It is one thing for Citigroup (NYSE: C) to sell $12 billion in leveraged corporate loans to private equity firms and even lend part of the money for the transactions. It is another for the bank to allow the buyers to pick which loans they want.

According to the FT Citi is "allowing private equity groups bidding for up to $12bn of its leveraged loans to cherry-pick from a wide range of assets with different prices and credit ratings." Some people briefed on the deals say that packages could include loans for the buy-outs of Chrysler and Alltel. Deutsche Bank (NYSE: DB) is making similar sales, setting up competition for which bank can unload troubled corporate debt more quickly.

The news begs the question of why Citi is selling the assets at all. By allowing investors to take the best assets, the bank may be bringing more capital on to its balance sheet for the early quarters of this year. The risk is that the under-performing assets which carry more chance of default will hit the bank as 2008 wears on.

The temptation is easy to understand. Citi may be able to dodge disaster by hoping its other business units do well in the second half. If so, the write-offs will not hurt it overall financial picture so much. Even if it is stuck with the "junk" in the portfolio, the money which comes in now is "window dressing" for the time being.

It is an awful race, especially if the economy does not cooperate and the other divisions within Citi do not get a year-end hockey stick performance. If that happens, the big financial services company could have a second half which is worse than the first.

Tis an ill wind that blows no good.

Douglas A. McIntyre

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