Yesterday, Citigroup Inc.’s CEO Vikram Pandit came out with a statement claiming that Citi has shown an operating profit for the first two months of the fiscal year. This news was seen as being the main culprit of today’s enormous rally across all major US markets.* This observation is supported by the fact that Citi ( NYSE:C ) was the leading gainer in the finance sector, jumping over 30% during the day’s trading.

“Taxpayers should rejoice if a bank they have such a large stake in could turn a profit after such an atrocious fourth quarter. According to the official financial report, “Citigroup… reported a net loss for the 2008 fourth quarter of $8.29 billion”

http://www.citi.com/citi/press/2009/090116a.htm

I don’t believe it takes a financial wizard to deduce that that loss is enormous, especially considering that it includes money “raised” from TARP funds. Therefore, a turnaround to an operating profit should be very promising, showing great potential for Citi’s ( NYSE:C ) future growth.
If only we-the-taxpayers were so lucky.

The job of the CEO of any company is to present the best possible image of the company, regardless of the company’s financial soundness. Of course, the CEO also must be honest regarding the viability of the company, especially to the stockholders – in this case, the taxpayers. Yet, as anyone who has studied statistics can tell testify, numbers can be made to represent almost anything with the (im)proper presentation. Now let us clearly identify the words Mr. Pandit used today to explain his companies “profitability”:

“Based on historical revenue and expense rates, Citi’s projected earnings before taxes and one-time charges would be about $8.3 billion for the full quarter.” (emphasis added)

http://biz.yahoo.com/ap/090310/citigroup_ceo_letter.html

Did you catch the spin? It is quite interesting considering in one sentence there are multiple tricks taking place. First of all, Mr. Pandit stated that the firm was profitable for the first two months, but used a projected number for the entire fourth quarter. This projected number is larger and thusly nicer looking to the public. Because it is a projection, it is also not a set number in reality. Stockholders have no definitive way of proving how they created that projection.

Second, and more disturbing, is the devious exclusion “before taxes and one-time charges”. The effective tax rate for the previous quarter was 44.6%; a sizeable percentage increase added to their loss column. One-time charges include their write-downs, the large bulk of expenses that Citi has incurred during this credit contraction. Effectively, Mr. Pandit merely gave the revenue for the company in the first two months of the year and then extended this rosy number to include all three months of the quarter. Conclusion: The number you heard announced this morning is relatively meaningless – a tool used by the CEO to instill confidence in his company at a time when there is very little.

Now, to be fair, the number can be seen as a slight positive. Last quarter, the revenues were $5.6 billion and therefore an increase of revenue to $8.3 billion would be a 48% increase. If the exact same expenses were applied from last quarter, the company would only post a loss of $5.59 billion for their first quarter 2009! Remember, however, that the $8.3 billion revenue is a projection and take note that a revenue increase close to 50% in 3 months time would be highly unlikely given the continual downturn in the markets.

What can we-the-taxpayer take out of today’s news and rally? The companies dragging down the market may not be getting any healthier or more profitable, but they are getting better at playing the spin game. Liberty-minded folk, keep on your toes.

*Article written intra-day and not reflective of closing prices.

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