Thursday, February 5, 2009

Citigroup Hides Mystery Meat in Balance Sheet:

By Jonathan Weil on Bloomberg:

Even now, Citigroup Inc.’s bosses can’t get over their delusions of grandeur.

You can see their shiny optimism in a $44 billion balance- sheet item called deferred-tax assets, which is a fancy term for pent-up losses that the bank hopes to use later to cut its tax bills.

That figure tells you Citigroup’s executives, in spite of their bank’s near-collapse, are still forecasting future profits as far as the eye can see. They have every incentive to do this, too. If they ever turned pessimistic, the assets might go poof.

While you won’t find any mention of deferred taxes in Citigroup’s latest earnings release, this may be the most important asset on the bank’s books today. It also looks the fishiest, at more than three times what it was a year ago, and more than double the company’s $19 billion stock-market value.

Those assets represented 55 percent of Citigroup’s common shareholder equity as of Dec. 31. And one crucial question still unanswered is how much of that $44 billion Citigroup is including in its closely watched Tier 1 capital, the primary gauge the government uses to measure a bank’s ability to survive losses.

Deferred-tax assets, or DTAs, typically consist of losses carried forward from prior periods. Under the accounting rules, these carryforwards are valuable only to companies that make money and pay income taxes. If a company is losing money and doesn’t expect to be able to use these assets, it’s supposed to record an offset, or allowance, to reduce their value.

Deferred taxes also can take the form of carrybacks, which let companies claim refunds on past taxes paid.

Worth Every Cent

Citigroup’s chief financial officer, Gary Crittenden, disclosed the $44 billion figure during the company’s earnings conference call last month. He said the bank had made no adjustments to their value, on the grounds that “these DTAs are expected to be realized in the future periods.” Those periods, he said, extend as far as 20 years out.

The $44 billion is roughly equal to the taxes that would be owed on about $125 billion of income, assuming Citigroup had a 35 percent rate. Citigroup reported an $18.7 billion net loss for 2008. It’s hard to say when the bank might make money again.

This is the same Citigroup that didn’t see the subprime- mortgage meltdown coming, or the credit crisis, or that it would need federal bailouts to stay afloat. That hasn’t shaken its executives’ confidence in their ability to predict Citigroup’s profits for the next two decades, or their conviction that the tax assets are worth every cent of that $44 billion.

“Good luck making that kind of money,” says Robert Willens, a tax and accounting specialist who teaches at Columbia Business School in New York.

Looking Odd

The last time I wrote about this subject, back in November, Citigroup had just disclosed in filings with banking regulators that its net deferred-tax assets were $28.5 billion, as of Sept. 30. It included $18.5 billion of that amount in its Tier 1 capital. The upshot: About 19 percent of Citigroup’s $96.3 billion of Tier 1 consisted of deferred taxes at the time.

That looked odd for a few reasons. Under the Federal Reserve’s rules, the only way a bank can include carryforwards in Tier 1 is if it expects to use them all within 12 months. Even then, the rules say that carryforwards aren’t supposed to exceed 10 percent of a bank’s Tier 1 capital.

There’s no such limit on carrybacks. But Citigroup has never disclosed any information showing it has vast amounts of carrybacks. Willens estimates Citigroup’s carrybacks might be a few billion dollars, based on the bank’s federal tax provisions for 2007 and 2006. A Citigroup spokeswoman, Shannon Bell, declined to say how much of the bank’s DTAs were carrybacks.

Congressional Help

For a while, it seemed Congress might help Citigroup and other large banks by expanding the federal carryback period for operating losses to five years from two. Not anymore, though. Under a bill passed by the U.S. House of Representatives that’s now before the Senate, companies wouldn’t be eligible if they had accepted federal bailout money, which Citigroup did.

Citigroup hasn’t disclosed in dollar terms how much Tier 1 capital it had as of Dec. 31. Bell wouldn’t tell me that, either. Nor would she say how much of Citigroup’s Tier 1 capital at the end of 2008 came from deferred-tax assets.

Citigroup will have to disclose those figures in the coming weeks when it files its annual reports with securities and banking regulators. When it does, the bank’s executives are sure to face more questions about how these assets could be so big.

We’ll see if they come up with answers that show a firmer grasp on reality.

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