Readers may recall that during Lehman’s demise, a pitched battle was underway between some short sellers, epitomized by David Einhorn of Greenlight Capital. Einhorn raised questions about Lehman’s financial statements, specifically, inconsistencies and rosy looking valuations. The struggle became weirdly peronalized, as Lehman sought to burnish the image of charmismatic CFO Erin Callen, as contrasted with the presumed to be evil company wrecking Einhorn. Of course, if the real performance (as opposed to what the reports said) was as bad as Einhorn’s line of inquiry suggested, it was management that had done the company-wrecking, but that level of detail is often lost on CNBC.
And one of the regular features of the Lehman versus its detractors affair was leaks to the media, leaks of a sort that even if the firm had done it in a way that it had plausible deniability, were clearly intended to reach outside parties, particularly the media.
Now let us turn to Citi. Recall what transpired, per the Wall Street Journal:
Citigroup Inc. was profitable in the first two months of 2009 and is having its best quarter in a year and a half, Chief Executive Vikram Pandit said in an internal memo aimed at boosting employee and investor confidence in his struggling bank.
Yves here. This is simply stunning. The Journal says up front a supposed internal memo was in fact intended to reassure investors. In other words, Journal says the information was expected to be distributed broadly, as it was. And let’s go back to see the detail:
The bank posted revenues — excluding asset write-downs — of $19 billion in January and February, Mr. Pandit said in the memo. For the full quarter, earnings before taxes and set-asides for problem loans are $8.3 billion, assuming revenues fill in at last year’s rate and expenses are in line with the fourth quarter, the CEO said. Mr. Pandit warned, however, that market volatility in March could alter the results.
Let us further consider the context. The night before the Journal had a front page story which was none too favorable to the struggling bank:
Barely a week after the third rescue of Citigroup Inc., U.S. officials are examining what fresh steps they might need to take to stabilize the bank if its problems mount, according to people familiar with the matter.
Federal officials describe the discussions, which are wide-ranging and preliminary, as “contingency planning.” Regulators are trying to ensure that they are prepared if Citigroup takes a sudden turn for the worse, which they aren’t expecting, these people say.
So the very next day, Citi decides to tell the world they have it wrong, things are really on the mend.
Now consider: statements by public companies about their financial condition, operations, and results are not held to a mere standard of accuracy (as in narrowly true) but “not misleading”. The critical language is:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange….To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading
Now the beauty of this little leak is that it covered a two month period, which means it cannot be compared directly with the quarterly results. It does not include writedowns (which I would argue makes it misleading). As the Financial Times’ Lex noted:
But investors should not lose their heads. The headline-grabbing revenue number, of course, does not include costs or writedowns. Besides, Citi exceeded $20bn in adjusted revenues for eight quarters up until the end of September. Even in the nightmare final quarter of last year, revenues excluding writedowns were still a respectable $13.4bn. So Citi having a bumper top line is nothing to get excited about. That “profitable” remains unquantified gives no comfort as to what extent writedowns have eaten into that haul. That is the problem. In volatile markets, flow businesses such as foreign exchange or cash equities will always do well.
And Tyler Durden noted there could have been double counting in connection with the partial sale of Smith Barney.
Dunno about you, but this looks to me like a bald faced attempt to manipulate the stock price, and it certainly worked.
Now Citi has only resorted to Fuld-esque tactics this time, as far as we recall (we’ve seen a few stories that looked like PR plants, but those are a standard fixture in corporate America), but this is not a welcome development.
Even more puzzling is why the markets overall took such cheer, as opposed to just the now shrunken financials. Banks are enjoying fat spreads on any lending these days, thanks to super low borrowing rates and lending rates that have not fallen as much (indeed, pretty much anyone with a credit card has gotten notification of rate increases on balances). High real interest rates (and thus high bank spreads) are a typical feature of deflation (Japan was, until recently, something of an exception here. Companies were so loath to borrow that rates to borrowers have also plunged). What is good for the banks is not necessarily good for recovery.