year of the debt's life.

In considering this matter, the Federal Reserve Board has taken into account a number of factors. Among these is Citigroup's representation that the flaw in the subordinated debt was inadvertent and that Citigroup gained no financial benefit from issuing debt that did not meet the Board's criteria. That is to say, the rate at which Citigroup issued the debt was the same as the rate it would have paid on conforming ten-year subordinated debt that had no acceleration rights other than in bankruptcy. The Board also has taken into account the operational difficulties of obtaining from bondholders the consent necessary to change the underlying terms of the debt agreement on an issuance of this size.

The Board believes that the subordinated debt issued by Citigroup, subject to the remedies outlined above, may be included in Tier 2 capital. This interpretation is based on the particular and unique facts and circumstances presented by this case and there is no assurance that this treatment would apply in any other situation. The Board understands that Citigroup has taken steps to ensure that the circumstances that led to this situation will not recur. If you have any questions about this matter, please contact Rich Spillenkothen (202/452-2773), Director of the Board's Division of Banking Supervision and Regulation.

Sincerely,

(Signed) Jennifer J. Johnson

Jennifer J. Johnson