The reported $4.28 billion profit for the second quarter was the result of the $6.7 billion gain from the sale of Citi’s most profitable unit, Smith Barney. Any bank selling off it’s most prize possessions can only have it’s focus on the near future and whatever profits lie there. To Citi’s dismay, what lies there does so like a snake in the grass. Witness:

The second quarter stockmarket rally led by the financials is testament to the remaining power of the plunge protection team and the Obama administration’s anxiety to keep high approval ratings. And though a failing bear market rally and the one-off gain from an asset sale cannot sustain a crumbling Citi, it does kick start Pandit’s con job. The CEO pointed to net subprime write-up’s for the quarter. Bear witness, please:

The improvement in net revenue marks was primarily driven by positive marks on sub-prime related direct exposures in the second quarter of 2009, compared to net write-downs in the second quarter of 2008, as well as positive credit value adjustments on exposures to monoline insurers in the second quarter of 2009, compared with downward credit value adjustments in the second quarter of 2008

Then, boldly proclaiming the bank had gone all the way down the write-down highway, Pandit said this lie:

“The rate of growth in these consumer losses may be moderating,” Pandit said on a conference call with analysts. What’s more, he said, the securities writedowns that saddled the bank with $36 billion of net losses during the prior six quarters may now “be largely behind us.”

“The rate of growth in these consumer losses may be moderating,” but Pandit is well aware a far more plausible possibility is that it’s the eye of the storm, that the transfer of $45 billion in taxpayer wealth to the bank, low mortgage rates, the availability of both Federal Housing Administration financing for first-time home buyers and improved financing for jumbo loans is driving the game. In other words, the bankers are re-flatting a mini bubble, which is certain to pop, again. You may believe that Pandit is sincere  when he says “The rate of growth in these consumer losses may be moderating,” but he tells you he is lying with actions that speak louder than words. Look:

The bank’s costs for bad loans in the quarter jumped by 75 percent to $12.2 billion. Late credit-card loans increased to 3 percent of the total, from 2.1 percent a year earlier.

Increasing credit cost and deteriorating consumer credit are in store for the future, in which the increasingly financially strapped, unemployed consumer, will increasingly default on credit cards and home loans, even as the vortex of the imploding commercial real estate crashes in. And while immaterial to prognosticate a future without write-downs, in the present, it’s the accounting gimmicks of the past that bite in a way bizarre (SFAS 159).

The results included costs of $1.6 billion taken under a bookkeeping rule that forces banks to account for increases in the market value of some of their liabilities. Citigroup recorded a $2.5 billion gain from the rule in the first quarter, when concerns about the bank’s creditworthiness led to declines in the value of the liabilities. Investor confidence in Citigroup rose during the second quarter, as measured by prices for its bonds, leading to an increase in the liability values.

Pandit took the reins at the ship that Sandy built, after it collided with the subprime ice berg and was already doomed. Why? The government has already backstopped losses for over $300 billion, but it’s not nearly enough. Citigroup, if it survives at all, will be but a vestige of its current self and all the king’s men and horses can do nothing to to save the bank.

So, while Shelia Blair pretends to protest Pandit, Pandit continues to cannibalize Citi and buy time paid for by the taxpayer. That taxpayer is overstretched from the shock waves of two bubble bursts in less than a decade, is increasingly unemployed, out of cash, losing credit and out of options. It is that very same taxpayer who Pandit and management know cannot hold out for much longer, from which the bank must take its wealth to survive. How long can Citi survive? It will survive for as long as it can take from the taxpayer, for as long as it takes to take the last red cent.

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