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How did sophisticated analysts miss the degree of risky CDOs and MBS obligations held by Citigroup, Merrill Lynch and others? The news media is swarming over reports of historic losses, CEO oustings, and the “surprise” discovery by top management of the extent of their companies’ risky investments in collateralized debt obligations and mortgage-backed securities. Why is all this a surprise? Part of the answer is in the way companies disclose their holdings and how to read the footnotes!

The importance of footnotes cannot be overstressed when it comes to analyzing financial reports. Earlier this week when The New York Times issued a list of the top ten issuers of CDOs we found an interesting pattern in how companies chose to disclose the investments.

Although Merrill Lynch listed their CDOs as a line item in their financial statements, Citigroup followed the more typical behavior of disclosing this information in the Securities section of the footnotes of the 10-K. Not only is the small print information easy to miss, numbers are hard to compare when companies use different language. You may wonder if a Citigroup “VIE” (Variable Interest Entities) is the same as a Wachovia QSPE (Qualified Special Purpose Entity).

Because footnotes so often reveal the full story behind the balance sheet, and because they are so hard to read, EDGAR Pro and I•Metrix both have a “section search” feature to help you ferret out the details. Here’s how:

In the example below, if you check the box to see the Financial Statements and Notes Table of Contents portion of Citigroup’s most recent 10-K filing….

… a list appears with the fine detail of Citigroup’s VIE and QSPE disclosures: