The $1.6 B profit of Citibank is not because it is doing any better, but because of some ‘lucky accounting’ as a WSG Blog post very rightly put is.
Had it not been for some of this lucky accounting, Citigroup would have posted a loss of $ 1.7 B..!
The impact is due to an accounting rule called FAS 159 and government relaxing the market to market accounting rule as mentioned in my earlier posts. (When governments do a Ponzi)
As I had mentioned in my previous post, these accounting rules will allow banks across the world to post ‘unreal’ profits.
The accounting rule FAS 159 will sound a little funny. Here’s how it works. Assume Citibank has taken loan worth $ 100. However, because of the poor performance of the bank, the market value of that loan is now just $75. The fall happens because the Citibank lender are ready to ‘sell’ the loan to anybody who will buy it just for $75, because they feel that Citibank might go down under. In such a circumstance, FAS 159 allows Citibank to book a fictional ‘profit’ of $ 25 (100 minus 75). The assumption is that Citibank can anytime buy back its own debt from open market at $ 75 and in which case it obviously doesn't have to pay anybody the remaining $25 and hence that’s a profit.
WSJ blog : Citigroup: Did It Really Earn $1.6 Billion? Not Really.
And how much such ‘profit’ has Citigroup booked in Q1 – hold your breath – it a $ 2.7 Billion…!
Barring this, the loss would have been around $ 1B
Over and above this, due to relaxation of mark to market rules, Citigroup has been able to avoid booking losses of another around $ 0.7 B. Had these rules also not been relaxed, the total loss would have gone up from $ 1 B to $ 1.7B.
The bad news doesn’t stop here. Citigroup and whole of US banking system are going to be hit by massive losses in credit card, auto loan, student loans and commercial credit , in addition to mortgage losses. These losses will be far in excess of the current provisioning. Citigroup’s investor presentation (Citigroup Q1 2009 Investor Presentation) itself is very revealing. It shows the US as well as Citibank's net consumer credit loss curve going up like a mountain slope. And with unemployment expected to keep increasing through at least the first half of 2010, the US banking system is sitting on another time bomb.