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Not So Fast, Citigroup

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Last month, Citigroup (NYSE: C  ) wanted everyone to think banking was rainbows and butterflies again, touting a metric that essentially equaled earnings before writedowns. Bank of America (NYSE: BAC  ) did the same, although didn't peddle it as much. Amazingly, investors seemed to fall for it, sending both stocks into four-bagger territory.

Today, Citigroup is hyping those earnings again for an entirely different reason. Net income for the first quarter theoretically came in at $1.6 billion -- Citigroup's first profit in more than a year -- but that doesn't incorporate a handful of charges reflecting that the government owns a huge slug of this company's capital. Accounting for preferred stock dividends and resets on preferred stock conversion prices, Citigroup common shareholders actually lost $0.18 per share.

Which, to be fair, isn't that bad. After all, analysts had expected a loss of $0.34 per share. Just like Goldman Sachs (NYSE: GS  ) and JPMorgan Chase (NYSE: JPM  ) , Citigroup had a huge quarter in fixed-income trading, which is blowing up right now because of fat spreads on debt products.

Yet even taking that at face value doesn't accurately reflect anything a sober investor would consider reality. More than half of fixed-income revenue came from a $2.5 billion write-up, thanks to an accounting rule tied to credit default swap positions on Citigroup's own debt. The rule exploits the notion that a company could buy back its own besieged bonds on the cheap, leading -- however bewilderingly -- to profit.

In other words, Citigroup was able to book a massive profit because investors are betting that's it's still on a road to bankruptcy. There are only two probable outcomes from this paradoxical situation: Investors are right, and Citi is heading for failure, or investors are wrong, and Citi's $2.5 billion illusory profit will disappear. Either way, it's absurd to call this "earnings" in any way, shape, or form. But hey, profit is profit, especially in the eyes of gullible investors willing to bid your stock up a few hundred percent.

Last fall, fellow Fool Anand Chokkavelu and I joked that if Goldman Sachs were to collapse, its own ingenious traders would find a way to bet against themselves and make out like bandits. Amazingly, we may have been on to something.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.

Read/Post Comments (16) | Recommend This Article (75)

Comments from our Foolish Readers

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  • Report this Comment On April 17, 2009, at 2:48 PM, MADACASTO wrote:

    Ok, that's your spin on the same story I've read all day. Show me your expertise and illustrate where Citigroup is without the manipulations and whether or not they are tapering their losses (essentially a gain in this market) or whether they are truly slipping into the abyss? Without this kind of analysis, all of these articles can be lumped together and the net commentary is very vanilla, at best. Tell me what you are saying with numbers and you might have something. Otherwise, this is the same story I can hear at any street corner, news brief or internet blog and it's a complete waste of words.

    Yes, Citigroup received government assistance. Mark to Market rulings are affecting reporting. These are not secrets and nobody is trying to hide this. So why do I need you so called experts continually repeating this?????

  • Report this Comment On April 17, 2009, at 3:10 PM, Bernanke2009 wrote:

    I agree with madacasto, everyone seems to be an expert but no one is an expert since this is a market full of illusions and hope.If your illusions turns out true then you are an expert if not blame it on others.

  • Report this Comment On April 17, 2009, at 3:31 PM, phishgoldy wrote:

    I don't think it's fair to use mark-ups as an argument against a firm which was dessimated by mark-downs related to securities which, while certainly complex and difficult to value, were in reality anything BUT worthless. Sure they were worth LESS than stated originally, but not WORTHLESS. Finally, to imply that Citi or any other large firm thinks they're fooling anyone is totally preposterous. Analsyts see through their math. Just don't forget - the sector was down EIGHTY PERCENT!! Who is to say that was justified in the first place...

  • Report this Comment On April 17, 2009, at 5:32 PM, VaneP wrote:

    I agree with the last three comments and think the original article was a waste of time. It's getting really crowded under the bus.

  • Report this Comment On April 17, 2009, at 6:52 PM, MORNINGSTARSCHOO wrote:






  • Report this Comment On April 17, 2009, at 6:55 PM, MORNINGSTARSCHOO wrote:







  • Report this Comment On April 17, 2009, at 8:33 PM, sailrmac wrote:

    <i>More than half of fixed-income revenue came from a $2.5 billion write-up, thanks to an accounting rule tied to credit default swap positions on Citigroup's own debt. The rule exploits the notion that a company could buy back its own besieged bonds on the cheap, leading -- however bewilderingly -- to profit.</i>

    Another way to read this is Citigroup debt might be a pretty darn good investment at today's rates. Maybe Citigroup should use it's mortgages as collateral to borrow more from the Fed and use the proceeds to buy it's own debt on the open market. It's smiliar to refinancing your house from a 14% mortgage rate to a 1% mortgage rate.

  • Report this Comment On April 17, 2009, at 9:13 PM, paultaut wrote:

    Own FAS. Let's associate the Stupidity that Is FASB 157 with Reality.

    I rent out my Condo, I receive rent monthly. I try to sell it on the open market but there are No buyers.

    Is my Condo worthless? I continue to receive rent. It is a performing asset. Should I carry it in my asset porfolio at Zero?

    Well, thats FASB 157 in a nutshell and that's where those that conceived it belong.

    If this concept had been in place during the 70s, 80s the deep recessions of 73-74 and 81-82 would have turned into mini-depressions as well. FASB 157 Did Not Exist prior to 2006. There is nothing in history to compare it to.

  • Report this Comment On April 17, 2009, at 10:08 PM, VaneP wrote:

    Great Paultaut. It is stupid. How can my property be my asset and the banks asset at the same time? The bank can't sell my property unless I default on the loan. The bank only owns the loan. The only rightdown the bank should have to make is for property it owns after foreclosure and only if the property is sold at a loss. You might blame a sizeable portion of the banking crisis on stupid accounting rules.

  • Report this Comment On April 17, 2009, at 11:34 PM, phubaiguy wrote:

    A bar of soap for the writers mouth! No more big bank fail! Is C a big bank? Best way to describe Citi's popularity with these guys is it's like a Dog breeder to PETA. Never mind other companies selling for many times more that very well could go under and where juggling the figures is not even an option tell us again about C. I don't know how many day traders exist but I do know where most of them are and it's a miracle when it can squeeze out a dime. I rode it down and noticed sometimes painfully how much money traders were making. At $16 the government threw out some $ and boom right up to $20..(let go my 100 shares at the time.) Now it's around $4 and if anything in much better shape. Logic doesn't come around to visit very often right now but still I can remember it. I'm sitting on a couple thousand shares of C now and you just watch and see, someday my son will be rich.

  • Report this Comment On April 18, 2009, at 8:56 AM, courtneTHEgreat wrote:

    Wait until SEPTEMBER/OCTOBER.... Can we spell Depression? What will the jobless/0-percent credit card offers do to the banks? I say the same as the fake housing prices. DOW to 5900 and lower in the 4th qtr.

  • Report this Comment On April 18, 2009, at 5:26 PM, CityWealth wrote:

    lol, this guy is just getting sour grapes because he missed the rally... after Citigroups CEO picked up his own dollar stock and made a couple million (see bloomberg), Citigroup rallied hard, anyone who bought a load of shares in the 1-2 dollar range, was seeing green this last week when city hit 4.

    These internet articles are sour grapes because people don't like it when a stock's value is based on investors and stock market players who KNOW right now that AIG and Citigroup are being speculated for fun and profit, as well as the huge short squeeze coming up for citigroup and anyone who bought the stock at less then 3 bucks and loaded up is going to be a millionaire, and the pansy that wrote this article was just afraid he missed all the excellent daytrading action the past week before earnings.

    You have to know when a stocks rally is based on people who are value investors and know how to root for the underdog.

    Anyone who bought 100 dollars of AIG's shares at a buck or less would now be up 50% in a sinlge week or so.

    The only fools here are people who can't take the big risks, anyone who went all in at city at any price below 3 made a killing this week... sorry you missed the day trading and the major pre-market rally on earnings day for citigroup... sour grapes eh morgan?

  • Report this Comment On April 18, 2009, at 7:38 PM, weider1717 wrote:

    I'm new to stock trading I just made a scottrade account and I put 5k into suntrust (sti) and I'm up about $1200 as of friday..should I sell or is it suspected to go up?

    anyway about citigroup I have been thinking about buying $25,000 worth of shares since it's at the 3.55ish range monday morning.

    would I be smart to do this or an idiot? I feel bullish with citi and feel it will soon see the teens maybe and I might walk out a good bit richer man for your normal joe.

    I have also thought about sirius (siri) and aig...

    I started to pour a good bit into siri when it was .12 now it's like .53! and I do mean put more than that 25k i mentioned..

    I just don't want to loose my next egg house money either i'm young and getting ready to build but am a dreamer...right now I'm putting in way too much time for my money I need a break.

    any advice?

  • Report this Comment On April 18, 2009, at 11:30 PM, CityWealth wrote:

    weider: Wait for Citigroup to simmer down, you missed the big rally, I was there day trading the range for the range past week and made a killing, as well as having bought a tonne of it for 2.50 a share... everyone who low-balled citigroup is just jealous of citi's 300% gain in stock price in the space of a week and wished the had put everything they had into it when it hit as high as 4.84 on the rally in pre-market when earnings came out.

    Putting 25K into citi is a good investment just be sure you put your order in pre-market, pre-market and after hours trading can present opportunities you would not otherwise get.

    Don't be worry if you don't invest in citi there are other stocks out there, just remember - the more money you put into a stock the less the price has to rise from that price in order to make a profit, don't go for big gains, go for consistent games (i.e. say you put 30-40K in, pull it out when the price moves up 0.40 cents and make some money, you can make %10 gains on your money if you put more money into it and you don't have to wait for the stock price to rise and have "record breaking earnings" earnings have a limit, learn to sell on the highs and buy back on the lows, and pick up "Market wizards" and read it front to back, theres more advice in there then you could ever find on these websites.

  • Report this Comment On April 18, 2009, at 11:36 PM, weider1717 wrote:

    thanks so much! good advice.

    what about investing that $25,000 in siri? which is sirus radio?

    I almost bought into that at .12 and now it's .53! yikes! that would have been a nice gain on $25,000 worth.

    what about aig too? been thinking about that one.

    but so far my first little experience in the market with suntrust has treated me great!

  • Report this Comment On April 19, 2009, at 2:20 PM, CityWealth wrote:

    weider1717 come to google finance, click on city (C) , in the search box type


    Check discussion group post there looking for advice and I'll find you, be sure to put "weider" in the message.

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