UPDATE 1-Citigroup, AIG classified certain repos as sales

* The classification was unintentional- Citi

* Accounting rules permitted classification-AIG

* Both cos said the moves did not have material impact

(Recasts; adds AIG details)

By Sakthi Prasad

BANGALORE, July 16 (BestGrowthStock) – Citigroup Inc (C.N: ) and AIG
(AIG.N: ) classified more than $11 billion in loans as sales in
the second half of 2009, masking the companies’ risk levels,
filings with the U.S. Securities regulator showed.

Citigroup and AIG’s announcements came in letters to the
U.S. Securities and Exchange Commission (SEC), both dated April
13 and made public on Thursday, which gave details about their
repurchasing agreement accounting between 2007 and 2009.

The news follows Bank of America Corp’s (BAC.N: ) move last
week to beef up its internal accounting controls after it
incorrectly classified as much as $10.7 billion in short-term
lending and repurchase deals for mortgage securities as sales.

Citi erroneously reported $9.2 billion of repos as sales —
its largest quarterly amount — during the third quarter of 2009
and said in the letter the move was unintentional.

Bailed out U.S. insurer AIG (AIG.N: ) said in its letter that
it had classified about $2.3 billion of repos as sales in the
fourth quarter of 2009 alone — the most recent quarter in the

However, the insurer said the accounting rules allowed it to
record certain repos as sales.

Repurchase agreements, or repo, is a form of financing that
allows a borrower to opt for cash loans once they have given
financial securities to the lender as collateral.

The borrower would then buy back the collateral from the
lender at a later date to close out the loan.

Classifying repo transactions as a sale instead of showing
them as borrowings masks the leverage position of a company as
the assets would be removed from the balance sheet.

The SEC in March said it had made inquiries of about 24
financial firms to determine whether their repo activities over
the past few years had been similar to those of Lehman Brothers
Holdings Inc (LEHMQ.PK: ). [ID:nN20112301]

Citigroup said the repurchase agreements qualifying for
sales accounting were primarily executed in its Japanese and
U.K. broker-dealers unit. Citibank in North America accounted
for lesser transactions.

The practice did not alter its results of operations,
revenue or liquidity, Citi said in its letter.

AIG also said the classification had no material impact on
its business.
(Reporting by Sakthi Prasad in Bangalore; Editing by Valerie
Lee, Sharon Lindores)

UPDATE 1-Citigroup, AIG classified certain repos as sales