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L. Neil Smith's
Number 517, May 3, 2009

"What a maroon...."

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Further Thoughts on Citigroup
by Jim Davidson

Special to The Libertarian Enterprise

A few weeks ago, I mocked the comments by Vikram Pandit that Citigroup anticipated its best results since the last time it bothered to post a profit (third quarter 2007, as I recall). Not only had it lost money in each of the prior five quarters, it had lost a staggering sum in 2008. But there he was, talking up his company's stock, with the fatuous claim that they were going to post profits for first quarter 2009.

Now, among other reasons this claim seemed absurd on its face, to me, was the alarming fact that the operating income, before tax and before a bunch of accounting shenanigans, for Citigroup in 2008 (twelve months ending 31 Dec 2008) was -53,055,000,000. Yes, they lost fifty-three billion dollars.

The despicable heathens in the accounting profession somehow arranged for Citigroup to report a loss, after taxes and shenanigans, of only -27,684,000,000. Where did that other 25 billion dollars come from? Nobody really knows. I mention this point because the nature of their reported loss is obviously and dramatically different from their actual operating loss. So you should be suspicious about reports of operating profits.

As a result of being completely incompetent and running Citigroup further into the ground, Vikram Pandit and his team of goofballs were awarded $45 billion in taxpayer bailout money. They were given a huge pile of money for being absurdly stupid, maliciously spendthrift, and idiotically committed to sectors of the economy that were failing.

At the end of the first quarter, lo and behold, Citigroup reports a profit after five quarters of not really bothering to earn a return for shareholders. What's more, they posted a dividend for the government which bailed them out.

Now, let me ask those of you who run family businesses what you could do with $45 million. You could probably figure out ways to generate after tax profits of around 20%. That level of profitability is fairly routine in entrepreneurial enterprises. No doubt the challenges are greater when you have ten times as much, let alone $45 billion (a thousand times as much), but let's say that an annual profit of 15% would be reasonable. Divide by four quarters and we find an expected value of $1.6875 billion in profit per quarter.

Did Citigroup perform that well? Nope. They turned in after tax results of $1.593 billion in alleged profits. However, after including various "extraordinary items" the income available to common stockholders (the kind of stock you can get on the stock market) was: -966 million. Yep. Citigroup managed to LOSE money for its common stockholders.

Now, I admit to complete ignorance of how they manipulate the data to generate an income statement with over two billion dollars in operating income on zero revenues. You would think they would report some sort of revenues number, but that doesn't appear on Google's report of their income statement.

Even the line for interest income is blank. I dunno. You'd think they would have some interest income, being filthy banking gangsters. Looking at last year's income statement on suggests that they had $130 billion in revenues last year (on which they lost $53 billion, or $28 billion, depending on what you want to believe).

So, they were handed $45 billion they never earned and should never have been given by gutless politicians and bureau-rats in an evil tyrannical government. And Citigroup couldn't even post pretend profits of 15% after tax with all that loot. What's more, the reported profits are some kind of lie, since the common shareholders actually lost nearly a billion in the first quarter. Nuts.

I am not alone in being extremely skeptical of this report of alleged profits. The New York Times, often a waste of ink but sometimes a shrewd observer of Wall Street, indicates widespread rejection by investors of Citigroup's claims.

Writes Andrew Ross Sorkin, "JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that's sort of like saying you're richer because the value of your home has dropped); Citigroup pulled the same trick."

Investors reacted by knocking 25% of Citi's common stock price. From less than a dollar in early March, the stock had climbed to about $4 a share, on the talk of making a profit this quarter. Once the numbers came out and were analysed, the price fell to $3 a share. It has since come back up to about $3.25 on news that some Japanese companies are interested in buying a company that Citigroup has put on the auction block.

Personally, I think the current stock price is about three times a fair market price for this under-performing and badly mismanaged bank. I would say that the current stock price is almost entirely puffery.

If that's so, then the market should come to understand this fact, and drop Citigroup like a pile of rotting garbage. Put this one in the column of "likely to be wiped out by the crash of the early 21st Century."

Is there any good news? Yes, as it happens. The government might not throw more money down this monstrous black hole. Instead, they are talking about perhaps swapping preferred shares for common stock.

Citigroup management would not have to pay exorbitant dividends if the preferred stock is swapped for common. (Is it really a dividend when there is an actual loss to common stock? Or is it some new type of Ponzi scheme?) The taxpayers would likely get screwed, especially if the swap takes place at an extremely over-valued common stock price of $3 or more per share. The common stockholders would likely get screwed, but you have to expect them to suffer if they miss the current opportunity to unload their Citi stock at an inflated price.

Would it save the management team? I doubt it. Pandit's people took over in late 2007, and have ridden the company into the ground—from about $55.70 per share down to under a dollar. Turning a blue chip into a penny stock is not an achievement Mr. Pandit. The board of directors, or the shareholders, or in the case of effective nationalisation the government, are going to replace Pandit and friends, very soon.

Are we going to see Citigroup as a viable company in eight years? Remember, in my essay on the lessons from 1722, we know that in the last secular crash something like nine out of ten firms that had been listed on the markets in London, Amsterdam, or Paris were out of business by 1730. And of those remaining, something like nine-tenths or more of their stock price was wiped out—with the markets not recovering their former highs until 1782.

My educated guess is: no. Citigroup is going to have another stock price tailspin, some sort of preferred for common swap, a change of management, further difficulties making profits, and will be acquired by a politically connected banking concern, such as Goldman Sachs.

Given the enormous popular backlash against the TARP and other bailouts, I suspect a change of administrations in four years, after which Goldman would not be nearly so politically connected. Can you imagine how a Ron Paul administration would deal with these banking concerns?

In March, I asked whether Citigroup could post a dollar of profit based on my back of the envelope look at their recent performance. The answer turns out, from a common stock holder's perspective, no. They posted a $933 million loss as far as common equity goes. The rest is monkey business and accounting shenanigans. Or, as we used to call them in business school, lies. All lies.

Jim Davidson, author and entrepreneur, is working on making "Alongside Night" a household term. Watch for the upcoming graphic novel and film based on the screen adaptation of the novel. Get your copy at Jim is also involved in Eleven at Forty Productions, which is organising the documentary film "Destination Resorts in Orbit."


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