Is $C’s Settlement Charge a Way to Hide Declining Revenues ?

“Earlier today, moments after hearing that Citi would incur a near-record $3.8 billion Q2 charge as part of a $7 billion settlement for the US investigation into its fraudulent MBS sales in the pre-Lehman period, an announcement which came literally minutes before its Q2 earnings announcement, we knew precisely what was about to happen:

Sure enough, moments after we sent this out we learned that Citi magically beats consensus EPS of $1.05, reporting a non-GAAP number of $1.24. The only problem: reported GAAP EPS was a laughable $0.03. Where did the bulk of the company’s net income come from? Why the “one-time, non-recurring charge” of course: $1.21 of the $1.24 in Citi EPS was thanks to the “punishment” the government just served it with.

And since Wall Street, all of it in the same boat as well, does not care about actual numbers based in reality, but merely pro forma adjustments, such as this one which was a kitchen sink addback for Citi, allowing it to generate $3.8 billion in pro forma “Net Income” when in reality none of this is an actual cash flow item, and certainly does not benefit the balance sheet, Citi stock is now a solid 3% higher on, well, magic!

In reality what happened: Citi’s revenues dipped 4%, and 5% for Citicorp excluding Citi Holdings….”

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