Another Horrible Quarter for Citi

Citigroup's earnings this quarter were horrible. So what's the reaction? Internally, it seems weak: Citi's announced the culling of 9,000 jobs, which sounds like a lot until you step back and look at the big picture. As CFO Gary Crittenden said on the conference call, investors should look at total headcount growth. This time last year it was positive: up 12%. And how much difference has a year made? It's now up another 8%. For every person Citi's fired, it seems, the bank has hired even more.

The external reaction is also weird: the stock is up more than 6% this morning. There seems to be a pendulum swinging: the first big tranche of write-downs sends the stock up, the second tranche sends it down, the third tranche sends it up. Is this really, really the kitchen-sink quarter after which there will be no more write-downs? Well, that depends on debt markets. March was a brutal month, and if these marks are all to end-March prices, it's possible that the worst is over. But given the vicious cycle in which the debt markets are still embroiled, I wouldn't count on it.

I was particularly interested by one component of the $13 billion in write-downs: $1.5 billion on auction-rate securities. Citi had $11 billion of these animals in February, but by the end of March, after write-downs and sales, it had brought its exposure down to $6.5 billion. Let's say that it managed to sell $3 billion at or around par, and that it wrote down the remaining $8 billion by $1.5 billion. That would mean that Citi is valuing its unsold ARS portfolio at just 81 cents on the dollar.

No wonder Andrew Cuomo is investigating the ARS market. This stuff was meant to be like cash, and so far there have been few if any defaults. So why is it being marked at distressed levels?