Has Citibank turned the corner?
No sooner did I suggest, yet again, that it was time for the Feds to deal with Citibank (C:NYSE) did CEO Vikram Pandit come out with a letter “to employees” and declare that the bank was having a great January and February. Didn’t I look like an idiot (see prior post “Is it time to nationalize Citibank?” March 10-09). At least for now.
When you read his letter, you can see why the market got excited yesterday. Citi is having the best two months since 2007. M&A is hot, and US$19 billion in revenue has been amassed over the first two months. Compared to what I believe was US$16.3 billion of revenue in all of Q4 2008 (before deducting US$10.7B in revenue reversals associated with asset writedowns).
If Citibank keeps up that pace, Q1 2009 could break US$27 billion in revenues. If expenses remain in the US$15.5 billion range, that’s a tidy profit for sure. Particularly when Citi’s market cap is just US$8B today. That feat requires Citi to avoid any further asset writedowns. And that, of course, is what the last year was all about. Asset writedowns undermining an otherwise decent business. As TD Bank CEO Ed Clark has said himself, banking is the best business God ever created as long as you don’t screw it up.
From a staff and market management standpoint, I totally understand the driving force behind Mr. Pandit’s letter. He had to stop the rout. And it worked. Stock is up 50%.
But hasn’t he set himself up for some ‘splaining if they take material asset writedowns in March? Although the assets that have bedeviled so many financial institutions bounce around each day, the formal accounting valuation should only happen each quarter when the CFO sits down with the auditor and settles on the balance sheet to be released with the quarterly financial statements. Although Citibank might be able to take another US$10.7B in writedowns this quarter and still report a net profit, won’t that come as a shock to those who read the “rosiest times since 2007” letter?
The truth is, that none of this may matter. The SEC head advised Congress today that she is in favour of amending market-to-market rules so that “fire sale prices” are ignored. CNBC’s Larry Kudlow calls it “mark-to-market lite”. That mark-to-market accounting is a problem is not new information to our readers (see prior post “Accountants are failing investors with “fair value” accounting” August 6-07). To suspend it now does nothing but prove that it was always a bad idea for those assets that folks were planning to hold until maturity.
And if the values of the SIVs, CDOs and CLOs are dependent on a recovery in the U.S. housing market, the recession isn’t going to stop tomorrow to ensure that Citi’s balance sheet can hold together.
MRM
I am not short Citi, but I do have a couple of questions.
1) If I am a repo man, and I walk up to a guy’s house and tell him I am going to repossess his car, he might say something like: “Don’t do it — I just got a great new job and I am making more money this year than I ever have.” I bet all sorts of people say stuff like that and all sorts of repo men have (to say the least) somewhat sceptical attitudes to such protestations. Given that Citi was (as of last week) rumoured to be teetering on the edge of bankruptcy…why is there almost no discussion of whether Vikram is being 100% truthful with us. [Please note I am not suggesting he is being untruthful — I am just saying his motives for being untruthful are highly apparent.]
2) Normally, comments like “we are making more money than ever before” in the middle of a quarter by a reporting issuer are frowned upon by regulators if not press released in an appropriate fashion as part of Reg FD. The materiality test is certainly met: the improperly released info caused the share price to move 50%! Or perhaps the new rule with the SEC is “thou shalt not leak material non-public information…unless it lifts equity prices during a really bad bear market?”
Duncan
The letter was filed as an SEC filing, but you won’t find it anywhere as a press release. I assume an SEC filing serves for Reg FD purposes, even though not everyone would know to go and look at their SEC filings every 5 minutes to see what’s there.
MRM
Criticism #2 cheerfully withdrawn — all the stories I saw made it sound like a “leak” rather than a filing. Thanks for the clarification. Although I still am not sure that (if I were an investor) this is how I would prefer the information to be disseminated.