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Citigroup chief financial officer Ned Kelly was trying to explain an aspect of the bank's better-than-expected first-quarter results on Friday morning when star analyst Meredith Whitney interrupted him. "Could you dumb that down for me?" she asked...
...what does that actually mean, dumbed down? Whitney's question was specifically about Citi's $1.7 billion in investment-banking profits in Europe, and Kelly's eventual answer was basically just that business had been good. But bank financial statements are never that simple: Citi's overall investment-banking earnings were boosted by a $2.5 billion derivatives valuation adjustment "mainly due to the widening of Citi's CDS spreads." In somewhat dumbed-down but still utterly flummoxing language: credit-default swap (CDS) spreads represent the cost of insuring against Citi's default. That cost went up in the quarter...
...upshot is that, while the quarter was Citi's best since mid-2007, it's awfully hard to say what it signifies. The chances that the bank might eventually be able to earn its way out of its troubles without more taxpayer help seem to have increased. But it will take many more quarters before anybody can say that with confidence...
...same goes for the country's big banks as a group. This week's positive results, which had been anticipated by a monthlong rally in bank stocks, are certainly better than last year's multibillion-dollar losses. But bank earnings are extremely sensitive to assumptions about the future, and whether the banks are actually on the road to recovery will depend to a great extent on how the economy performs in the coming months. That said, there are a few dumbed-down lessons that can be taken from the earnings news thus...
...nice to forget December. Investment banks traditionally end their fiscal year in November, commercial banks in December. Since Goldman Sachs and Morgan Stanley shifted to commercial-bank status late last year, they decided to shift their fiscal years starting this year. In doing so, they orphaned the month of December 2008. For Goldman, it was revealed this week, that meant saying goodbye to $780 million in losses that will never show up on the bottom line of an earnings report...