Morning Gloom

The week is off to a dismal start. Outside it's pouring rain, and inside markets opened the day in a sour mood. Bank of America's earnings report did nothing to lift spirits. The larger than expected profit is nice, I suppose, but the $13.4 billion added to loan loss reserves is unnerving.

But I suspect that markets are still digesting the results from Citigroup, and attempting to gauge their implications. Dear John Thain has a detailed look at the (many) ways in which Citi massaged its figures here, but he also paints a rather distressing picture of the underlying fundamentals. Citi's business doesn't look nearly as healthy as its rivals. And its loan portfolio is looking much worse. DJT writes:

These [informative charts] aren't directly comparable, as the categories don't correspond to one another, and JP Morgan uses the more conservative 30-day delinquent instead of Citi's 90+-day delinquent numbers. However, JP Morgan's portfolio's performance seems to be leveling out and even improving (with the possible exception of "Prime Mortgages"). Clearly, the pictures being painted of the future are very different for these institutions.

Goldman analyst Richard Ramsden seconded the notion in a weekend research note suggesting that Citi's loan portfolio continues to deteriorate, and that it's earning power on the other side of recession might be pretty disappointing indeed.

Also discouraging is the fact that some government regulators are asking Treasury not to release results from the stress tests, based on fears that the findings could undermine the weakest banks. As I said last week, it's been pretty obvious all along that this would happen. That there is an ongoing internal debate over the matter is very, very worrying.

Citi may not be able to earn itself out of its troubles. Its credit losses are very large and growing, and its business is underperforming. So while the government's plan to magically fill capital holes through a preferred for common equity swap might possibly keep Bank of America lumbering along, it's hard to see how the same trick (planned for Citi since back in January) will do anything for Citigroup. Felix thinks the swap plan might work in general, and that some banks may even have luck raising private capital. I don't think that optimism extends to Citi.

I'm just not sure what the plan for Citigroup is. Maybe the government is working extra hard to wring as much as possible out of current TARP funds because it expects that most or all of the $250 billion in additional bank rescue funding requested in the new budget will have to be used for an inevitable Citi takeover. But if administration officials aren't even sure what stress test data they're going to release on May 4, can they possibly be prepared for the task of putting Citigroup into receivership? Let me just say that I'm not surprised markets are looking a little glum today.