Breakingviews
Citi’s hocus-pocus
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Wall Street pay czar Ken Feinberg should give Vikram Pandit a pay raise. The Citigroup 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 billion 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.
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Well as a stock holder of this company all I can say is OUCH.
You are unnecessarily too severe and appear to be reluctant to accept that he is doing a better job than his detractors would like us to believe.
Pull this dead beast apart.
I read Matthew’s articles but this is hardly one…maybe he wants to get the attention of the unsophisticated investor as what he indicated above is not something unexpected or “black magic”, just another fundamental analysis one would look into while valuing a bank.
As CEO, what would have liked him to say? The bank is still losing money? We’re still knee-high into the crap, down from neck high? He’s fixing what Weil and Prince broke – and that is Citi.
The entire banking industry is a ponzi scheme. Sub Prime loans are still being written. Nothing has changed. No one has gone to jail. Citi, if it was in any other industry would have been out of business 2 years ago. Since we have our banking overlords Obamma, Geitner, Paulson, Bernanke Government Sachs we are perpetually bailing out an idustry ripe with turds in a giant cesspool we call Wall Street. Wake up people the game is rigged from the top. Dont look behind the curtain you will see the wizard of Oz.
Citi, ING and other big banks are just too big to be efficient and manageable.
what should I do with all the derivatives Citi just sold me?? hehe
Can anyone tell me why Robert Ruebin’s name never comes up in this whole Citibank scam?
Excuse me, that’s Treasury Secertary Robert Rubin.
Next time that they ask for a bailout…think twice !!! How to spend taxholders money !!!
during TARP era – March, 2008 and August 2008 through January 2009 – Paulson called Citigroup’s senior counselor, Robert Rubin 28 times, compared to its CEO, Vikram Pandit 8 times. You judge who makes the decision who is the real guy !!!
“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”
You mean $200 billion?
Just so everyone is aware, Citi gave officer in its investment bank a significant raise during mid year, that was applied retroactively as of 1/1/09. A managing director that had a base salary of $175-200k was given a raise to $450k per year. They received a check in October to make them whole for the first part of the year that they were on a lower salary. Why has this taken place and why are these Citi managers not being fired for taking our dollars and stuffing their pockets. Where is Feinberg and where is Congress? Why did I have to learn this from a recipient of this great benefit and why did our government allow this crap to happen?
pwim, thanks for catching that.my bad
What more could you want from a bank that enables a multi-level marketing business to quietly operate as its subsidiary. Selling wishful thinking at all levels.
It is obvious that the bank want more bailout. Before this happen they already issue billions of dollar in note provided to other corporate and manage fund. The market has returned over 55% would that be enough to repay its debt. I guess time to buy CITY stock.
I can’t wait to see Citi submit to JPMorgan Chase and do all fellow banks, the US government, US citizens, and the world a big favor by getting out of the banking business. They deserve everything they have coming to them. If they would have followed JPMorgan’s business model (as seen by JPMorgan’s latest 3rd quarter earnings) they would not be in this mess. Pandit should quit while he’s ahead (if you want to call it that). What’s worse is that if Citi ever goes down, we are in a world of trouble. And lastly, the “trash heap” that Citi is trying to dump, is the most profitable part of their business for the 3rd quarter!!! I think anyone can do a better job than Pandit…
Hey, this was a patient who got really-really sick. It seems to be getting better but shouldn’t expect it to run a marathon at this stage.
Another couple of quarters and then Citi should be profitable in every sense..
When Vikram took over, there were mixed reactions. When the wind carried news about the pay raises of those high up, a lot of eyebrows were raised, particularly those who had been actually soldiering on to keep the company afloat (globally speaking). and it’s real amazing how one can report both gain & loss. even a newbie would tell you that eventually only the net matters.
there are tons of semi-literate hacks who want to scream “black magic” at every corporate action. Goldstein is just one of them.
JpMorgan business plan has been to continue the rape and pillage of its unfortunate customers, to the tune of tripling credit card rates on top of the tarp money from the taxpayers. Citi has not been quite that outrageous hence they have not seen the same third quarter success. Now that I am learning to do without them, I look forward to their demise, all of them. There’s not enough money in the universe for them to be able to weather the hurricane they’ve created, black magic or no. Wasn’t it Chase/Morgan that initiated the derivative market? Or was that the credit default swap? I can’t keep the voodoo straight.
This is so true. I used to work for Citi. The internal control is non existant. We were dumping our business expenses into accounts that doesn’t seem to belong to any business unit. When I asked my superior, he said he doesn’t know where it goes but do it anyways because it’ll help his numbers. That’s just in a unit of 10. Take that times many times over. Investors be wary, what you’re seeing is the dinning room (you haven’t seen the kitchen)!!!!
Can anyone explain about the percentage of business these bailed out banks did that related to real banking.If investors and depositors understood about the precipitous risks the Pandit likes took in exposures that were garbed as banking related their cover would have been blown to blithering. Even now there are false stories about recovery and abating of recession. These again emerge from the Street and thanks to financial ethics dumped and laid to rest.
The main problem is that:
1. In the aftermath of WW2 a new breed of bohemians arrived in USA with tricks they tried and failed in Europe especially Germany. 2. Unfortunately for USA, its magnanimity in believing everybody in the first instance and giving immigrant a chance proved its undoing.3. Soon they found themselves entrenched in a cultural voodoo patronizingly called “babyboomerism”. 4. As the natives broke up their families in a misplaced definition of freedom, those who came as refugees as masters. 5. After half a century that treachery stands exposed.Hence this gimmicky article. After all Americans have discovered that those claimed superhuman IQs are no longer so.