Accounting fraud allows Citigroup to post phantom profit for Q1 2011

After JPMorgan and Bank of America, yesterday was Citigroup's turn to use accounting fraud to post phantom profits.

Basically, the company is reporting a profit of $3 billion in profits when at the same time, reducing the loan loss reserves by $3.3 billion... Nothing new under the sun, that has been going on for all the banks for the past 3 years, and analysts cheer on the news, accounting firms approve the numbers, scandals are left for the next year or two.

April 18 (Bloomberg) -- Citigroup Inc. rose in New York trading, the only U.S. lender among the top 10 by assets to advance, after reporting profit that beat analysts’ estimates and cutting provisions for future loan losses by $3.3 billion.

[...] First-quarter net income fell 32 percent to $3 billion, or 10 cents a share, exceeding by a penny the average per-share estimate of 21 analysts surveyed by Bloomberg.

Chief Executive Officer Vikram Pandit, 54, relied on the reduction in reserves to report the New York-based bank’s fifth profitable quarter in a row. Losses on troubled loans declined 25 percent as fewer customers missed payments compared with the same period last year. Profit at Citigroup’s trading and investment-banking businesses fell by almost half. Revenue declined in five of the six business units.

“The company is showing just an incredible turn in the quality of its loan portfolio, which I don’t think was expected,” said Lutz, Florida-based Richard Bove, an analyst with Rochdale Securities LLC. “I don’t see any bank having that type of rapid improvement.”

[...] Citigroup’s revenue declined 22 percent to $19.7 billion. Revenue for the Citicorp division, which contains the bank’s trading, consumer and investment-banking units, fell to $16.5 billion from $18.5 billion in last year’s first quarter. The Citi Holdings division, which contains unwanted businesses and assets, had revenue of $3.28 billion, down from $6.55 billion.

Losses from bad loans declined to $6.27 billion from $8.38 billion. The $3.3 billion reduction in the provision for losses on future soured loans amounted to about 80 percent of the bank’s pretax profit.

“These guys have put up a fairly respectable record of turning this institution around,” said David Knutson, a credit analyst with Legal & General Investment Management, which manages Citigroup bonds worth about $85 million. “It’s another question whether they should be releasing reserves as aggressively as they are.”

Total trading revenue declined to $4.87 billion from $6.59 billion in the same period last year, a period that Oppenheimer & Co. analyst Chris Kotowski called “the best quarter in history” in a note last month. New York-based Kotowski had predicted a drop to $5.01 billion.

Trading and investment banking are run from Citigroup’s institutional-clients group, which Pandit overhauled in January when he appointed ICG head John Havens to chief operating officer. James Forese now runs securities and banking, reporting to Havens.

Stock-trading revenue fell to $1.07 billion from $1.21 billion a year earlier, and compared with $596 million in the fourth quarter. Fixed-income trading revenue declined to $3.8 billion from $5.38 billion in the same period last year.

“This was a very solid quarter outside of trading and a strong quarter inside trading,” said Moshe Orenbuch, an analyst with Credit Suisse Group AG who had predicted that fixed-income trading revenue would fall to $2.73 billion.

The earthquake in Japan forced the bank to set aside about $100 million for possible losses on mortgages and private-equity investments, Chief Financial Officer John Gerspach told analysts on a conference call. The bank recovered initial trading losses “within a week or so” after the quake, Gerspach said.

Citigroup’s regional consumer-banking business reported earnings rose 58 percent to $1.55 billion. Profit at the U.S. bank increased to $551 million from $15 million. Latin American earnings rose to $486 million from $372 million last year. In Asia, the consumer bank’s profit fell to $461 million from $567 million.

Citigroup may invest as much as $4 billion in consumer banking in the next three years, mainly in emerging markets, Manuel Medina-Mora, head of consumer banking for the Americas, told reporters in Santiago in March.

Citigroup’s investment-banking business, which includes advising on mergers and acquisitions as well as managing sales of equities and bonds, reported revenue slid to $851 million from $1.06 billion in the same quarter last year. The bank dropped to seventh from third among advisers on completed global mergers and acquisitions during the quarter.

Transaction Services

Profit at the transaction-services business fell to $841 million from $930 million last year in the first quarter. The unit, which made about one-third of Citigroup’s $10.6 billion profit in 2010, lost top executive Paul Simpson to Bank of America during the quarter. Pandit has yet to appoint a permanent replacement.

In Citi Holdings, the local consumer-lending division reported a $599 million loss, compared with $1.83 billion in the first quarter of last year. This unit, which contains the CitiFinancial business, also reduced its provision for future loan losses by $1.11 billion.

“Citi Holdings losses continued to decrease,” Pandit said in the statement. “We are investing in our core businesses in Citicorp, our capital strength improved and the mix of revenues reflects the diversity of our businesses and our depth in both the emerging and developed markets.”

Citigroup reclassified $12.7 billion of assets in its “special asset pool” business to trading from held-to- maturity, a move that paves the way for the sale of those assets, the bank said. The move reduced revenue by $709 million.

“Securities-related revenue was a positive surprise and the reserve release was better than expected,” David Trone, an analyst with JMP Securities LLC, said in a note. “On the negative side, like peers, there is no material momentum on the traditional banking side, which we view as key to getting the stock out of its range.”

Where does CitiGroup profit come from?

While all the bank are now marking their books to their fantasies and most of the announced profits are just going to vanish in the coming months/years (Zombie banks...), CitiGroup is taking it a step further as points out this post on ZeroHedge:

Yet what caught our attention is the FV action at the big 4 banks: Citi, BofA, Wells and JPM. What is most notable is that while the three firms ex Citi have taken a decent haircut to their Book-to-FV margin, Citi is now down to a mere 0.2% difference between loan Carrying Value at Q2 ($602.6 billion) and loan Fair Value ($601.3 billion). What is more notable is that on average the margin has increased over the past 2 quarters: while the average FV-to-Book spread was 3.2% at year end 2008 for the non-Citi banks, it grew by 1.5% to 4.7% at Q2 (non weighted). And in this environment where banks have been getting more cautious and applying an increasing discount to their loan book values, Citi has collapsed the differential from 2.8% to 0.2%!

Just what about the economic environment has given Citi auditors KPMG the flawed idea that the bank's loan can be easily offloaded with virtually no discount? And just how much managerial whispering has gone into this particular decision.

If one assumes a comparable deterioration for the Citi loan book as for the other big 4 firms, and extrapolates the 2.8% getting worse by the average 1.5% decline, one would end up with a 4.2% Book-to-FV deterioration. On $602 billion of loan at Q2, this implies a major $25 billion haircut. Yet this much more realistic number is completely ignored courtesy of some very flexible interpretation of fair value accounting rules at KPMG. Maybe Citi and its accountants should take a hint from Regions Financial CEO Dowd Ritter who carries the FV of his $90.9 billion loan book value at a 25% discount. [...]

And as usual the SEC is completely out of yet another regulatory picture. What is very frightening if Ritter is the correct one of all bank execs: if a 25% discount to the combined carrying loan value at just the Big 4 banks is truly appropriate, it would mean that the nearly $3 trillion in loans on the "asset" side of the big banks deserves a whopping $734 billion haircut!

Citi Pandit told Congress compensation was $1 Million but bank filing shows $10.8 Million

Mish, via Huffington Post, via Reuters shows:

Citigroup Chief Executive Vikram Pandit received nearly $11 million of compensation in 2008.

A month earlier, he testified to Congress that his compensation for 2008 was just $1 million.

"My compensation for the year 2008 was my salary, which was $1 million," he told the House Committee on Financial Services on February 11, failing to mention his sign-on and retention awards, as well as stock and option awards.

At the same hearing, Pandit pledged to accept a salary of just $1 a year and no bonus until Citibank once again posted a profit.

The $10.82 million in total compensation for 2008 consisted of $7.73 million in sign-on and retention awards, a $958,333 salary, $9.84 million of stock and option awards and $16,193 of other compensation.

According to Crain's New York Business, Pandit originally was paid $40 million, not $11 million, but lost a significant bulk of the money when the stock tumbled, recently dipping to below $1 a share.

Please also have a read at this previous post: Citi CEO Vikram Pandit Says "Pigs Can Fly"

Citi CEO Vikram Pandit says "Pigs can fly"

So, Vikram Pandit said today that his bank is having the best quarter since 2007, when it last posted a profit.

“I am most encouraged with the strength of our business so far in 2009,” Pandit wrote in an internal memorandum obtained today by Bloomberg. “We are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007.”

Unfortunately, Bloomberg — which I usually recommend and is usually very precise on their reports — didn't finish their sentence. Mish points to this article which complements Bloomberg's:

Based on historical revenue and expense rates, Citi's projected earnings before taxes and one-time charges would be about $8.3 billion for the full quarter.

Pandit declined to say how large credit losses and other one-time items have been that would at least partially offset profit.

Right, so the company is making profits if you exclude the losses! That's quite convenient. So, is Vikram Pandit a big fat liar? Should the SEC do something? Is there a pilot in the plane?

Now, having a look at this report (cheers M. Denninger!), I think it's easy to guess that the Vikram is indeed — for the least we can say — trying to motivate his people...

Citibank, Bank of America , HSBC Bank USA , Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives surged to $587 billion as of Dec. 31. Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.
[...]
Four of the banks' reserves already have been augmented by taxpayer bailout money, topped by Citibank — $50 billion — and Bank of America — $45 billion , plus a $100 billion loan guarantee.
The banks' quarterly financial reports show that as of Dec. 31 :
— J.P. Morgan had potential current derivatives losses of $241.2 billion , outstripping its $144 billion in reserves, and future exposure of $299 billion .
— Citibank had potential current losses of $140.3 billion , exceeding its $108 billion in reserves, and future losses of $161.2 billion .
— Bank of America reported $80.4 billion in current exposure, below its $122.4 billion reserve, but $218 billion in total exposure.
— HSBC Bank USA had current potential losses of $62 billion , more than triple its reserves, and potential total exposure of $95 billion .
— San Francisco -based Wells Fargo , which agreed to take over Charlotte-based Wachovia in October, reported current potential losses totaling nearly $64 billion , below the banks' combined reserves of $104 billion , but total future risks of about $109 billion.

So where does the truth lies? No one knows. Why? Because nobody is willing to force the banks to open their books and show what they are hiding. Why? Probably because the losses far exceed their capital and that would cause a complete meltdown. But the meltdown cannot be avoided, it can only be postponed and that's what Henry Paulson, Bernanke, Geithner, Bush, and Obama are doing: buying time.

Anyway, the one sure thing is that every market bounce led by the financial is yet another bear market rally for the foreseeable future. So when you see shares of Citi, BofA and other bounce as much as 36% in one session, you know: it's not over yet. The market being currently quite oversold after a brutal drop, not so many people are willing to sell their long or short the market at all. So the bounce could last for some time. If the markets bounce enough, it could be the opportunity many are waiting for closing their positions, and the opportunity I am looking for to short it.

Citigroup dismantled

The news is now official, Citigroup in its configuration is going to disappear. Next step is complete dismantlement and selling itself in pieces?

Jan. 16 (Bloomberg) -- Citigroup Inc. posted an $8.29 billion loss, twice as much as analysts estimated, and said it will split in two under Chief Executive Officer Vikram Pandit’s plan to rebuild a capital base decimated by the credit crisis.
[...]
A dwindling capital cushion and sinking stock price forced the 52-year-old Pandit to abandon Citigroup’s decade-old strategy of providing investment advice and insurance alongside branch banking, stock underwriting and corporate lending. He’s shedding units to free up capital and save the bank from insolvency.

“They are going to try to home in on what’s worth something, and try and sell the pieces that they really can’t value,” Todd Colvin, vice president of MF Global Inc., said in a Bloomberg TV interview.
[...]
The plan to cut off “non-core” businesses in a deteriorating economy may put the bank into a deeper hole, Sanford C. Bernstein & Co. analyst John McDonald wrote in a Jan. 14 report.

“It will likely be difficult for Citi to effectively dispose of assets and businesses in the current environment,” McDonald wrote. “Any new solution is likely to need an incremental infusion of common equity, either from the government, private investors or the public markets, any of which is likely to be dilutive to existing Citi shareholders.”