The hits just keep on coming: Citigroup earnings

April 17, 2009 in Finance,News

The accounting alchemy Citi used this morning to report a "profit" is being much more widely reported than Goldman's Decembrist revolt, but I want to address it nonetheless.

On the surface, Citi reported a profit of $1.6B.  Unfortunately, by the time that trickled down to common shareholders there was only -$966M left, a loss of -$0.18/share.  The balance went to dividends and expenses associated with Citi's various preferred shareholders.

But the headline is that Citi had a $2.5B gain (or 156% of their net income) because of a relatively new accounting rule that allows firms to have unrealized gains as their credit spreads widen.  The higher spread reduces the value of the firm's debt, and that reduction of liability is a gain.  In theory, Citi could go repurchase their debt below cost and monetize the difference.  Obviously, however, Citi can't do that, and in all likelihood that 2.5B will be reversed over time as Citi recovers, or even entirely lost if Citi defaults.  So I'm going to disregard this rule that allows company to profit from what essentially amounts to themselves doing worse.

The most interesting facet of all, though, is that if (big, sarcastic if) the talking heads are right and short selling/CDS speculators are to blame for spreads widening out of control, then I think Citi really owes those "market manipulators" a thank you and a heartfelt apology, since it is only because of their shenanegans that Citi posted a profit.  End of sarcasm.

Citi reported profit: 1.6B or almost $0.29/share

Unrealized gain on liability reduction: 2.5B or $0.47/share

Preferred expenses: 2.5B or $0.47/share

Back it all out and what's left for common shareholders? -3.4B or -$0.65/share.

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