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.

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