July 7, 2008 – 1:13 pm

The analyst who made her stardom on downgrades of Citigroup is polishing that fame on the beleaguered banks crusty facade. Oppenheimer & Co’s Meredith Whitney lowered her call for Citigroup’s second quarter earnings in Wall Street’s quarterly game of “beat the estimates”.

Citigroup will probably lose $1.25, compared with her prior estimate for a gain of 21 cents. She forecast Citigroup’s writedown at $12.2 billion.

The estimate of profit reverse comes with the entire industry’s failed earlier attempt to prop itself up following Goldman Sachs’ mea culpa. The cascade of worthless stock market news from Street-owned outlets like Bloomberg, which continue to promo-gate the quarterly game of “we beat our own drastically lowered estimates,” is beginning to show signs of fray. Not even the mighty Goldman Sachs propaganda machine could wipe away the reality of hundreds of billions in losses and write-downs.

Analysts and investors are reversing their predictions that the worst of the credit-market contraction is over after more than $400 billion of writedowns and losses by the world’s largest financial institutions.

Vikram Pandit, the bank’s new CEO, is making many moves, but none will make a difference. Under the crushing weight of the losses and write-downs, the pressure builds up to a point where the responses become spastic failures. Witness:

Citigroup will begin a new bonus plan aimed at getting its senior executives to work for common earnings improvement across the entire company instead of only driving profits within their departments. According to the FT, the new system isan effort to increase co-operation and minimize in-fighting among the disparate parts of the sprawling financial services conglomerate.”

The plan is designed to fail because it doesn’t account for bankers most basic human flaw:

The most wrong-headed part of the thinking behind the program is that it does not account for the fact that banking executives do their best out of personal greed. The current system of having every operation in the bank strive for its own best results already maximizes overall earnings. The profits from a number of successful divisions within the firm adds up to better financial results for Citi as a whole. Bonuses based on the performance of the the bank as a whole simply makes star executives believed they are being robbed by being lumped in with the company’s losers.

As usual the bank punishes the rank and employees, although in the case of a company that grew too fast too quickly on the wings of too many risky investments, the job cuts are at least justified:

In a conference call with shareholders last month, Gary Crittenden, the finance director, indicated that Citi may cut parts of its retail-banking and consumer-finance operations in certain countries where it considers the business to be too small.

“Citi has a presence in 106 countries,” said one source close to the company. “But does it really need to be in Greece, Slovakia, the Czech Republic and Italy? In a lot of those places it has no scale at all.”

Citi has already diluted share holder value by roughly $50B, yet we find no end in sight. Despite maneuvers to write down over $8B, cut 18,000 jobs and raise at least $10B (from where?), the bank is clearly becoming more desperate and delusional:

Vikram Pandit, the bank’s recently installed chief executive, had just sent an e-mail to every employee in the company.

Headed “Our culture”, the memo praised the “remarkable efforts” from staff and the 200 years of history that ensured Citi would continue to be the “backbone of world commerce”. Citi would become “the greatest turnaround story of our age”, Pandit promised. “We can make this the best company in the world, bar none.”

Most of that 200-years was spent as City Bank of New York, which was founded in 1812; but that profit history was wiped out in less that five years by the risk-hungry methodology of Sandy Weill and the suicidal subprime credit binge of his successor, Chuck Prince.

Now Pandit has come on board more to clear the decks than to right the ship. At best the frenetic activity will make headlines and delay itchy trigger fingers poised on the mouse, hovering above the sell button. But when all the huffing and puffing is done, Pandit will have accomplished nothing.

In the end, it’s just the same old thing: slash jobs, raise cash, boost moral. But the hand outs from rights issues are drying up along with investors’ torched patience; earnings in the post-bubble-bust world are nowhere to be found and it will take a lot more than pep-mails and ill-conceived bonus plans to repair the house that Prince ruined.

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