Citigroup's All-Clear May Have Some Caveats

No sooner did I suggest, yet again, that it was time for the Feds to deal with Citibank (C) when CEO Vikram Pandit came out with a letter “to employees” declaring that the bank was having a great January and February. Didn’t I look like an idiot (see prior post “Is it time to nationalize Citibank?” March 10-09). At least for now.

When you read his letter, you can see why the market got excited Tuesday. Citi is having the best two months since 2007. M&A is hot, and US$19 billion in revenue has been amassed over the first two months. Compared to what I believe was US$16.3 billion of revenue in all of Q4 2008 (before deducting US$10.7B in revenue reversals associated with asset writedowns).

If Citibank keeps up that pace, Q1 2009 could break US$27 billion in revenues. If expenses remain in the US$15.5 billion range, that’s a tidy profit for sure. Particularly when Citi’s market cap is just US$8B today. That feat requires Citi to avoid any further asset writedowns. And that, of course, is what the last year was all about. Asset writedowns undermining an otherwise decent business. As TD Bank CEO Ed Clark has said himself, banking is the best business God ever created as long as you don’t screw it up.

From a staff and market management standpoint, I totally understand the driving force behind Mr. Pandit’s letter. He had to stop the rout. And it worked. Stock is up 50%.

But hasn’t he set himself up for some ’splaining if they take material asset writedowns in March? Although the assets that have bedeviled so many financial institutions bounce around each day, the formal accounting valuation should only happen each quarter when the CFO sits down with the auditor and settles on the balance sheet to be released with the quarterly financial statements. Although Citibank might be able to take another US$10.7B in writedowns this quarter and still report a net profit, won’t that come as a shock to those who read the “rosiest times since 2007″ letter?

The truth is, that none of this may matter. SEC head Mary Shapiro advised Congress Wednesday that she is in favor of amending market-to-market rules so that “fire sale prices” are ignored. CNBC’s Larry Kudlow calls it “mark-to-market lite”. That mark-to-market accounting is a problem is not new information to our readers (see prior post “Accountants are failing investors with “fair value” accounting” August 6-07). To suspend it now does nothing but prove that it was always a bad idea for those assets that folks were planning to hold until maturity.

And if the values of the SIVs, CDOs and CLOs are dependent on a recovery in the U.S. housing market, the recession isn’t going to stop tomorrow to ensure that Citi’s balance sheet can hold together.

Comments

[wobatus:]

The letter was very clear that it didn't include marks. And that has been reported ad nauseum, and has been ever since the letter was released. Shut up already.

Mar 12 07:24 AM

[User 376066:]

Who ever heard of an investment bank holding assets with the legitimate intent to "hold them to maturity". Give me a break! Their children are for sale.

Mar 13 02:40 PM