November 4, 2007 (LPAC)--The Nov 4 New York Times reports that "Citigroup's board is highly likely to nominate Robert E. Rubin,... as its interim chairman," at its emergency Sunday board meeting. Rubin would replace Citigroup CEO Charles Prince III, who reportedly has been forced to resign. Prince's resignation, if confirmed, would be the second resignation, within the past 96 hours, of a CEO at a major U.S. financial institution, following that of Merrill Lynch CEO Stanley O'Neal.

The Citigroup shake-up follows a deepening melt-down at the world's either first or second largest financial institution. Under Prince and his mentor, the previous Citigroup CEO, Sandy Weil, Citigroup wildly expanded, increasing its total assets from $1.09 trillion in 2002, to $2.35 trillion at the end of the third quarter of 2007, a doubling in less than five years. Often, Citigroup invested heavily in financial markets shaped by and under the domination of the City of London financiers.

Citigroup has the following speculative investments:

• $80 billion in radioactive, off-balance sheet Structured Investment Vehicles (SIVs). Altogether, Citigroup has 7 SIVs, with names like Dorada and Sedna Finance, 4 of which, {EIR} has discovered, were created in and are steered from the Cayman Islands.
• $60 billion in off-balance sheet Conduits, which are also speculative vehicles, operating under slightly different rules.
• At least $20 billion in Collaterialized Debt Obligations (CDO).
• More than $70 billion in assets-backed securities, based on credit card cash flows.

All of these markets are either outright catering, or facing serious problems. The most problematic are the SIVs. An SIV must by law have sufficient paid-in equity (the value of the stock that it sold), such that the equity represents "stored funds" which could cover those losses/writedowns suffered on the SIV's senior debt. To state it simply, were the losses on the SIV's senior debt to exceed the value of the SIV's paid-in equity, the SIV must effectively be shut down. It appears that some of Citibank's SIVs, are headed toward or may have crossed the danger line, had strict accounting principles been in force.

On Thursday Nov. 1, Canadian Imperial Bank of Commerce analyst Meredith Whitney stated that Citigroup would have to increase its capital by $30 billion to cover problems. The statement, which is true, caused tremors throughout the international financial system, and there was a mass dumping of Citigroup stock, which led to the Dow Jones average dropping by 362 points.

This precipitated widespread fear, and prompted the U.S. Federal Reserve, through three separate interventions, to inject $41 billion in short term liquidity into the U.S. banking system--all on Nov. 1, the largest one-day intervention since September 2001, after the 9/11 attacks.

The Citigroup situation is made more dangerous by two further problems. First, were there ruptures at Citigroup, this could detonate its derivatives holdings of $34.9 trillion in notional value, which would bring down the world's $750 trillion-plus derivatives market, and the entire world monetary system. Second, Citigroup is America's largest bank, and thus at the heart of the world's dollar-based system. A melt-down here would have many other far-reaching consequences.