October 17, 2008 – 1:32 pm

Citigroup obligatorily reported third-quarter earnings today and the carnage was graphic. Management surely wishes it could just fast-forward to the end and skip this middle part altogether. Despite the frailty of its position, Citigroup until now was largely considered a financial bellwether. The veneer wears very thin now as the bank is reporting that losses on debt are in fact profit.

Negative revenues also included a $306 million write-down related to the ARS settlement and were partially offset by a $1.5 billion gain related to the inclusion of Citi’s credit spreads in the determination of the market value of those liabilities for which the fair value option was elected.

The bank was brutalized by $13.2B in write-downs as it stacked up $2.8B in losses.

Citigroup reported a $2.8 billion loss in the third quarter, the fourth consecutive period that the global banking giant has been swamped by write-downs on investments and steeper losses on consumer loans.

The bank took more than $13.2 billion in charges in the third quarter, bringing the total amount of write-offs and credit losses since the credit crisis began last year to more than $64 billion.

The quarterly loss was a stark reversal from the $2.2 billion the bank earned in the period a year ago. The loss was 60 cents a share, compared with a gain of 42 cents a share in the third quarter a year ago. Revenue fell 23 percent, to $16.7 billion.

Citigroup has posted a loss in every quarter since then, eliminated 11,000 employees and forfeited its title of largest U.S. bank by assets to JP Morgan. It will probably never reclaim that fame.

In addition to continued cost cuts, Citi continued to shrink, ridding its balance sheet of assets that don’t provide attractive returns. Citi’s assets shrunk more than 13% from a year earlier, and the company is now smaller than JPMorgan Chase & Co. (JPM), which on Wednesday reported total assets of $2.3 trillion following the acquisition of the banking operations of Washington Mutual Inc.

Citigroup sought vigorously for an acquisition of Wachovia, but was rebuffed by JP Morgan and its connections.

Citi earlier this month lost a bid to Wells Fargo for Wachovia Corp. and its massive deposit base. The government also considered Citi, among other suitors, to buy the banking assets of the failed thrift Washington Mutual Inc., which got snapped up by JPMorgan. Crittenden said on the conference call that Citi considered a third buy as well, but didn’t disclose the target.

Citi didn’t care anymore than JP Morgan about Wachovia’s subprime-riddled deposit base, but the desperate fight for survival has now become a race to be too big to fail. Replacing mortgage defaults is the coming wave of consumer credit card losses along with the ticking nuclear time bomb of derivatives. This is going to affect all banks, making that $25B handout from Uncle Sam seem like peanuts.

Isabel Schauerte, an analyst at Celente, a financial research firm in Boston, said: “Citi’s third-quarter performance is another manifestation that the misery has spread beyond investment banking units and into banks’ customer divisions.

“While mortgage-related writedowns have somewhat of a cathartic character by now, the deterioration of consumer credit emerges as the next main front.”

Pay no attention to the grandiose references to multi-trillion dollar asset base; there are multi-trillion dollar liabilities and one of the largest derviatives books on the planet ; where are the earnings? Despite claims from management, each aquisation simply buys it a buy more time, but now stripped of its ability to acquire targets, Citigroup can merely play defense and hope.

Between what the bank can do and what it must do is where insolvency lingers and lingering there are $4.4B on investments the bank wrote down, $4.9B in recorded credit losses, and a $3.9B charge to boost reserves. Where are the earnings? Even Citigroup knows it must generate a profit some day and that the loss of Wachovia brings someday one day closer.

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