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Dave Kranzler
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I spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, I traded junk bonds for a large bank. I have an MBA from the University of Chicago, with a concentration in accounting and finance. Currently I co-manage a precious metals and mining stock... More
My company:
Golden Returns Capital
My blog:
Investment Research Dynamics
  • Citibank's Mark-to-Fantasy Quarter: Is Pandit Selling Medical Marijuana? 0 comments
    Apr 19, 2010 6:15 PM | about stocks: C
    Because that's what you would have to be smoking in order to believe the garbage coming from Citigroup today with regard to its earnings report. Citi reported $4.4 billion in net income today, handily topping Wall Street's estimates. But let's just say that if you pick through Citi's 8-k filing today and combine it with some information not filed but available from its 10-k, then you would understand that to believe Vik Pandit with regard to his earnings report, you would also be vulnerable to believing that he could fly you on a magic carpet over to visit the Taj Mahal.

    For the sake of brevity, and the understanding that really picking thru the 8-k and 10-k with a microscope would yield much more precise results, but not add to the analysis, I have isolated the critical page from the 8-k in order to show that Citi's results were largely the result of marking up the toxic assets held on the Citi balance sheet because there is no real bid for them. (To be sure, this is the same accounting scam utilized by all the banks, but the Taxpayers own Citigroup and should see the truth). Here's a link to the Citi 8-k:  Vik's Magic Carpet

    Here's is how Citi explains its results: "The sequential improvement reflected strong results in Securities and Banking (“S&B”), a positive CVA in the quarter ($289 million in the quarter compared to negative $1.9 billion in the fourth quarter of 2009) and higher positive net revenue marks in the Special Asset Pool (“SAP”)."  "CVA" is what they call "Credit Value Adjustments."  This is a fancy term for "mark up an asset that is so toxic we can't sell it and accrete the mark-up to net income."

    I had to go to the 10-k in order to understand what the Special Asset Pool is.  This should really be labelled, "Citi's Cesspool of Garbage That We Marked Down Enormously and Now We Mark It Back Up Pool." The SAP contributed $1.25 billion in revenues with very little expense attribution, which means that most of that $1.25 fell to the bottom line. If there were no mark-ups in SAP, Citi's net income would have been lower by $1.25 billion, or would have been $3.2 billion instead of $4.4 billion.  Here's a link to the 2009 10-k if anyone wants it:  Citi 10-k

    Now, if you click on the Magic Carpet link above and scroll down to page 18, you'll find the numbers for Citi's "Institutional Clients Group" (NYSE:ICG), which houses Citi's Investment Banking and Principal Transactions business segments. If you compare 4Q '09 with 1Q '10, you'll see that ALMOST the entire revenue differential between '09 and '10 is attributable to "Principal Transactions." That segment had a $5.1 billion swing in revenues.

    For those who do not know, principal transaction business is trading business that is generated by using a firm's capital to try and generate revenues by buying low and selling high. When the trade doesn't work out like that, it becomes either "securities available for sale" or "securities held to maturity." The crap assets not stuffed into the SAP are housed in the Principal Transactions segment. Granted, we would need much further detail to know for sure, but it is highly likely that a large portion of the revenues attributed to the PT segment were generated by mark to fantasy asset mark-ups.

    The Fixed Income segment contributed the bulk of the revenues to the ICG business. This is the business in which we would expect to see the mark to fantasy asset write-ups, When you strip out every other business segment under ICG, risk-based trading/positions contributed almost the entire profit difference between 4Q '09 and 1Q '10. Investment banking was down 28%, Private Banking was down 12% and Transaction Services were down 2%.

    Let's look at the Citi pie another way. Here is the definition of SAP from the annual report: "Special Asset Pool (NYSE:SAP), which constituted approximately 28% of Citi Holdings by assets as of December 31, 2009, is a portfolio of securities, loans and other assets that Citigroup intends to actively reduce over time through asset sales and portfolio run-off. At December 31, 2009, SAP had $154 billion of assets. SAP assets have declined by $197 billion or 56% from peak levels in 2007 reflecting cumulative write-downs, asset sales and portfolio run-off. Assets have been reduced by $87 billion from year-ago levels. Approximately 60% of SAP assets are now accounted for on an accrual basis."  That last sentence is the GAAP terminology for "mark to fantasy."

    The SAP has $154 billion in assets. To generate $4.4 billion in asset mark-ups that would "create" net income would only require marking the whole portfolio up 2.8%. That's a such a small amount among friends (i.e. between Vik, his board of directors and the SEC) that it would be easy to make the adjustment in asset valuations and no one would notice or question it.  Remember that Citi specifically attributed its net income results to better results in it SAP segment.  This can only mean "asset mark-ups."

    At the end of 2009, Citi's "Trading Account Assets" were $342 billion. If you wanted to create $4.4 billion of fantasy mark-ups, all you would have to do is mark up that portfolio a mere 1.3%. Of this $342 billion, $38 billion were mortgage-back securities - $10 billion of that were subprime - and $58 billion were derivatives. There's A LOT of leeway according the loose accounting standards now enforced for marking up those asset classes.

    If you strip out the SAP mark-ups AND the ICG mark-ups, Citi would have LOST money this quarter.

    Here's one of the considerations the Company uses to determine where to mark a security being held: "the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery." That's from the 10-k and it clearly leaves a lot of "wiggle room" for discretion. Of course, we know that Wall Street is not known for discretion when it comes to being honest.

    The bottom line is that, in the context of the $4.4 billion of net income Citi reported today, it is very hard for someone to look at where that number was likely derived and believe anything other than that it was based on mark-to-fantasy accounting indiscretions (re: fraud), and that to believe any differently is severe denial or a refusal to look that facts as presented above.

    And I just wanted to remind people, regarding the character credibilty of Vik Pandit, when he became CEO of Citigroup, the bank paid him $800 million for his hedge fund firm. THAT hedge fund business was shut down - worthless - about a year later. Since we're all shareholders of Citi, this a fact that should be considered when deciding if my analysis is accurate, or if Pandit's "word" is accurate.

    Disclosure: none
    Themes: BKX, banks, SEC, GAAP, fraud Stocks: C
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