Citi: Yes, It Got Worse

Curiouser and curiouser, as Alice might say. As we plunge further into the subprime rabbit hole, Citigroup (NYSE: C  ) provided some fireworks today with its fourth-quarter earnings report. On a high level, Citi announced lower writedowns than expected, and it didn't announce the widespread layoffs that many were also expecting. The stock is down more than 7% as a result. Feel like you've been drugged? Join the club.

As I wrote yesterday, investors were actually bullish about the idea that Citi would be writing down a much higher amount than previously expected. The idea was that Citi would be putting together a "kitchen sink" quarter, throwing in all the possible losses that it could reasonably take. This would produce a big red inkblot in the short term, but would theoretically save the company from having to make additional write-offs in future quarters -- and it would potentially even allow for reversals of some of the amount previously written off.

Where's the sink?
But it appears that the kitchen sink wasn't in the playbook for Vik Pandit, Citi's new CEO. Write-offs clocked in at $18.1 billion, right around what was previously expected, but well under the $24 billion that was being bandied about yesterday. In this bizarro world where taking more losses makes investors happier, $18 billion just wasn't what the market wanted to hear.

So what's Pandit thinking? One scenario is that he was steamrolled by Citi's board. I've heard this mentioned in a few places, and there could be some merit to it. Writing down anything that he can get his hands on and conducting a major streamlining of the workforce (read: making massive layoffs) is good for Pandit going forward, but still doesn't reflect well on the company or the board. And Citi's board is no group of lightweights by any stretch, so it's not hard to imagine how this would happen.

A more optimistic view is that Pandit actually believes that these were the right numbers to report. As things continue to get worse, it seems nobody is willing to believe this, but I wouldn't put it out of consideration. Regardless, I still wouldn't call it the most prudent move he could have made.

Subprime wasn't all that was on the menu for Citi, though. It also revealed that credit costs have notably deteriorated. Total credit costs increased $5.4 billion, owing to credit losses of $1.6 billion and a $3.9 billion increase in loan loss reserves. A worrisome $4.1 billion of that increase in credit costs came from U.S. consumers, yet another sign of the stresses the U.S. consumer is facing.

Changes
In canned comments with the earnings release, Pandit said, "We have begun to take actions to ensure that Citi is well positioned to compete and win across our franchises while effectively keeping a tight control over our business risks." While it's true that Citi has been taking some major steps to make sure it has adequate liquidity -- including today's announcement of a $14.5 billion infusion and a hefty dividend cut -- much more is likely needed to convince investors that Citi is on the path to change. After suffering through years of mediocre performance with Chuck Prince, the onus is on Pandit to make some decisive and marked changes.

Meanwhile, we've got plenty more to come from financials this week. Merrill Lynch (NYSE: MER  ) joined Citi in announcing a capital infusion today, and it is revealing fourth-quarter numbers on Thursday. Merrill's new CEO, John Thain, is probably in a better place than Pandit to make whatever moves are needed at Merrill, so it's hoped that Merrill's announcement will have a different flavor than Citi's. Tomorrow we'll hear from both JPMorgan (NYSE: JPM  ) and Wells Fargo (NYSE: WFC  ) , while Washington Mutual (NYSE: WM  ) joins Merrill in reporting on Thursday.

In crazy times like these, it's hard to guess what these companies are going to say, let alone how investors are going to react. But by the end of the week, we will at least have a few more pieces in the financial puzzle.

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