Citigroup's Dark Arts

Wall Street pay czar Ken Feinberg should give Vikram Pandit a pay raise. The Citigroup (C) chief executive has certainly earned it based on his mastery of the dark arts and alchemy.

It takes sheer wizardry to announce simultaneously a small $101 million profit and a loss of 27 cents a share for the same quarter. It takes a little sleight of hand to disclose a quarter-to-quarter increase in the number of retail bank branches, but a small decline in the number of customer accounts at those branches.

Want some more magic? In the third quarter, Citi absorbed $8 billion in credit losses as the bank continues to get rocked by delinquencies and defaults on consumer and commercial loans. But even in the face of those losses, the bank added only $802 million to its overall loan loss reserve -- some $3.1 billion less than it set aside in the second quarter.

The clear signal Pandit wants to send is that the total $36.4 billion in reserves it has set aside for loan losses is more than enough to weather the rest of the economic storm. It's a gamble, given Citi's sizeable exposure to the American consumer. But if Pandit had dedicated any more money in the quarter to build up its loan loss reserve, the bank would never have achieved its meager $101 million profit.

And that profit is dubious in any case: It is mainly a byproduct of a securities exchange with Citi's main benefactor -- the U.S. government. In converting the government's preferred equity stake into stock, Citi booked an after-tax gain of $851 million. But ordinary shareholders incurred a $3.1 billion loss in the transaction.

Abracadabra! That's how Citi managed to report both a profit and loss in the same quarter.

None of this, however, should fool investors or the federal government, which now owns a third of Citi and guarantees losses on more than $200 million in ailing loans and securities. No matter how hard Pandit may try to dress up Citi's numbers, the bank remains awfully sick.

Overall, Citi generated $20 billion in revenues, roughly in line with expectations.

But revenues at Citicorp -- the portion of the financial conglomerate that Pandit says is strategically vital to the bank's long-term success -- declined 12 percent, to $13 billion from the second quarter. Some of that decline was because of a drop in the value of Citi's own corporate debt and some derivatives. But revenues at Citi's investment bank, which is included under the Citicorp umbrella, were largely unchanged from the previous quarter at $1.2 billion.

As it turns out, the best revenue performer at Citi was Citi Holdings, the portion of the bank Pandit wants to shed and which houses some of its worst assets -- the ones mainly guaranteed by the federal government. Citi's trash heap, instead of losing money for the bank, actually generated $1.3 billion in revenue in the third-quarter, largely because of a write-up in the value of its subprime-related securities.

But the trouble is there's just so much value those beaten down mortgage-backed securities and collateralized debt obligations can regain. The upside potential for Citi's trash heap of assets already may be baked into the bank's numbers.

Then again, maybe the real hocus-pocus at Citi is Pandit trying to conjure up profitability from a steady improvement in the value of its many still toxic assets. That might explain the odd-sounding quote from Pandit in Citi's earnings release: "We continue to execute steadily against our plan."

The real plan is wishful thinking.

Comments

[kds8mln:]

C trades way under its book value. What do you expect from a $4 stock? You want a EPS of $1 ...or what? You are too late to the short camp, please don't talk like a smart ass. Lol.

Oct 15 07:42 PM

[mbi4ever:]

Matthew;

You are so wrong in your opinions about Citi.
EOM

Oct 15 08:50 PM

[Dirk:]

Yeah, a book value that belongs onthe fiction shelf

Oct 15 08:52 PM

[tommiegun:]

You're way off base. If you have looked at the details instead of the summary numbers you would realize that the trend for losses is headed downward. The over 90 day trend is down as well as chargeoffs.

In addition, smarty, their credit card defaults are down a whole 2% points. See Reuters 10/15/09 4:57PM: "Citigroup Inc (C.N), the biggest issuer of MasterCard-branded credit cards, posted the deepest decline as defaults fell to 10.15 percent from 12.14 percent".

So, barring a big increase unemployment, the credit reserve of$37.5bil. is probably a safe bet.

Oct 15 10:17 PM

[Ricard:]

Great article.

"It takes sheer wizardry to announce simultaneously a small $101 million profit and a loss of 27 cents a share for the same quarter. It takes a little sleight of hand to disclose a quarter-to-quarter increase in the number of retail bank branches, but a small decline in the number of customer accounts at those branches."

I was wondering the same thing when I read three different headlines about how Citigroup booked a profit and a loss.

Oct 15 10:17 PM

[Fourpenny Guy:]

Citi is a joke. While JP Morgan and Goldman actually make money, Citi manages to lose money despite the coveted foreign operations it has in 160 countries. However, look at a few issues: their inexperienced CEO lost Wachovia, turned down Goldman, then sold half of Smith Barney to most backward firm on Wall Street. Then, he sold Phibro. Both profits and client service seem optional at this stage. Vikram's job should be optional, too.

I'll also mention that CITI HAS NO VALUE-BOOK OR OTHERWISE. Their offbalance sheet items dwarf assets, and they are selling proitable divisions, with no clear future plans. The joint venture with Morgan Stanley would be better served if a third partner, namely Deutsche Bank, were to fund Morgan Stanley's ability to manage the brokerage operations they will fully inherit in 5 years. The fact is, Morgan is too small to manage an Arby's, let alone a complex 18,500 broker operation. I would say that clients deserve better than a two-bit investment bank with backward technology. If only Citi and Morgan had failed.

Oct 15 11:09 PM

[Angry Banker:]

Morgan is a weak JV partner? This is the same Morgan that was the #1 M&A adviser globally in Q3? (yes they beat Goldman)

On Oct 15 11:09 PM Fourpenny Guy wrote:

> Citi is a joke. While JP Morgan and Goldman actually make money,
> Citi manages to lose money despite the coveted foreign operations
> it has in 160 countries. However, look at a few issues: their inexperienced
> CEO lost Wachovia, turned down Goldman, then sold half of Smith Barney
> to most backward firm on Wall Street. Then, he sold Phibro. Both
> profits and client service seem optional at this stage. Vikram's
> job should be optional, too.
>
> I'll also mention that CITI HAS NO VALUE-BOOK OR OTHERWISE. Their
> offbalance sheet items dwarf assets, and they are selling proitable
> divisions, with no clear future plans. The joint venture with Morgan
> Stanley would be better served if a third partner, namely Deutsche
> Bank, were to fund Morgan Stanley's ability to manage the brokerage
> operations they will fully inherit in 5 years. The fact is, Morgan
> is too small to manage an Arby's, let alone a complex 18,500 broker
> operation. I would say that clients deserve better than a two-bit
> investment bank with backward technology. If only Citi and Morgan
> had failed.

Oct 16 09:54 AM

[MrBuzz:]

Citi is being pushed in the wrong direction by President Obama and his hentchmen. They are bunch of people who use people for their ends and then through them under the bus. Citi needs to stop selling off profitable areas of business NOW ! Its stupid to sell off money making businesses they are what made the Group so strong in the 1st place. This is nuts. But, makes sense when the largest Shareholder is now The US Govt and President Obama a guy who never ran a business in his life likes to play with other people's lifes.

The leadership of Citi needs to run its business. Forget President BO and just do what is needed. Take the gloves off ! Do it now.

Oct 18 10:12 AM