Last night Vikram Pandit, Citigroup's CEO went on Charlie Rose's show (PBS) and uttered these words;
“We’re in 109 countries around the world, and Citi’s strength is viewed to be America’s strength in many ways. The bailout was really about the entire financial system. It was about confidence in the financial system. It was about stability,”
Umm, Mr. Pandit, we have enough problems without having to all be tied in to the freakshow that is Citigroup. A couple of days ago on the blog I said that in reality, besides blowing the Wachovia deal, almost all of Citi's problems were baked in by former management (and the CURRENT Board) before Pandit got there. I'm really starting to wonder though if part of the reason Pandit was picked for CEO was because someone at Citi said, "We paid $800 million for this guy's half-assed hedge fund, $161 million paid directly to him. Let's put him to work!" What's scary is I was talking to a friend of mine who is the CFO of a large, established and successful hedge fund yesterday about Old Lane. He said that from an infrastructure standpoint, Old Lane, despite being in business for over a year, really didn't have much of a infrastructure. You see, a hedge fund, as a business, isn't about a bunch of guys just coming in with their brilliance and "trading stuff". A lot of the value, or lack thereof, has to do with analytics, risk and operational control, prime brokerage agreements and legal infrastructure. It appears that Old Lane didn't have much in the way of this "stuff". Paying $800 million for a hedge fund with a very short track record is probably insane to begin with. Paying $800 million for a hedge fund that hasn't even done the basic "blocking and tackling" with regard to infrastructure is off the charts stupid.
Anyway, back to Mr. Pandit's remarks yesterday with Charlie Rose. I guess I have to expect Pandit to "talk his position" and lump Citi's problems in with this "act of God" (my line, not his) that all these management types claim happened to them in the last two years. But to say Citi's problems are America's problems? You just stepped over the line Vik. Citigroup IS America's problem. So for this "infamnia" we have to bring out an article written Monday by the champion finder of corporate accounting bull-sh*t, Bloomberg's Jon Weil. Mr Weil was really the first guy to come out and not only say Freddie and Fannie's capital calculations were a fantasy, but he showed us very clearly why. Three words DEFERRED TAX ASSETS. Freddie and Fannie, by the second quarter of 2008 had wrung up approximately $50 billion of these "assets". A deferred tax asset (DTA) is essentially capitalizing losses on your balance sheet with the idea being, when future income is generated, you can put these losses against future income (you can also carry back for two years). To keep the assets on your balance sheet unreserved you have to show that you will make the appropriate income in the future years to use all the DTAs. Freddie and Fannie certainly were not going to use these "assets" because they sure as hell were not going to make the kind of money over the next few years. Hence, Treasury finally opened their eyes to this sham and took the GSE's into conservatorship.
Guess who else relies heavily on DTAs, unreserved, for their gross capital and Tier 1 capital? Ding ding....Citigroup. Remember this when Citi tells us about their "strong capital position" over and over again. Here is Jon's Article Citi's DTAs. The main upshot is Citi reports a net DTA of $28.5 billion as of September 30 , 2008. These "assets" are buried on the balance sheet as "Other Assets". That represents 29% of Citi's common shareholder equity and 19% of itsTier 1 capital calculation (Tier 1 capital only allows for carry forward that will be used in the next twelve months). The problem is DTAs can only be 10% of your Tier 1 capital unless you can show that the excess 9% can be used to carry back against two years of tax provisions. To keep this excess DTA on their books at year end 2008, Citi would have to show that they can carry a portion of the DTA back to 2006and 2007. In 2007 Citi had a negative tax provision and in 2006 it was only $3.9 billion. If you combine Citi's inability to show that the excess DTAs can all be used for carrybacks, and they certainly won't be used for 2008 (as Citi will generate negative tax provisions) you arrive at the point that Citi is still strongly overstating its capital position.
We're going to need a bigger boat.
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