Comments on: Citigroup Posts Potemkin Profits

By: nancefinance

nancefinance — Sun, 19 Apr 2009 03:48:00 +0000

Every business unit at Citi was down in the first quarter. The only area that made money was in trading, which led me to wonder: How’s the risk profile? A spokesman assured me that Value at Risk remained unchanged. Reliance on VaR seems to have helped get the big banks into trouble in the first place. All in all, the first quarter report was less than heartwarming.

By: Baby Mangino

Baby Mangino — Sat, 18 Apr 2009 18:26:00 +0000

Zero Hedge has a quote from Egan Jones describing just how this stuff is manipulated:

Accounting and government magic - the recasting of FASB157 enables financial institutions to defer the recognition of losses with the result that C's March trading profits swung from a $6.8B loss to a $3.8B gain. Another item worth reviewing is the decline in interest expense from $16.5B last year to $7.7B this year. Nonetheless, much more equity capital is needed. Beyond the conversion of preferred to common, watch the form of any additional capital. The Fed and Treas. have guaranteed $306B of C's assets, have injected $45B in preferred and converted to common leaving few additional options. The problem is that C has $2T of assets ($3+T including off balance sheet assets) whose values are depressed by 10% to 20%. C needs to be watched.

By: LeeAnne

LeeAnne — Sat, 18 Apr 2009 18:01:00 +0000

that joke -'any number you want it to be' made the rounds in the 1950s. It referred to the mafia.

Guy comes into the brokers office and says pull down the shades I have a deal for ya or words to that effect ...

It got a big laugh; it was such shocking idea.

Now? -not so much.

By: dk

dk — Sat, 18 Apr 2009 15:58:00 +0000

Generally I find using a decline in the value of debt as a reason to claim an increase in earnings is completely offensive: unless you buy back the debt you still have to pay the interest.

In this case it doesn't bother me so much because there is a high probability that debt holders will be forced to exchange their debt for equity and so Citi will not have to pay all the interest.

You can claim the drop in the value of the debt is a reflection of this and so including it is perfectly valid.

I do think Citi and its auditors should publicly state this.

By: jjl

jjl — Sat, 18 Apr 2009 13:57:00 +0000

On bank earnings I’ve found it curious that there has been no guidance (of which I am aware) from banks on earnings going forward and no media comment. If I missed it please point me to it, otherwise any insight would be appreciated.

By: Independent Accountant

Independent Accountant — Sat, 18 Apr 2009 12:51:00 +0000

YS:
Old CPA story. A Fortune 500 CFO wants to hire a new CPA firm. He asks the partner at firm 1, “How much is 2 + 2″? The partner responds, “Four”. He asks a partner at firm 2, who also responds “Four”. The partner at firm 3 responds, “Any number you want it to be”. Obviously KPMG, which audits Citigroup is firm 3. Laugh. It’s that bad out there.

By: Thomas

Thomas — Sat, 18 Apr 2009 12:44:00 +0000

OK, to answer my own question:

Read up on it, and apparently, it's entirely legal to mark down your debt to market value, because you can theoretically buy it back on the market.

(Not sure why the other source I found talked about derivatives. Maybe it's both about debt and about derivatives.)

Considering that you have a legal obligation to pay back your debt at par on maturity (unless you go bankrupt or agree on a restructuring), that's a rather bizarre accounting rule, in my very humble opinion.

By: Thomas

Thomas — Sat, 18 Apr 2009 12:17:00 +0000

The bit about “2.5 bn $ of revenues from lower market value of own debt” was new to me (though the quote says this sort of effect was already common for many investment banks last year).

So if I understand correctly, the way it works is that Citi has liabilities from derivatives which are somehow linked to the market’s assessment of its creditworthiness, and if the market becomes more skeptical about Citi, the market value of those liabilities goes down, therefore leading to a profit?

By: Richard Kline

Richard Kline — Sat, 18 Apr 2009 10:13:00 +0000

It doesn’t surprise me in the least that the CEO of this outsize mortuary would obfuscate and his CFO would prestidigitate. I mean, if they put a real number under their masthead, they’d be out of work, right? What _really_ riles me about numbers like this is that our Federal Government is openly conspiring with private management to lie to potential investors and the public about the state of this firm (and others). That would be criminal if you or I did it, right? Raison d’etat, may be the thinking, but as far as I’m concerned they’re all co-conspirators in an epic crime, which only continues as we watch.

By: mmckinl

mmckinl — Sat, 18 Apr 2009 06:17:00 +0000

“Potemkin Profits”

A brilliant turn of phrase … soon to be a classic …

Thanks Yves …