Hello and welcome to the Citi Second Quarter 2011 Earnings Review with Chief Executive Officer Vikram Pandit and Chief Financial Officer John Gerspach. Today's call will be hosted by John Andrews, Head of Citi Investor Relations. [Operator Instructions] Also as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. Mr. Andrews, you may begin.

Sara, thank you very much, and good morning to everybody. Thank you for joining us this morning. On the call today, we'll start off with Vikram, our CEO, who will give you an overview of the quarter. And then John Gerspach, our CFO, will take you through the earnings presentation, which is available for download on our website, www.citigroup.com. Afterwards, we will be happy to take your questions. Before we get started, I would like to remind you that today's presentation may contain forward-looking statements which are based on management's current expectation and are subject to uncertainty and changes in circumstances. Actual results and capital and other financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our discussion today and those included in our SEC filings and including, without limitation, the Risk Factors section of our 2010 Form 10-K. With that out of the way, now let me turn it over to Vikram.

John, thank you. And good morning, everybody. Thank you for joining us today. We announced earnings of $3.3 billion for the second quarter, which brings our total net income for the first half to $6.3 billion. This was another solid quarter of operating performance as we continue to execute our strategy and invest in our franchise. Loans grew throughout our core businesses in the second quarter at a level that more than offset the reduction in Citi Holdings. The revenues from our International Consumer Banking operations increased from the previous quarter and year, as did the net income from the North American Consumer Bank. In our Institutional Businesses, Investment, Corporate and Private Banking revenues improved. Global Transaction Services performed very well, as net income increased from the previous quarter, despite continued low interest rates. However, our Markets business was clearly impacted by the trading environment. In Citi Holdings, we continued the reduction of assets in an economically rational manner. Our Holdings assets were reduced by $29 billion during the quarter, from $337 billion to $308 billion, and now make up less than 16% of Citigroup's balance sheet. We remain on track to meet the Basel III capital requirements through both the optimization of our assets and the generation of capital. We continue to expect that Citi will be in a position to return capital to shareholders in 2012 and still have an 8% to 9% Basel III Tier 1 common capital ratio at the end of that year. As we'll show later in the presentation, and John Gerspach will take you through this, our earnings and utilization of deferred tax assets create a multiplier effect on regulatory capital formation. In the first half of this year, this generated $9 billion of Basel III regulatory capital on $6.3 billion of earnings and $1.5 billion of DTA utilization. Looking forward, while we are comfortable with the broader macro economic trends that underpin our strategy, we are concerned with the impact the near-term economic environment will have on the industry for the second half of the year. But that said, we are consistently profitable and remain focused on growing responsibly. Let me turn it over to John, who will take you through our presentation, then we'll come back to the Q&A later.

Thank you, Vikram, and good morning, everyone. Starting on Slide 2, Citigroup reported second quarter net income of $3.3 billion or $1.09 per diluted share versus $0.90 per share in the second quarter of 2010. Revenues of $20.6 billion were down 7% versus the prior year, as strong growth in International Consumer Banking and Transaction Services was more than offset by lower revenues in Citi Holdings, Securities and Banking and North America Consumer Banking. Expenses were up 9% year-over-year to $12.9 billion. But excluding the U.K. bonus tax of roughly $400 million in the second quarter of 2010, expenses were up nearly 13%. Approximately 1/3 of this 13% increase resulted from the impact of foreign exchange, and another 1/3 was related to higher legal and related costs. The remaining 1/3 was driven by the net impact of investment spending, partially offset by ongoing productivity savings. All other expense increases, such as higher volume-related costs in Citicorp, were largely offset by a reduction in Citi Holdings expenses. Net credit losses declined again in the second quarter to $5.1 billion, 35% lower than the second quarter of 2010. We also released $2 billion of net loan loss reserves compared to a $1.5 billion net release last year and a $3.3 billion in the first quarter. On a sequential basis, end-of-period loans grew 2% for Citigroup, as strong loan growth in Citicorp more than offset the decline in Citi Holdings. Turning now to Citicorp and Citi Holdings on Slide 3. Citicorp reported revenues of $16.3 billion and net income of $3.7 billion in the second quarter is down slightly versus last year. Sequentially, we grew end-of-period loans in every business in every region in Citicorp, and the same holds true year-over-year with the exception of North America branded cards. Versus last year, Citicorp…

[Operator Instructions] Your first question comes from the line of Glenn Schorr with Nomura.

First question is combining the Slides 14 and 22, and I just want to make sure I'm reading it correct. If you look and see the recent run rate of, call it, $40 billion to $50 billion of organic paydown and runoff in Holdings and combine that with the 1.75 multiplier, I just want to make sure, that looks like you can get anywhere from $70 billion to $100 billion of risk-weighted asset in actual runoff on an annual basis. Am I reading that correct?

I haven't done that math, Glenn, I'd have to admit. But if you take a look at the way the assets are declining, again, the way we look at the asset decline, we would expect the Basel III multiplier effect on those remaining holding assets to be about 1.75x at the end of next year. And how you get to that 1.75, or how you think of terms of where we end up in assets is also going to depend on where you think we end up in total asset mix of Citi Holdings' assets.

Right. And I guess I can't get a comment on progress on Citi Financial and private label cards, because that's kind of in motion. Is that fair?

That's fair. Fair that you can't get a comment.

Another clarification -- I understand. Slide 26, on your exposure to the GIPSI, formally known as the PIIGS. I just want to make sure I'm reading this correct also. Of the $13 billion in net exposure, only $1 billion is to sovereigns and -- or a little more than $1 billion. And that next comment is what I want clarification on. Is 70% of the $6 billion to financial institutions is subs that are to non-GIPSI subs to outside the GIPSI region, right, so...

Let me give you an example of something that might be contemplated by that comment, all right? Say that we had a deposit in a branch, a separately capitalized sub of one of the GIIPS banks, offshore out of the GIIPS zone, but that deposit was guaranteed by the parent company in one of the GIIPS countries. We would count that in the $6 billion as being part of the exposure merely because it's covered by a parent company guarantee.

Got it, okay. And then the net takeaway of Slide 26 is that you feel like you're in pretty good shape and you've been preparing for this. And netting your exposure, even your unfunded exposures, the large multinationals. That's the net takeaway we're supposed to take away, correct?

Well, you can draw your own conclusion. But obviously, we've been telling you that we thought the exposure was manageable, now we provided you more detail. And it's obviously been something that we've been working for a long time. And above that, Glenn, we think that this exposure as it is today, it's appropriately -- it's an appropriate number given our size, our stature and our business model.

But let me add one thing to that. I think what Glenn's talking about is in some ways getting a handle on, is this appropriate business? So what is appropriate business? And that's exactly the reason, Glenn, that we have provided you with the appropriate amount of transparency to sort of get beyond the headline numbers. And so for example, you talked about the sovereign exposure, a little bit more than $1 billion. Well, that number has come down a lot over time. And we've gone through that process the last few quarters. On the other hand, you asked about the financials. That's an interesting one because -- let me tell you what we did last quarter. We worked with some of the financial institutions in the region to create lending that is collateralized and secured and in other subsidiaries in other parts of the world. Now that is the right thing and the right kind of business. It's right for our client. It's right for our investors, right for our shareholders. And there are going to be other great opportunities that is considered by us to be appropriate business, but that will get picked up in some of these numbers, which is why differentiation and transparency is important as well here. And we've also given you, as you know, a breakdown between funded and unfunded lines. You know very well the conditions that are required to be met by borrowers before they draw unfunded lines. And as you can see, a lot of that exposure is to multinational clients as well. So differentiation is important. I think the question you've asked is important, and that's why we're given you this kind of transparency. And I really think that's the kind of transparency you should expect.

Okay. And just a quick one to wrap up. Vikram, you've mentioned you're concerned about the economic impact on the industry for the second half. Maybe just a little clarification to spoonfeed, how could that manifest itself to the industry? It just means slower growth for everybody, is that your point?

Well, I think, well, it's uncertain growth is what this notion is. And I don't -- I mean, you watch what's going on around the world as well as anybody else on this call. There is just a lot of uncertainty out there. And it may not be uncertainty that leads to any kind of crisis, but here's the kind of uncertainty that can affect people's confidence and can affect trading volumes in the market. It can affect how spreads go on. And we think it's that kind of uncertainty, while we all hope gets resolved soon, is likely to last through the rest of the year. And that doesn't necessarily affect all the underlying trends in terms the emerging market consumer, and all of the underlying themes are still intact. But near term, we just think there's a lot of uncertainty that could undermine confidence and affect volumes and affect the kind of growth one could see. Now that could turn too, if somebody -- if you had more certainty in certain aspects of the world, you could see the risk [indiscernible] as well. So that's really the point.

Your next question comes from the line of Jason Goldberg with Barclays Capital.

Just I guess a follow-up. I thought the disclosure of 14 and 15 on the Citi Holdings runoff was helpful, and I guess you commented that it slowed. It looks like it's kind of now down to like the high single-digit type billion-dollar per quarter runoff pace. Is that kind of what we should expect going forward just from kind of paydowns and losses?

Well, I think as the portfolio continues to shrink, the paydowns will reduce as well as a percentage. So again, we tried to give you enough on Page 14 and Page 15 that you can kind of conduct your own analysis.

Okay. And then you kind of gave us the denominator, but I guess on the numerator on Basel III, I guess-- where would you kind of peg kind of Tier 1 common today on dollar basis versus kind of where you would see it under Basel III? And maybe just some similar color there.

And what we said there, Jason, is that -- as we've been saying, we intend to operate at an 8% to 9% Tier 1 common range under Basel III by the end of next year. But that's our target. That's been our target for the last 9 months. And we've been consistent with that because we think that, that's the right level of capital for us to have. And that's what we're working towards for next year.

Got it. And then just lastly, you commented about the operating expenses being above your prior guidance. Would you care to put kind of a new bracketed range on that?

I'll tell you, Jason, given the continued weakening of the dollar and the uncertainty surrounding the industry regarding litigation matters, I would say that what you should do is take a look at where we are today and figure that we're going to be around those levels going forward, subject again to whatever might happen with the dollar and those litigation matters.

Your next question comes from the line of Jim Mitchell with Buckingham Research.

Quick question on the Basel III target. You mentioned that's inclusive of buybacks or dividends or both. Can you kind of give any kind of indication of what that magnitude that is contemplated in that target, or is it mostly buyback...

We're not going to get ahead of ourselves here. We're looking to, as we said, to return -- we expect to be able to return capital to shareholders next year, but we're not going to start to comment yet as to what the size or the timing of that may be.

Fair enough. But do you think -- is it mostly buyback oriented or dividend oriented, do you think?

Same comment. I think we're a little early in trying to structure how that divide might work. Obviously, given where our stock is trading, when you have stock trading below book value, below tangible book value, that would certainly color your thinking.

Yes. Fair enough. And then maybe on the assets and holdings, it was helpful in terms of the table and how to think about the wind-down. Can you maybe give some help on how to think about the risk-weighted asset? What is heavier, I guess, in Citi Holdings in terms of the risk-weighted assets under Basel III versus what are lighter? So is it mortgages that are the biggest hit, or is it the Special Asset Pool? And we can kind of do our own conclusions on the pace of runoff on the individual assets.

Well, Basel III certainly puts a premium on any type of asset that's resulting from a securitization. And so that would sort of draw your attention to more of assets that are in Special Asset Pool.

Right. So to the extent that you can move those down more quickly, that could be helpful?

That would be the logical conclusion, yes.

Right, okay. And one last question on the legal expenses. Can you give us a sense of what that might have been in the quarter so we can just sort of make our own projections on how to think about what's the kind of the run rate? And then on top of that, what's the legal expenses in 2Q?

Again, I think what we're talking about is the growth in the legal expenses year-on-year. As we've said, the litigation and related matters added roughly $900 million to our expense base in the first half of this year compared to the first half of last year. And so that's about the level that we're looking at.

But we don't know what it was last year, so we don't know the Absolute number.

No, and I'm not going to going to exactly what we had baked into what last year was.

Your next question comes from the line of Guy Moszkowski with Bank of America.

On some of those expenses, I think I heard you say that basically all of the increase in Citi Holdings' quarterly expense, which was about $200 million up from last quarter, was due to those legal expenses. Is that right?

That's what we said, yes.

Okay. And you think that we should run that forward at around that level for the remainder of the year. Is that right?

I'm not going to say that you should run those Citi Holdings expenses, at least that level of litigation in Citi Holdings.

And are you going to be trying to -- do you think you will be able to achieve any reductions in the underlying operating expense in Citi Holdings over the remainder of the year? Because it looked like there was pretty good progress in the earlier part of this year there, and then obviously, you've kind of given some of that up with these legal expenses.

Yes, and we continue to drive down the Citi Holdings expenses as we drive down assets. And I think we do have a pretty good track record. And you should assume that as we continue to drive down the assets in Citi Holdings, we will get expense saves coming out of the business. That is clearly the way that we are operating Citi Holdings. And to your point, we had a little bit of a bump on the road this year -- this quarter due to some legal and related costs.

Okay. In Citicorp, in Securities and Banking, obviously, we don't get a lot of color on what the expenses are. But it looks like overall, your expense load went up about $100 million, even though your revenues fell sequentially by about $500 million. What's going on there? Have you added fixed costs? Were there some onetime items there that we should be thinking about?

No. There's no significant onetime item that I can recall hitting Securities and Banking. And what we've said is we are continuing to build out the banking franchise. So there was some add there. I'd say that we're roughly 2/3 through of what we want to accomplish as far as building out the banking franchise. And that's about it as far as anything significant that would have gone into Securities and Banking.

Okay. Fair enough. The Brokerage and Asset Management unit, obviously mostly driven by Morgan Stanley Smith Barney, was the decline that we saw there really largely revenue and volume related? Was there anything with respect to sort of an expense share between yourselves and Morgan Stanley, which I know sometimes has bumped the numbers around? Or was this really just the underlying environment?

No. It's a little bit of the underlying environment, but don't forget that because of the way the JV works, there are certain deposits that feed the JV. And then with the increase overall in FDIC assessment, that also works its way through the JV. And so that did have an impact on it as well.

Okay, that helps. Now in Citi Holdings, the net interest revenue went negative. Is that sort of an anomaly with respect to the asset sales that took place or something? Or should we -- or in fact, with the asset sales that have taken place, should we now expect that maybe that's a permanent fixture of that business-- that negative carry?

That's a great question. I mean obviously, as we continue to drive down yielding assets in Citi Holdings, and in this quarter as you said, we got rid of that $13 billion of securities that we had in the hold-to-maturity. That is certainly going to impact the net interest income coming out of both the Special Asset Pool as well as Citi Holdings in total.

So should we think that, that's sort of a negative carry going forward, or was that somewhat anomalous? But we should obviously take into account that with assets lowered, net interest income will be lower no matter what. I mean, what's the best way to look at it?

Again, I'm not going to get into exactly how you should be taking a look at your model. But yes, interest -- net interest revenue out of Citi Holdings will be under pressure.

And you alluded to that--the asset sale, which appears to have been very beneficial in terms of gains. But what was the RWA reduction that, maybe on a current or a Basel III basis, would even be more helpful that you achieved by getting rid of those assets in the quarter?

Well, we haven't directly commented on that. But I've seen analyst reports that have estimated that the $12.7 billion of securities could have generated as much of $100 billion of risk-weighted assets under Basel III, and we haven't challenged any of those estimates.

Okay, fair enough. And then I just have one more question about the foreclosure issues that are obviously in the midst of negotiations, so we don't have a settlement yet. But I seem to remember that Citi had undertaken a review of foreclosure procedures before the whole thing really started blowing up last September. And the sense I had was that your procedures were more compliant with what's needed than at some other places. Do you expect to get the benefit of that in terms of how much of the industry foreclosure settlement you might have to shoulder yourselves?

As you said, it's unclear as to exactly where these talks are headed at this point in time. And we would expect that if it's possible, we'd like to work with the other banks to structure a settlement that is both fair and reasonable and would take into account all pertinent factors.

And do you think that it's a pertinent factor that you had undertaken that review and would appear to have had a somewhat different procedure for foreclosures?

What do you think?

Well, I would think it would matter. But I just -- we never really got a lot of color on the degree to which it reduced robo-signing issues and the like.

And I guess as with any set of discussions, along with amount, there will be discussions as far as how those amounts get apportioned and how those amounts get structured. And so I'd say all of that is in the mix right now.

Your next question comes from the line of Betsy Graseck with Morgan Stanley.

John, you talked a little bit about the FX impact on expenses. Could you give us some color on the FX impact on revenues?

Yes, sure, Betsy. FX impacts, foreign exchange impacts, not just expense, but also revenues and net credit losses. Last quarter, I think we said that for the firm as a whole, when you looked at the impact of FX on those 3 components, it was basically a 0 for the entire corporation. This quarter, when you take a look at the impact of revenues, expenses and net credit losses, it's roughly about $100 million positive. So the total impact of FX roughly adds about $100 million to our pretax income.

Okay. So you should have some areas, obviously, where you're getting a little bit of positive operating leverage, I would expect, from the FX itself. Is that right?

That's fair that the FX impact would -- again, it has different impact on different parts of the businesses. But there would be some that the benefit on the revenues would certainly outweigh the benefit of the expenses, yes.

And I mean obviously, there's a little bit of angst around the expectation that the expenses in total are going to be above the $50 billion, $48 billion to $50 billion that you talked about at the beginning of the year. Can you talk through what you're doing to keep a tight lid on expenses in areas where you're not investing? Have you done as much as you can there? Is there any opportunities to increase expense saves in areas you're not investing in?

Yes. And I think we're attacking that pretty hard. I mean look, we don't like the idea that our expenses are going to be above the guidance anymore than anybody else does. When you're faced with $700 million impact in the first half due to foreign exchange and say, roughly $900 million due to the increase in legal and related expenses, you've got 2 decisions to make: You can either manage back down to the guidance by cutting your investment programs; or you can agree that you're going to press on, but as we've always said, continue to find reductions in your base. And don't forget, we've targeted, we -- our basic operating mantra is that every business should be able to find approximately 3% to 5% of productivity saves every year. And that's actually the way that we have been operating and we will continue to operate. So if you think about the first half of the year, we talked about $1.6 billion worth of impact due to foreign exchange and legal and related. During that time, the impact of investments is a little bit north of $1.5 billion. So we've made about $1.5 billion of investments, and we've had roughly 50% of those investment dollars covered by productivity saves in the business. And so we're continuing to actively manage our expense base. Again, we're very conscious of -- you guys are very focused on expenses. I got to tell you, so are we. But we're also trying to make sure that we're putting the right expense dollars into the businesses to grow operating margin. We think that, that's what you want us to do, and that's really what we're doing. Now we began investing last year. We called out the fact that we were beginning to invest in…

So are we at a point where that $1.5 billion gross pre the offsets that you have. That $1.5 billion gross investment spend is stabilizing in the second half, or moving up as Asia and Lat Am are? I don't know if they're on a run rate. And you're increasing in the U.S.

Yes. I would say that you should still consider the second half of this year to be -- expect it to be dominated by those 3 factors. Again, FX and legal, I don't know how to forecast. But clearly, we're going to stay in an investing mode in those businesses. But again, you should start to see the revenues outpace the investment spend in both Asia and in Latin America in the fourth quarter.

Right. And I guess just my basic question was does the investment -- you're ramping up investment spend in the U.S. Is that offset by pulling back on the investments in Asia and Latin America because you've done what you need to do, or does that $1.5 billion go up a little bit, offset by the operating leverage that you expect to get in 4Q and on in the Latin America and Asia regions?

Well, what you're going to see -- I mean, just because of the lapping of the expense growth, you should start to see moderating levels of expense increase coming out of both Latin America and Asia.

Your next question comes from the line of John McDonald with Sanford Bernstein. John McDonald - Sanford C. Bernstein & Co., Inc.: John, in terms of the positive refinement of the Citicorp RWA inflation, can you share any color on which areas were refined in your analysis?

It's basically every one of them. As you work through the model, I may have mentioned this in other calls, don't forget the U.S. never moved to Basel II. So really, it's only been since everyone has gotten tremendously focused on Basel III, that we've actually really spent a lot of time, on a daily operating basis, working through what are the impacts of various calculations. And everything on Basel III is model-driven. And I've made this comment before, Basel III turns your regulatory balance sheet into one giant Level 3 asset. And so it's working with every one of the models in every one of the businesses. That just provides you some greater clarity. John McDonald - Sanford C. Bernstein & Co., Inc.: Okay. In all the numbers you were giving us, the multipliers in kind of the year-end '12. Are those fully mitigated, or would you have more mitigation that can be done beyond 2012 at Corp and Holdings?

Well, I wouldn't say that mitigation would be completed. But we certainly believe that by the end of 2012, we'll certainly get through the bulk of the mitigating actions. However, as in anything else, the more you work on it, the more you learn. And so it may very well be that as we continue to work, we'll find even more mitigating actions that we can do. John McDonald - Sanford C. Bernstein & Co., Inc.: Okay. And then in terms of the numerator side of Basel III, those deductions are scheduled to phase in over many years, not starting until 2014. Have you been told by regulators that you and other banks may need to meet the Basel requirements on an accelerated basis? Or is it your sense that the banks will just need to meet the requirements according to the time line that's been set forth by the Basel committee?

I don't believe that we are going to be required to meet the Basel III requirements any earlier than whatever the U.S. rules -- again, I don't know what the U.S. rules are going to say. But assuming they somewhat track the language that has been passed by the Basel committee, I don't expect us to be held to a higher standard any earlier. But I do believe that one of the things that the regulatory bodies will look for is a credible path to get to those Basel III requirements. And I think that is what the financial institutions will need to demonstrate. John McDonald - Sanford C. Bernstein & Co., Inc.: But your 8% to 9%, just to be clear, that you're talking about being at next year, that kind of conservatively fast-forwards those deductions, right? That includes those deductions that technically don't start till 2014. Is that right?

That's correct. John McDonald - Sanford C. Bernstein & Co., Inc.: Okay. And then the last question on the net interest margin. At the top of the house, I think you talked a little bit about NII at holdings. Just how do you see the -- what are the kind of puts and takes for your NIM and net interest income, all in at Citicorp and Citigroup, for the next couple of quarters?

Okay. Let's start with this quarter. So we had about a 6 basis point decline in NIM quarter-on-quarter. And there's roughly say, 5 factors that drove NIM decline first quarter to second quarter. Number one would have to be the FDIC assessment. The increase in the FDIC tax cost us about 4 basis points of NIM in the quarter. The second factor would be loans. The combination of those higher-yielding loans running off in Citi Holdings combined with the lower, somewhat lower yielding net loan growth in Citicorp, that had about a 9-basis-point impact, a negative impact, on our NIM. The third factor, we had some additional borrowing costs in some of our trading businesses to fund some client positions that was a little bit higher than the first quarter. That was 3 basis points. So those are the bad guys. And then on the good guy side, this quarter, we had -- we didn't have the reserve build in Citi Financial in Japan that we had in the first quarter. So that was 7 basis points to the good. And then as we begin to roll that--run down our long-term debt, that added about a 3-basis-point positive to our NIM. So I think I've got the math right. That should net out to roughly 6 basis points. So as you think going forward, it's going to be -- the FDIC now should be behind us. That's kind of baked in. And it's going to be that combination of what happens with the runoff in loans in holdings, the loan growth in Citi, the impact of the continued runoff in the long-term debt. And so I'd say over the next 2 quarters, absent some significant portfolio sale coming out of holdings, you should probably see NIM be plus or minus 1 or 2 basis points from where we are right now. John McDonald - Sanford C. Bernstein & Co., Inc.: Okay. Is the magnitude of the roll-off of long-term debt similar going forward to what we saw this quarter?

It'll be a little bit less. Don't forget, this quarter, about $8 billion of the runoff was due to debt buybacks that we did in the quarter. So I think absent the debt buyback, it'd be about $16 billion of a decrease. And that's probably more indicative of what you could expect in the next couple of quarters. John McDonald - Sanford C. Bernstein & Co., Inc.: Okay. And then in terms of the interest-earning assets, there was a little bit of growth. You had a little bit of loan growth net and then also some--it looks like increasing in liquidity still. Is that preparing for regulatory, or is that just the positive inflows and nothing else to do with the money?

Well, we do continue to build up cash. Now we actually drove the cash down quarter-on-quarter. That was -- primarily, we used the cash to buy back debt. So we're at somewhat of an equilibrium right now as far as loan reductions and asset runoff which generates cash, and then the use of cash as far as funding loans.

Your next question comes from the line of Ron Mandle with GIC.

I have a couple of things. So one, I was wondering about the tax rate, down from the first quarter, if this is a good level to think about for the second half of the year, or how should we think about that.

Yes. And Ron, the short answer is yes, it is. Again, depending upon -- this certainly reflects where we think the business mix is. Now when I say a good level, you need to look at the level for the first half of the year. Don't forget at the end of every quarter, what we do is we reassess the mix of our earnings for the remainder of the year and then adjust the tax rate. So if you look at the tax rate for the first half of the year, it's probably somewhere in the neighborhood of, say, 25%. And that's because that reflects where we believe our tax rate will be for the entirety of 2011. So we had a slightly higher tax rate in the first quarter, and now, we've actually, by lowering the tax rate to 22% or whatever it was in the second quarter, it gets us down to a first half tax rate of 25%. And that's our view of the rest of the year. Now again, that's also going to depend upon how the mix in our earnings streams run in actual for the second half of the year. But that's where we think we are right now.

Okay. And would we see a little creep upward next year at this point?

Well, we've always said, Ron, that we actually think the long-term -- the normal tax rate for us is going to be something in the 28%, 29%, maybe as high as 30% range. But if you want to stay in the range of 29%, that's pretty much has been our thinking and continues to be our thinking as to where we end up a little bit longer term.

Right, okay. And then in regards to -- a question about the legal. One aspect was you mentioned that the holdings expenses were up $185 million mainly due to legal. But with the assets down, x legal expenses, would likely have been down. So I guess my conclusion is that you actually provided considerably more than the $185 million for incremental legal expenses for holdings.

I wouldn't challenge your analysis, Ron.

And I guess where I'm going with that is -- could you discuss some of the legal issues in a little bit more detail? GSE put back, private label put back, maybe what some of the other legal issues are?

Well, we don't really -- we don't comment specifically on litigation matters. But don't forget, the put back, certainly the repurchase, that doesn't go through litigation. That's actually a charge against revenue.

Right. And how much was that in the quarter?

We provided an additional $224 million to the reserve in the quarter. And I believe that's laid out actually on a schedule in the appendix of the investor deck.

Your next question comes from the line of Matt O'Connor with Deutsche Bank.

Two separate follow-ups to topics that have come up. On the FX revenue impact, it's helpful to broadly speak of numbers of maybe $500 million or $600 million. From a geographic point of view, does it show up in net interest income and fees, a combination?

I'm sorry?

The FX revenue boost. Does that show up evenly in net interest income and fees? Or one more than the other.

I can't answer that, I'm sorry. It certainly impacts every one of our revenue lines. It depends upon obviously, the denomination of the currency that the different revenues are booked in. And I'm sorry, I just don't have that breakout in front of me between interest and noninterest.

Okay. And then separately just a follow-up on, I think, John's question about the margin and the net interest income dollars going forward. If the NIM's relatively stable from here, obviously the positive loan growth that you saw this quarter is very good and it sounds like it's sustainable. So should we expect net interest income dollars to continue to rise off the second quarter level?

Again, certainly from a Citicorp perspective, that is what we would expect. The Citi Holdings is going to be dependent upon what assets run off and the timing of those runoffs as well.

Okay. But I guess as we think about loan growth overall, absent large asset sales out of Citi Holdings, it seems like you should be able to generate net loan growth for the overall company from here.

Yes. If you look at -- on a sequential basis, we had positive loan growth for the firm as a whole, second quarter compared to first quarter. Year-on-year, Citicorp loans grew 16%, Citi Holdings declined 35%. I think that you should expect that either by the end of this year or at the very early of next year, we should, on a year-on-year basis, see positive loan growth.

Your next question comes from the line of Ed Najarian with ISI Group.

I guess most of my questions have been answered, but one quick one. You're seeing credit losses decline very rapidly in the partner card business, I think down more than 50% over the last 5 quarters. Any thoughts of retaining that business? And I know you've been running it as an operating business and potentially moving it over to Corp from Holdings?

Yes. As we've said before, putting the retail partner cards business in Holdings was not because we ever thought it was a bad business, it just didn't seem to fit the Citicorp strategy when we laid that out. Now we have been running the partner cards business as an operating entity. We've done a lot of work to restructure the business. But the ultimate question that we'd have to answer as far as whether or not it goes back is, "Does it fit the Citicorp strategy?" And that's just not a determination that we've made as of yet.

Are you doing any kind of analysis or thinking about trying to reevaluate that, or has your thinking remained unchanged since you made the decision to put in Holdings a while ago?

No. We look at the businesses in Holdings from a periodic basis. You may recall at the beginning of last year, we actually moved some loans and other things out of Holdings back into Citicorp exactly because of that type of review. So we will -- we look at it all the time. And if and when we conclude any of that analysis, we'll certainly let you know.

You may or may not be willing to answer this one. Obviously, that particular business is not broken out as part of Holdings. Now with credit losses running at these lower levels, has it become significantly profitable again?

Actually, there's a slide in the appendix to the investor deck, Slide 35. If you take a look at Slide 35, retail partner cards actually generated earnings before tax of $769 million in this quarter and $697 million of pretax in the first quarter as well.

Your next question comes from the line of Gerard Cassidy with RBC.

The question I had was on the Citi branded cards. Your net credit losses have been steadily declining, which obviously is quite positive for the business. Do you guys have a sense of how low the net credit losses could go? It looks like they were 6.2% for the regional -- for the total Regional Consumer Bank under their Citi-branded cards. Can we see that get into the 3% to 4% range?

I think 3% to 4% may be -- never say never, but doubtful. But I think what you will see is -- I'm going to call it an overshooting, especially when you look at it on a rate basis. Don't forget on a rate basis, you've got both a numerator and a denominator effect. We are in the process of rebuilding the cards portfolio in North America. We mentioned the fact that on a sequential basis, loans increased slightly. And so that should begin to help grow the growth in the denominator. As that numerator continues to shrink, you're likely to get a very low NCL rate at some point in time. I don't know if it's going to get down with the 3 handle, but you may get a quarter where it has a 4 handle. But that's only because the loans that we'd be building--we'd be putting on the books now haven't seasoned yet. And therefore, as those loans season, I think you're likely then to rebuild back up to a more normal NCL rate, something in the 5% range.

Do you guys feel that you've turned the corner in terms of building the portfolio? Obviously, the end-of-period loans in this area grew this quarter versus the first quarter. Do you think you're now on a growth trajectory for this business?

Well, I'm cautious by nature. I'd like to see a couple of quarters of growth before I say that we've actually turned the corner. But it is good to see, at least that first quarter where you've got some small amount of sequential growth.

Okay. Coming back to the expenses. I know you don't want to get into the details on the legal expenses, but were any of those expenses for building up a litigation reserve for potential settlements in the future?

I would say that you can take a look at our legal and related expenses as being a combination of both expenses incurred and settlements that have already been made, and as well as in anticipation of settlements that have yet to be made.

Okay. Good. And then just finally, on the foreign exchange on the expense side, what's driving -- you mentioned, I think it was $700 million of elevated expenses due to foreign exchange. Can you share with us some color on what caused that?

Well, it's the weakening of the dollar. Don't forget, roughly 50% of our expense base is denominated in currencies other than the U.S. dollar. So as the dollar weakens or those currencies strengthen, it causes additions to our expense base. The dollar has weakened against almost every major currency during the last year, and that's just put a real strain on the expense base. It's weakened against the euro. It's weakened against the British pound. It's weakened against the Mexico, the Mexican peso. And those are all significant contributors to our expense base.

And I guess then, the revenues in those respective areas were not as positively impacted then by the weakening dollar to offset the expenses?

No, no, no, and I'm sorry. I thought I indicated earlier that those same moves did obviously cause revenues to grow. They also caused net credit losses to increase as well. And when you look at the net impact of foreign exchange movements on our results for the entire quarter for the entire firm, it had a net benefit of $100 million pretax. So all of those currency movements added about, again roughly, $100 million pretax income to Citigroup.

Your next question comes from the line of Moshe Orenbuch with Crédit Suisse. Moshe Orenbuch - Crédit Suisse AG: I promise I won't ask about FX, the NIM or expenses, actually. So the first thing is you mentioned the 27 months...

Moshe, you can ask anything you want. Moshe Orenbuch - Crédit Suisse AG: All right, I think we've hit those topics. You mentioned 27 months coverage on the mortgage reserve both in holdings and in aggregate. Could you talk a bit about what you'd have to see in order to bring that down? Or do you expect the charge-offs to increase? I mean, how do we think about that?

Well, I'd say the whole subject of mortgages right now is, I think everyone's waiting to see what happens coming out of these negotiations, quite frankly. We've got excellent trends building up in delinquency statistics, but there is the specter of forced write-downs and knock-on effects that, that could have. And so you want to be cautious. Moshe Orenbuch - Crédit Suisse AG: I mean I understand caution, but obviously, it's -- given that the trends are improving, in other words, that should tell you that all other things being equal, you would need less reserves as opposed to more, right? I mean, isn't that correct?

That's absolutely right. Now the one thing though, and I don't want to get preachy about this, but mortgages are really different than credit cards. Your risk on mortgages, it just hangs around for a long time because those mortgages sit in inventory once they get past the 180 days. And so you still have a great deal of severity risk that can impact you as -- until housing prices begin to rise and until you can start clearing out some of your foreclosure and process inventory, you've got an elongated period of time where you're going to have elevated credit losses. That's one of the reasons why we have been such active sellers of delinquent mortgages, because we just don't want to start building up a lot of mortgages that are sitting on our books that are more than 180 days past due. Moshe Orenbuch - Crédit Suisse AG: Right. And to the extent that you have extra severity risk, I guess, as home prices decline, you're saying essentially that's partially mitigated by the fact that your delinquency trends have been better.

Delinquency trends certainly help. But once those mortgages get past that 180 days, and like I say, that's why we manage that very, very closely. That's when your severity risk really kicks in. Moshe Orenbuch - Crédit Suisse AG: Right. Kind of on the comment that you made of running the capital levels at 8% to 9%, I mean I think that's very helpful kind of guidance for us. One of your competitors, JPMorgan, spoke yesterday, and they mentioned they're planning to run at 7.5%. Is the 8% to 9% kind of a basically kind of an internal classification? I mean, how should we think about how you arrived at that?

Well, we arrived at that, and I think we tried to describe the thought process in the, I think it was the third quarter of last year. And we just believe that given our mix of business and where we are, we think that, that -- and recognizing interconnectiveness and everything else, we think that's the right level of capital for us to operate. I think others at that point in time were saying that they were at 7%. And they thought that 7% was it, and they weren't going to run it $1 more than 7%. We've always been targeted at this 8% to 9% level. We try to be very consistent with that. And that's the way we've have been managing the place now for going on a year. Moshe Orenbuch - Crédit Suisse AG: Okay, great. Very last quick one. In terms of the partner card business, and you've talked about that a lot. But it's not really just one kind of block of business, right? I mean, there's different partners. And is it probable or possible that some of those partners would be more consistent with your customer franchise, and maybe others less so?

That is certainly a possibility. I certainly would not deny that.

Your next question comes from the line of Peter Ganucheau with Carlson Capital.

There's been a lot of discussion on the FX issue. I just want to get a conclusion. You're basically saying that most of the P&L impact would be hedged naturally or explicitly. So I'm trying to get comfort with thinking that the FX volatility won't move the needle in the bottom line on the P&L. Is that fair?

We are -- basically, it's self-hedged. When you take a look at the impact on our revenue and our expense and the cost of credit, we basically -- the business is basically self-hedged against FX exposure. So we'll get, depending upon how the dollar moves, we'll get either a very small impact, positive or negative, on the bottom line. But it does have an impact on the individual lines, and that's why when people look at expenses, just separate out just their view on expenses, that's going to color your view on expenses.

So maybe just think about expense as FX? I mean, I don't know. Okay, and then the second one is a mathematical...

That would clearly be a way to look at it.

Okay. And the second point I have is the question on some math. I've got $992 billion of risk-weighted assets, 72% you said is Citicorp. That's $714 billion. Now your old guidance on the risk-weighted asset inflation would have been 35%. The new guidance is 20%. Do a little math, I won't take you through it, but the delta is $108 billion in risk-weighted assets. At 9.5% Tier 1 common, let's say it's a 7 plus to 250 [ph] , that's $11.3 billion in incremental excess capital that's freed up. And that's 10% of your market cap and the stock is flat. So I must be doing my math wrong. So what am I doing wrong?

The only thing that struck me as you went through that is by the end of 2012, we would certainly expect to have some growth in our Citicorp assets because we are growing that business.

Okay. Fair enough. Holdings is there, but it's running off, right? But even if you include the increased inflation at Holdings, it still, it would cut that effect in half, but it's still noticeable.

Your next question comes from the line of Mike Mayo with CLSA. Michael Mayo - Credit Agricole Securities (USA) Inc.: I know we've been through expenses a lot, and you said the net effect is the positive $100 million on income. But what is the revenue number? You said the weaker dollar contributed $1.6 billion or $1.9 billion increase in the first half versus the prior year. How much did the weaker dollar add to the revenue line item?

I don't have that for you, Michael. I'm sorry. As I said, the net impact for the full firm is roughly $100 million pretax. Michael Mayo - Credit Agricole Securities (USA) Inc.: Okay. Linked quarter, your revenues were down $0.5 billion and your expenses were up $0.5 billion. FX is going to impact both. You said legal hurts that some, but it still looks like it's going to be negative operating leverage. And you said you're doing a degree of investment spending that should pay off for Asia in the fourth quarter and Transaction Services next year and U.S. Consumer Bank second half to next year. But of what you can control in expenses, where do you think you need to do better than you've been doing? Or is it that just the way it's going to be because you're in an investment mode?

Well, we are clearly in an investment mode and we -- look, I think you can always do things better. But we're definitely focused on driving those productivity saves. And so we're very focused on managing the business as we go forward. Michael Mayo - Credit Agricole Securities (USA) Inc.: You gave us an isolation where each segment should turn to a positive operating leverage mode. When do you think the overall firm would be in a positive operating leverage status? Is that the end of this year, next year, 2013?

I'm sorry, Michael. But when you consider with holdings and everything else, I'm not prepared to pick a time frame. Michael Mayo - Credit Agricole Securities (USA) Inc.: Sure. Let me shift gears. The net $13 billion of exposure to the European countries identified, what is the gross number and what's the difference between the gross and the net?

I don't think that the gross number is relevant. I mean again, we're taking a look at the net exposure after hedges and appropriate risk management approaches. Michael Mayo - Credit Agricole Securities (USA) Inc.: Okay. So after collateral, and what else would be included in risk management?

Hedges, collateral, outside guarantees. I mean, I'm just trying to kind of run through an inventory. Michael Mayo - Credit Agricole Securities (USA) Inc.: Okay. And having gone through the crisis and having seen a lot of outside guarantees and hedges not working, how comfortable are you that you have the right hedges and risk management in place?

Well, it's reported. And if we report it as net exposure, it's based on our confidence that we are -- we consider these to be true hedges. By the way, just the only thing I'd add is John Gerspach talked about collateral, its net of collateral. It's -- there are types of collateral that don't get netted. Suppose you had a -- if you had a loan in one of these countries and the collateral was a lot of, let's say, U.S. corporate bonds, that's not a qualified hedge necessarily. It doesn't come through the numbers. So we do have collateral of that sort too in some of these financial institutions numbers. Michael Mayo - Credit Agricole Securities (USA) Inc.: Okay. And then lastly I saw that Jerry Grundhofer stepped off the board 3 weeks ago after having pretty recently been renominated. Can you add any color to what was said in some of the public statements? He was in charge of the Risk Committee as I understand it. Who's the new head of the Risk Committee? Why did he leave?

We will make those announcements in terms of changes post our board meeting that's coming up. So that's in process. We are delighted with the board that we have. We have enormous amount of depth, both on the financial services side and the risk side. And Jerry was very clear, and our press releases were very clear in terms of his reasons for choosing what he wanted to do. And we really think that we all have come a very long way. He made substantial contributions, and the board is in good shape going forward.

Your next question comes from the line of Meredith Whitney from Meredith Whitney Advisors.

This is John Dunn [ph] actually. Just one last question on expenses. Can you give us a breakout of the comp versus noncomp in the investment bank, and just a sense of how that compares to last quarter, on last year?

No. We don't disclose comp versus noncomp in the investment bank.

Okay. Just wanted to take a chance.

Your last question comes from the line of Mike Holson [ph] with The Boston [ph] Company.

Okay, I'm going use that opportunity to ask 2 quick ones. The first one's really easy. You mentioned there's a gain from the sale of HDFC. Approximately how much was that?

Pretax, it was roughly $200 million.

Okay. And then I'm just going to follow up on Mike Mayo's question about the gross PIIGS exposure. I understand the reasons why you guys don't want to disclose it, but having seen the [indiscernible] before, if Europe turns into a real problem, the net exposure guidance or disclosure you gave isn't going to give investors any comfort whatsoever. So I would encourage you guys to give the gross exposure at some point if you're not going to do it today.

Okay, thank you.

There are no further questions at this time. Presenters, do you have any closing remarks?

Yes. It's John Andrews. Thank you for those of you who just managed to stay on for this lengthy call. The replay will be available later this afternoon on the website. And we'll all talk to you later, thanks.

This concludes today's conference call. You may now disconnect.