Oct. 16 (Bloomberg) -- Citigroup Inc., the lender 34 percent owned by the U.S. government, is seeking to block a TPG Credit Management LP fund’s attempt to buy assets from a collateralized debt obligation for pennies on the dollar.

Citigroup owns $19.5 million of senior notes in Tropic CDO V Ltd. and the “improper” sale of assets would cause “irreparable harm” to its stake, Jay Huang, the New York-based bank’s head of global CDO trading, said yesterday in a letter to trustee U.S. Bancorp. Huang and Jeanette Volpi, a Citigroup spokeswoman, declined to comment.

A fund associated with TPG is exploiting an unintended wrinkle in the $650 billion market for CDOs by asking holders of the riskiest portions to allow asset sales in exchange for millions of dollars in fees. While equity holders have the right to decide which assets the CDOs sell because they’re first in line for losses, they may no longer have the incentive to ensure that assets are sold at fair value because their investments have been wiped out by the worst financial crisis since the Great Depression.

“Noteholders have the very reasonable expectation that no arbitrary third party would be able to ‘cherry pick’ the portfolio collateral,” Huang said in the letter obtained by Bloomberg News.

5 Cents

TPG Credit, a Minneapolis-based firm founded by former Cargill Inc. executive Rory O’Neill and associated with private equity firm TPG, has offered in the past week to buy $470.8 million of bank trust preferred securities from seven different CDOs for 5 cents on the dollar, according to trustee reports obtained by Bloomberg News. TPG Credit will pay holders of so- called equity portions another $23.5 million in fees to allow the sales, the documents say.

Owen Blicksilver, a spokesman for TPG, declined to comment. Steven Gomes of trustee U.S. Bancorp didn’t respond to phone calls and an e-mail.

TPG Credit joins Babson Capital Management LLC, GoldenTree Asset Management LP and other investors buying assets of CDOs, securities that contributed to the $1.6 trillion of writedowns and credit losses taken by the world’s largest financial institutions since the start of 2007. Citigroup has taken about $118 billion of writedowns and losses, according to data compiled by Bloomberg.

TPG of Fort Worth, Texas, is also targeting distressed real estate assets from failed banks. The buyout firm is part of a group buying the real estate assets of failed Chicago lender Corus Bankshares Inc. for $554.4 million, the Federal Deposit Insurance Corp. said this month.

‘Consent Payment’

CDOs parcel fixed-income assets such as bonds, loans or trust preferred securities and slice them into new securities of varying risk intended to provide higher returns than other investments of the same rating.

Julie Braun, chief operating officer of TPG Credit, said in an Oct. 9 letter to Tropic CDO V noteholders that Trust Preferred Solutions LLC is seeking to buy $115 million of securities issued by 20 finance companies including Centra Financial Statutory Trust II and Forstrom Capital Trust II for 5 cents on the dollar. Investors must agree by Oct. 23, the letter said. Trust Preferred Solutions is a TPG Credit investment vehicle.

Wiped Out

About $50 billion of so-called TRuPs CDOs are outstanding, backed by preferred securities issued by U.S. banks and thrifts, Ratul Roy, an analyst at Citigroup in New York, said in a telephone interview yesterday. While the riskiest portions of the CDOs have stopped paying interest as bank defaults have increased, the safest portions of the CDOs have more than doubled in price to 45 cents on the dollar since March, he said.

Equity portions are either receiving no cash or will soon be wiped out, Roy said.

While Tropic CDO V’s equity holders haven’t received payments in a year, they’ll get “a consent payment equal to half of the aggregate purchase price of the subject securities, unfairly benefiting the preferred shareholders at the sole expense of the noteholders,” Huang said in the letter.

“We intend to hold the issuer, its directors and the trustee responsible for any transaction that improperly impairs our collateral or interferes with our legal and contractual rights,” Huang wrote.

To contact the reporters on this story: Caroline Salas in New York at csalas1@bloomberg.net; Pierre Paulden in New York at ppaulden@bloomberg.net

Last Updated: October 16, 2009 16:30 EDT