A tale of two sea creatures

Bank earnings are never as transparent as a calm tropical sea. But third-quarter numbers ought, at least, to be easier to follow than they have been for some time. Take Goldman Sachs, for example. Sure, the Wall Street titan might not reveal exactly how it makes its cash. But aside from a couple of small writedowns resulting from the credit crisis, it’s pretty obvious that the firm now stuck with the vampire squid nickname has had no trouble feasting on favourable markets. No such luck, however, over at Citigroup.

There is some good news. For starters, markets have improved to the point that Citi was able to book $2.7 billion of write-ups on problem mortgages and other assets. Credit losses declined a bit. And Citicorp, which contains the bank’s core set of businesses, made $2.3 billion, though on a very low tax rate.

But Vikram Pandit’s struggling megabank announced that it had managed to squeeze out just $101m of earnings in the three months to September – an amount that Goldman sucks in every few days. Strip out all the one-off funnies, and even that token amount fades away fast.

Citi booked a $161 million after-tax profit selling its managed futures business to Morgan Stanley Smith Barney. Then comes a one-off $851 million gain related to the huge exchange of preferred into common stock, which left the US government owning around a third of the bank. Finally, Citi benefited to the tune of $1.1 billion from “income earned and indefinitely reinvested in countries with relatively lower tax rates” – much of which came from Citi Holdings, the unit created to manage the businesses the bank considers surplus to requirements.

Take all those items out, and Citi is lying on top of a $2 billion loss. Granted, that’s halved by adding back, properly taxed, the revenue lost to the arcane accounting rule that forces US firms to mark increases in the market price of their own debt as a loss. But while Goldman feasts, that still leaves Citi looking like a beached whale.