Citigroup: Doing Well, Despite What the Media Says

Accounting is the language of business -- Warren Buffet

Bradley Keoun of Bloomberg just published a report on its website, "Citigroup Posts Loss on Credit-Card Securitizations", saying Citigroup Inc. (C) reported its first loss since at least 2005 on credit-card securitizations, signaling that risks may be growing in a business that generated $3.5 billion of revenue in the past three years. The biggest U.S. credit-card lender lost $176 million in the second quarter packaging card loans into securities, the company said  on August 1. The firm's results may portend similar losses for rivals.

After reading his article, an innocent person might come up with a conclusion that credit card companies may be in peril just like the mortgage companies, but that is far from the truth. In its 10-Q filed on August 1, Citigroup said that In the second quarters of 2008 and 2007, the company recorded net gains (losses) from securitization of credit card receivables of ($176) million and $243 million, and $45 million and $578 million during the first six months of 2008 and 2007, respectively. Net gains (losses) reflect the following:

• Incremental gains from new securitizations
• The reversal of the allowance for loan losses associated with receivables sold
• Net gains on replenishments of the trust assets offset by other-than-temporary impairments
• Mark-to-market changes for the portion of the residual interest classified as trading assets

Basically, what the company is talking about is the interest-only strip (I.O. strip) on its book. After Citigroup sold its loan receivables to the trust, it records an intangible asset call I.O. strip. The I.O. strips are valued based on three factors:

1. interest rates the company charging on its customers
2. the interest rates company paying the investors in the trust
3. expect losses or charge-off in the trust.  

The company then adjusts the IO strip quarterly base on prevalent interest rates and expected charge-offs.

The company did not lose any money in its trust.  It merely adjusted the valuation of its interest only strips. Of course, the question remains, how much did Citigroup make from the credit card loan receivables from its trust then? To answer that question, we simply need to go to SEC website and pull some information from the Citibank Credit Card Issuance Trust.

The trust files a 10-D monthly and tells investors the charge-off rates and interest rates it's charging, and other good stuff. For the month ended June 2008:

Portfolio Yield, (it charges customer)      --      15.90%

Credit Loss Component  (Charge-off)    --        5.83%

Interest rates paid to the trust investor    --        3.43%

That leaves the profit margin to Citigroup - an unbelievable margin of 6.24% on 72 billion dollars worth of credit card loan balance. Citigroup is on pace to collect over 4 billion dollars from its credit card trust this year alone.

My point is this: many reporters in the news media simply have no clue about how a business is doing, because they have no background in accounting.  Just like Bill Clinton famously said, it depends on what "is" is.

Disclosure: I have no position in C.

Comments

[Ishortyou]

Greedy crooks in Banks and Broker firms wrapped subprime, credit cards, bad loans, etc. into structured finance vehicles i.e.: CDO-ABS-MBS-SIVs, they misled the market and bond insurers into these fraud and now everyone is paying the price with losses now the misleds have to clear up their books from that toxic waste!

[Robert RUBIN]

On November 12, 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act of 1933. One of the effects of the repeal was to allow commercial and investment banks to consolidate. Some economists have criticized the repeal of the Glass-Steagall Act as contributing to the 2007 subprime mortgage financial crisis.[6][7]

Losses at financial firms from the mortgage collapse may eventually triple to $600 billion as defaults on home loans grow, says Zurich-based UBS AG. One reason banks are losing money is the repeal nine years ago of the 1933 Glass-Steagall Act, which separated commercial and investment banking after excessive risk- taking contributed to the Great Depression, Eveillard said.

The repeal enabled commercial lenders such as Citigroup, the largest U.S. bank by assets, to underwrite and trade instruments such as mortgage-backed securities and collateralized debt obligations and establish so-called structured investment vehicles, or SIVs, that bought those securities.

Citigroup, which has fallen 36 percent since reporting in January the biggest quarterly loss in its 196-year history, may have writedowns of $15 billion this quarter, according to New York-based Merrill Lynch & Co. That would add to the $22 billion that Citigroup already lost because of the housing slump.

Citigroup played a major part in the repeal. Then called Citicorp, the company merged with Travelers Insurance company the year before utilizing loopholes in Glass-Steagall the allowed for temporary exemptions. With lobbying led by Roger Levy, the "finance, insurance and real estate industries together are regularly the largest campaign contributors and biggest spenders on lobbying of all business sectors [in 1999]. They laid out more than $200 million for lobbying in 1998, according to the Center for Responsive Politics..." These industries succeeded in their two decades long effort to repeal the act. Also, "The newly formed Citigroup announced only days after the deal that it had hired recently departed Treasury Secretary Robert Rubin as a member of its three-person office of the chairman".[

[JasonC]

The commenters are mindless parrots acting as a press clippings service for bears. The article is spot on. A 16% interest rate covers a multitude of financial sins, and card companies aren't going to actually lose money doing so in the corporeal world. Might they occasionally make less lending at 16% with money borrowed at 3%, than they hoped initially? Sure. Call that a mark to market "loss" if you like. Who cares? So you make a 6% spread instead of a 10% spread. It is still positive and huge.

[Robert RUBIN]

Jason, the point is that Citigroup is a lousy run business. So what if one line of their business is profitable? The mindless parrot is looking at the big picture. This bank deserves what it gets in its TOTAL business. After all, GM & Ford are doing well in Europe. So what?

[Frank Rong]

You are no Robert Rubin