July 15, 2008 – 12:35 am

Off balance and running out of options, Citigroup sits alone, imploding in the shadows. It hunkers there in the dark, trying to hold on for one more earnings season, pull in one more central bank or Sovereign wealth fund, or buy one more analyst upgrade.

The clowns are smiling about the dark profits in assets parked off balance sheet:

At an investor presentation in May, Citigroup Inc. Chief Executive Officer Vikram Pandit said shrinking the bank’s $2.2 trillion balance sheet, the biggest in the U.S., was a cornerstone of his turnaround plan.

Nowhere mentioned in the accompanying 66-page handout were the additional $1.1 trillion of assets that New York-based Citigroup keeps off its books: trusts to sell mortgage-backed securities, financing vehicles to issue short-term debt and collateralized debt obligations, or CDOs, to repackage bonds.

Now, as Citigroup prepares to announce second-quarter results July 18, those off-balance-sheet assets, used by U.S. banks to expand lending without tying up capital, are casting a shadow over earnings. Since last September, at least $100 billion of assets have flooded back onto Citigroup’s balance sheet, accompanied by more than $7 billion of losses.

$1.1T with a t,te, teeee hiding in the dark. That doesn’t put a shadow over earnings; it blackens them out completely.

Citigroup has nothing but negative earnings to begin with, and the dark profits associated with nefarious credit-related instruments are mostly worthless in the bright light of day. So, what it’s really saying is that the bank’s balance sheet is closer to $3.3T, with a big T:

Citigroup has had to bail out at least nine investment funds in the past year, including seven structured investment vehicles, or SIVs, whose funding withered. The bank had to assume $45 billion of securities from those SIVs, which are now included in the $400 billion of on-balance-sheet assets Pandit says he’s trying to unload in the next three years.

The next three years, are you kidding me? You won’t be around in three years:

$400 billion down and $1.1 Trillion to go. I have said this summer of 2007 but it’s worth repeating again: Citigroup will not survive in one piece. If Citigroup survives at all it will be a mere shadow of its former self.

Mike “Mish” Shedlock

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