July 18, 2008 – 8:59 am

The battered financials have been using every known spell of witchcraft to get a bounce before crashing into ultimate supports, and they finally fell upon a one-two punch to squeeze the shorts out. 

First the SEC declared that it would selectively enforce naked short selling protection on 19 of the Chosen Ones, including Citigroup, followed by a daily rotation of members reporting earnings that “beat the street by a penny.” Today the baton was passed from the noble JPMorgan to ever-majestic Citigroup, who could do no better than lose $2.5B, eat write-downs of $7B in investment banking and lose an additional $7.2B to credit-related costs. 

The big U.S. commercial and investment bank posted a $2.5 billion loss in the second quarter, compared with prior-year net income of $6.23 billion, as it chalked up $7 billion in write-downs in its investment bank and another $7.2 billion in provisions for loan losses.

But the losses and write-downs each fell by about half from the first quarter, which was just enough to keep the ball rolling. This well worn ploy has worked again! Witness:

Citi rose nearly 10 percent Friday and helped lift other financial stocks, having joined JPMorgan Chase & Co. and Wells Fargo & Co. in convincing investors that the prospect for the sector, while gloomy, may not be as dire as the market feared.

Nor did Citi shine any light on the dark earnings thought to exceed $1T. The PR session finally ended, but not before Pandit released a statement:

“While there is still much to do, we are encouraged by our progress in delivering on our commitment to the re-engineering efforts,”

Hmm… As far as I can tell, there is nothing more they can do. Looks like Citi is about out of options:

The bank has raised about $40 billion over the past several months by shedding businesses, lowering its dividend, and selling stock.

And during the second quarter, Citi lopped off $99 billion from its total assets, which now stand at $2.02 trillion. Back in May, Chief Executive Vikram Pandit said the bank would shrink its then-$2.2 trillion in balance sheet assets by about $400 billion to $500 billion over the next few years.

Citigroup needs to earn money, not beat lower standards. In the environment of a credit depression, cash is unlikely to be rolling in.

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