June 25, 2009 – 8:45 pm

Citigroup share holders and taxpayers alike thought the Citigroup blood bath would never end. Even as the bank celebrates its first profit in five consecutive quarters, the bleeding hasn’t subsided. The bank’s fiscal first quarter 2009 $1.6B profit is the result of a concerted public relations effort spun with accounting tricks beginning immediately upon reporting its fourth quarter 2008 loss of $8B on $5.6B of write-downs.

After more than a year of crippling losses and three bailouts from Washington, Citigroup, a troubled giant of American banking, said Friday that it had done something extraordinary: it made money.

But the headline number — a net profit of $1.6 billion for the first quarter — was not quite what it seemed. Behind that figure was some fuzzy math.

With more than $200 billion of taxpayer handouts in hand, management obviously felt they had some explaining to do, so the very day after the earnings report, Citi announced it was firing its chairman, Sir Win Bischoff. They also said the company’s top three executives would forfeit their bonuses and then in true grace, they nixed plans to buy a corporate jet.

Like several other banks that reported surprisingly strong results this week, Citigroup used some creative accounting, all of it legal, to bolster its bottom line at a pivotal moment.

The litany of extra-legal complications comes from a well-worn hit parade of ‘oldies but goldies,’ SFAS 157 not the least of them.

One of the maneuvers, widely used since the financial crisis erupted last spring, involves the way Citigroup accounted for a decline in the value of its own debt, a move known as a credit value adjustment. The strategy added $2.7 billion to the company’s bottom line during the quarter, a figure that dwarfed Citigroup’s reported net income. Here is how it worked:

Citigroup’s debt has lost value in the bond market because of concerns about the company’s financial health. But under accounting rules, Citigroup was allowed to book a one-time gain approximately equivalent to that decline because, in theory, it could buy back its debt cheaply in the open market.

Wouldn’t everybody love to do the same with that house you bought during the credit bubble or that excursion purchased when gas was a dollar a gallon? It didn’t make the bank any healthier than you sucking your stomach in does, but it makes you look better.

“It’s junk income,” said Jack T. Ciesielski, the publisher of an accounting advisory service. “They are making more money from being a lousy credit than from extending loans to good credits.”

Given that a bank’s business should be making money from loans to good credits, this bodes ill for the future. But where SFAS 157 was the victim of a cover up, SFAS 159 was buried alive. During the interim between fourth quarter 2008 and Q1-2009 earnings reporting sessions, the banks put your bailout dollars to good use lobbying congress to axe murder the Fair Value Accounting Standard.

Citigroup also took advantage of beneficial changes in accounting rules related to toxic securities that have not traded in months. The rules took effect last month, after lobbying from the financial services industry.

Previously, banks were required to mark down fully the value of certain “impaired assets” that they planned to hold for a long period, which hurt their quarterly results. Now, they must book only a portion of the loss immediately. (Any additional charges related to the impairment may be booked over time, or when the assets are sold.)

For Citigroup, this difference helped inflate quarterly after-tax profits by $413 million and strengthened its capital levels.

That means that Citi would have a net of $413M more level 3 assets on its fat ass, but that’s not the kind that goes away by sucking your stomach in. In just the prior quarter, the bank would have to make plans for that fat, but like the emperor’s new clothes, this quarter they can just feign blindness.

Citigroup and other banks also benefit simply by taking a sunnier view of their prospects. Banks routinely set aside money to cover losses on loans that might run into trouble. By squirreling away less money, banks increase their profits.

That is what Citigroup did. During the fourth quarter, Citigroup added $3.7 billion to its consumer loan loss reserves, more than analysts had expected. In the first quarter, even though more loans are going bad, it set aside just $2.4 billion.

Profits over provisions. Aren’t you glad Citigroup doesn’t have an airline division. For the bank’s part, financial chief Edward J. Kelly, like everyone who didn’t see the credit crunch coming, remains unconcerned.

Mr. Kelly said that Citigroup would increase its provisions if the recession deepened and that its reserves would be adequate.

Who does he think he is, bullsh!tting the way he is? This recession will most certainly deepen, whether Citigroup’s prepared for it or not.

And what all the bullcrap could not cover up was the stench of write-downs taken on mortgage-related assets. The housing sector still hasn’t bottomed. Nor will it.

The company took $5.62 billion of writedowns on subprime- mortgage-related securities and other investments in its trading division, reflecting a further erosion in their market value. That compared with $14.1 billion of writedowns in the first quarter of 2008, for a positive $8.47 billion revenue swing.

The bank’s biggest fear is their future, not yours. Desperate to have you not see what is right in front of your face, and wont go away. Citi is broke, and standing at the dead end of Ponzi finance, the bank has no way to consistently drive earnings. The major gains this quarter for Citi and the other big banks came from one time trading gains, not from doing what profitable banks do, making money from extending loans to good credits. Good credits are gone, the credit crunch is here, and that is the real cover up.