Citigroup's Horrible Conference Call 27 comments
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The Seeking Alpha transcript of this morning’s Citigroup conference call runs 12,000 words; it makes for incredibly boring reading, and I can fully understand John Carney’s pain in having to listen to the whole thing live.
The most interesting thing to me was how the brand-new CFO, Ned Kelly, not only was at pains to praise his predecessor, Gary Crittenden, but even went so far as to unnaturally pump up this quarter’s results — the one quarter for which he can’t really bear any responsibility at all. Here’s how he kicked off:
This is the strongest quarter we’ve had in well over a year on many measures. Perhaps more vividly reflected in positive net income…
Slide one shows our consolidated results for the quarter. We reported revenues of $24.8 billion, that’s nearly double year over year and $19.2 billion higher sequentially.
He’s referring to the slides in this presentation; “sequentially” is Kelly’s way of saying “quarter-on-quarter”.
Kelly’s comments were echoed by Derek Thompson:
Another day, another big first quarter announced by a struggling bank. Citigroup today reported that for the first time in a year, it’s turned a profitable quarter with revenue rocketing up 99%, following in the steps of strong earnings from Goldman Sachs and Wells Fargo.
Thompson added some caveats, but not about the net income or the revenue. The fact is, however, that neither of them in reality is nearly as impressive as Kelly would like to make them sound.
For one thing, Citigroup’s earnings per share were negative, which puts the positive income figure into some perspective. For another, Citigroup would have been operating substantially in the red were it not for the fact that it managed to book $2.5 billion of income from the fact that its debt securities plunged in value over the course of the quarter. Since the mark-to-market value of its liabilities is now lower, it’s allowed under US accounting rules to register a profit. But that’s not income as most people understand it.
And the rise in revenue is even more illusory. Here’s Bloomberg:
The company took $5.62 billion of writedowns on subprime- mortgage-related securities and other investments in its trading division, reflecting a further erosion in their market value. That compared with $14.1 billion of writedowns in the first quarter of 2008, for a positive $8.47 billion revenue swing.
In other words, despite the fact that subprime write-downs in the first quarter of 2008 were mind-bogglingly enormous, and continued through the next three quarters of the year, there were still another $5.6 billion of writedowns to be taken this quarter. Will they ever cease? No one knows. But through the magic of year-on-year comparisons, Citigroup can actually show a revenue gain just because its subprime writedowns this quarter were lower than they were a year ago.
Later on in its presentation, Citigroup shows how important net writedowns are to its reported revenue figures:
Suddenly that 99% year-on-year surge in revenues isn’t quite as impressive: if you ignore the writedowns (which Kelly always refers to as “marks”), then revenue only rose from $25.5 billion to $26.9 billion year-on-year.
Given that this chart is so prominent in his presentation, one wonders why Kelly was so keen on pushing the soaring-revenues story: wouldn’t it have been better to simply be honest about why it’s silly to compare revenues over a period of time when writedowns have been so enormous? Instead, you get utter comedy like this back-and-forth with Meredith Whitney, who keeps on trying to cut through the Kelly verbiage, to little effect:
Meredith Whitney: What happened in securities and banking in Europe during the quarter to have such outsize results?
Ned Kelly: My suspicion is and somebody will quickly correct me if I’m wrong. I think the marks by and large are basically booked in New York. The European results reflect the fact that the marks are booked in New York so the relative out performance of Europe on one level given that in terms of that $4.2 billion of traditionally disclosed marks is what drives that.
Meredith Whitney: Could you dumb that down for me please?
Ned Kelly: If you think about it we have $4.2 billion of what we described as traditionally disclosed marks. As you know, those are by and large in securities and banking. Those marks would predominantly be booked in New York rather then in Europe.
Meredith Whitney: Right, but on a relative basis Europe was stronger and that’s what I’m asking about not Europe relative to US, Europe relative to Europe.
Ned Kelly: First quarter ’08 I am told Europe did have the marks, this year they do not.
Meredith Whitney: On the sequential basis the difference they didn’t have the marks last quarter?
Ned Kelly: They did not have the marks last quarter.
Meredith Whitney: They had the marks last quarter they don’t have the marks this quarter?
Ned Kelly: First quarter ’08 Europe had the marks. Not since then. So I was right.
Meredith Whitney: I’m looking at it on a sequential basis.
Ned Kelly: Sequential basis, apples to apples no marks.
Meredith Whitney: It’s materially stronger and I’m just wondering what’s in there if its not marks what is it?
As Carney says of Kelly:
Much of what he says is so obscure that it is not only unquotable but incomprenhensible to anyone but an expert in Citi’s balance sheet. JPM, on the other hand, managed to sound comprehensible and, therefore, candid. When someone is talking jibberish, it’s hard not to think they are pulling something over on you.
To give just a flavor, from Kelly’s opening remarks:
There are three items we added to our traditionally disclosed marks this quarter which amounted to $4.2 billion and which are detailed in the appendix on slide 26. These additional items started with on the mark side $1.2 billion in private equity losses and then these items were offset partially by a $2.7 billion net benefit from CBA on our non-monoline derivative positions and a $541 million benefit in revenue accretion on non-credit marks in certain securities in banking assets we had moved from mark to market to accrual accounts last quarter.
Is this English? No. Is it useful? No. Is it the kind of thing that investors in Citigroup in any way want to hear? No. Even Vikram Pandit didn’t seem to have the time to sit through this kind of stuff: he wasn’t on the call at all, leaving Kelly to deal with the analysts on his own.
I’m not sure why Pandit replaced Crittenden with Kelly, but judging by Kelly’s first earnings call, the change is not clearly for the better. Citigroup would have been much better served by someone who was clear and direct about what was going on within the company, financially, rather than someone who considers his job to be to put the best possible spin on a mixed-bag of numbers. The only way that investors will ever take the CFO seriously is if they feel they can trust him. And after today’s performance, that day is likely to be a very long way off.
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This article has 27 comments:
I find thos so funny because it was the "leaked" pandit memo that stared this rally, then of course all the manipulation happened (benanke and buying t-bills), toxic assets, Mark to market, all for a nice big show at the G-20.
If someone spreads a false rumor and it lowers the market I believe that is illegal? But of course if a company CEO does it for the upside it isn't?
Our country has become a joke.
Did you ever hear in this presentation that revenues were boosted billions by the taxpayer money provided by the USG? I didn't think so.
I'm sure while this obscure FASB rule is kosher, it is not tangible to the shareholder, just another accounting hat trick that lets C report a black number.
Now that the financial press and analysts are getting under the hood of the Q1 results, when are we GOING TO HEAR THE SCREAMING?
When will the shareholders AND THE BOARD SAY ENOUGH ALREADY !!!!!! Fire Pandit's butt out of there, smoke and mirrors never works long term.
Here is a simple memo to the Citi CFO and others like him:
- If you are trying to prove that you are smarter than the rest of us by using complicated jargon -- STOP it doesn't work...just makes you look supercilious and untrustworthy.
Though it doesn't appear to have been the goal of this column, I'd have preferred to see a translation of the discussion rather than a critique of it.
"Since the mark-to-market value of its liabilities is now lower, it’s allowed under US accounting rules to register a profit. But that’s not income as most people understand it."
This is the flip-side of write-downs. If these profits aren't income as most people understand it, so are the mark-to-market losses not actually losses, as most people understand them. These sorts of gains are exactly as legitimate as mark-to-market losses, as they are based on exactly the same accounting rules.
When I have an expense, (or loss) it is written in that section, within a category describing the loss or expense.
It is marked taxable or not, deductable or not, and at the end of the time period, week, month, year, I get my answer of how my business is doing.
This is called a GROSS INCOME, AND TOTAL EXPENSES... and belive it or not, it gives me a net profit or loss. At the end of the year, I pay my proper taxes or get a refund if I estimated too high. Is this a problem for banks to do, or do they get a special dispensation to hide things, cover up things, lie, cheat, and/or steal all in the name of rhetoric?
Is this helpful for our confidence out here. I for one am totally concerned, and afraid for my property, money, retirement and our country. I feel we are being led by the unknowing who are trying things that already have been proven in the past to NOT work.
I truly feel sorry for our dead soldiers who died for our wonderful country that is being led to the slaughter. Yes, I feel it is that serious.
If I were king, things would change by noon tomorrow.
The Capt.
On Apr 18 12:07 PM vodop09798 wrote:
> Amazing how the shorts suddenly find their voices whenever we get
> a TEMPORARY downturn.
This is the reason why IAS rules don't allow this.
On Apr 18 10:47 AM Vox Rationalis wrote:
> I'm not surprised that a new CFO would tend to speak in terms that
> only finance geeks would understand. I'd expect him to do much better
> next time after a round of criticism.
>
> Though it doesn't appear to have been the goal of this column, I'd
> have preferred to see a translation of the discussion rather than
> a critique of it.
>
> "Since the mark-to-market value of its liabilities is now lower,
> it’s allowed under US accounting rules to register a profit. But
> that’s not income as most people understand it."
>
> This is the flip-side of write-downs. If these profits aren't income
> as most people understand it, so are the mark-to-market losses not
> actually losses, as most people understand them. These sorts of
> gains are exactly as legitimate as mark-to-market losses, as they
> are based on exactly the same accounting rules.
On Apr 18 10:02 AM Bandwagon2009 wrote:
> Unfortunately the trend towards giberish, acronyms and obscure lingo
> seem to be inexorable. I follow technology -- and you should here
> some of those guys...in many ways Alan Greenspan was the past master
> of this approach. Why did we need pandits (no pun intended) on CNBC
> to parse his every sentence/phrase. I am sure he is a smart guy
> -- why couldn't he construct simple more understandable sentences?
> If he did, just maybe, we wouldn't be in this pickle.
>
> Here is a simple memo to the Citi CFO and others like him:
>
> - If you are trying to prove that you are smarter than the rest of
> us by using complicated jargon -- STOP it doesn't work...just makes
> you look supercilious and untrustworthy.
Now with the TO BIG TO FAIL bankers are thought of the biggest fakers (liers deceivers manipulators) around..KIDS WITH LEMONADE STAND HAVE MORE "COMMON SENSE'
On Apr 18 03:51 PM Simon Smelt wrote:
> The Citigroup quarter results and conference call are intended to
> help boost C price in the short term, so knowledgeable folk can exit
> their holdings for more than small change.
I question whether anyone connected with what has been happening for the past six months or so has any thought that what they are doing is really for the financial betterment of America's citizenry.
America is being attacked once again.......This time it is by those we have elected to serve our best interests. A country divided cannot stand. We need new leadership if we are ever going to turn things back around.
If I were king, I'd change things as well, and the first thing I'd do is purge any elected officials found guilty of conspiring against the people they were elected to serve.
While I agree with the sentiment, I am not on board with any one here that comments about what they would do if they were "king". The people of the U.S. understand what needs to happen; if their elected officials don't respond, we should use Article V of the Constitution, start at the state level, and enforce fiscal discipline.
I am hoping in the short term, market participants vote with their exit from C....
Enron screws over California for billions, implodes, we get a huge reporting burden, and then public companies just outright obfuscate, omit and lie!
As a shareholder, I want to see the loan book and know what's hiding on and _off_ the balance sheet.
If you mark your assets to today's prices but don't sell them, you incur profits or losses that are not for real.
The only time you make a profit or a loss from initial capital is when you actually liquidate your asset(s).
And invetors are selling bank stocks based on "fake losses" and buying them based on "fake profits"?
It is how Americans have been living their lives -based on dreams instead of realities. Based on the American Dream instead of Realities of Life?
They hold asset investments. When the price of their assets went high. They consider the difference from their initial capital as a profit and spend it - while still holding the assets whose price may go up or down. When the assets price plunged, they have already spent the supposed profits. If they liquidate such assets, they will not only incur losses due to price differential but also losses from spending all those fleeting mark to market profits.
Mark to market led consumers to use their real-estate assets and their stock market holdings as their personal ATMs.
Banks use the mark to market to justify massive bonuses based on profits that may or may not materialize and drove their companies down with marked down losses that may or may not actually happen.
We will never know if we made profits or incur losses until we liquidate our assets.
Marking them to market only provide us the means to fool ourselves. A foolish dream of profits and losses that will never materialize until we liquidate our assets.
Mark to market is a very dangerous tool the government is trying to implement in order to provide company balance sheet transparency. Obviously, mark to market end result until now is to further muddy the waters.
Go back to basics - real profits and real losses.
Cold hard cash upon asset liquidation cannot be manipulated.
Stop manipulating assets values with Mark to Market.
Given this, why does anyone own C? One of Buffett's great rules is, don't invest in any business you can't understand. It sounds like nobody outside C understands C. So why invest in it?
In Dec after a bailout I thought C at 5 sounds good. I sold when it hit 7 in what turned out to be a great move.
I had Mar 9 off and that morning I bought the financials on the 50 strongest banks list that had just been published. Then I added BAC, RF and GE. I thought hard about C thinking that at $1 it would be a great buy and the government was going to protect it. It would have been a super great buy! But I decided that I just didnt like what C had done and I didnt want to own it regardless.
I have sold all of those financials at least doubling my investment. If I had bought C I would have quadrupled my investment. But I am glad I didnt. C is a piece of ***** and will probably get bailed out 2 or 3 more times. Each time right after the bailout it will be a good buy... but not I.
It will be a continued transfer of wealth from citizens to Wall Street. It is my hope that Citi gets broken up into manageable pieces. It doesnt deserve to live... just save as many jobs as possible.