FT Debunks Citi Memo

Good read on the purposefully leaked Citi memo today from Financial Times. The Brits make a good point about Citi's so called bumper revenues, which a) are not bumper at all based on historical standards and b) are to be expected as increased revenues always accompany volatile markets, especially in f/x and cash equities. The main thing Citi did not provide info on is the impact of writedowns, which one can bet their bottom dollar will be large to quite large.

"Citi having a bumper top line is nothing to get excited about. That “profitable” remains unquantified gives no comfort as to what extent writedowns have eaten into that haul. Provided the global economy keeps deteriorating, and house prices sink lower, balance sheets may fail even harsh stress-tests. It remains a brave investor who believes that this time bank revenues can overwhelm the writedown bogeymen."

The FT also has beef with two other concepts brought up in the letter: that depositors and investors are, contrary to fact, not fleeing in droves, and that Citi has a strong capital position. Of course, the $81 bn in TCE only materializes assuming the government extracts its pounds of flesh, which would not have been necessary if the asset side of the business wasn't an icecube next to a flamethrower. Another question is how much of this blockbuster revenue was due to the Smith Barney brokerage: Citi was forced to sell half of this unit about a month ago, and thus any associated revenues have to be chopped in half for a true pro forma representation, else Citi is double counting the income statement and balance sheet benefits.

As more impairments have to be taken, higher and higher tranches of the capital structure will likely become equitization candidates and thus sources of incremental stock dilution. Lastly to assume that BofA and WFC are immune from C's cancer, is as naive as rampant stock purchasing based on a 1 page letter of unsubstantiated propaganda.