Tea Leaves Hard to Read at Citigroup

The complexity of Citigroup Inc. and its $1.9 trillion-asset balance sheet has long confounded investors, but with that group now including the government, which holds a 34% ownership stake, the inscrutability of Citi takes on added significance.

It could make it all the more difficult for U.S. officials to decide when and how to end federal support of the company.

Citi's third-quarter results appeared full of arguments both for and against the withdrawal of taxpayer aid. On the one hand, Citi shrank its operating loss compared with the previous quarter, pumped up its cash position by 17%, to $244 billion, and saw a decline in net credit losses. On the other hand, revenue in each of the company's main divisions fell from the year-earlier quarter, and the jobs picture, which Citi Chief Executive Vikram Pandit said he believes is the best indicator for predicting macroeconomic conditions, remains weak.

Pandit and Chief Financial Officer John Gerspach gave analysts their assessment of the firm's performance, going through nearly 40 slides prepared as a supplement to the earnings release and conference call. But 40 minutes later, it still was no clearer to analysts whether the results meant it was any more likely that funds from the Troubled Asset Relief Program would be repaid anytime soon.

"I appreciate that it's not our God-given right to know what the government is doing at every second with its positions, but is there any comment you can provide in terms of those talks still in motion, and any potential timing?" asked UBS analyst Glenn Schorr, who kicked off the 50-minute question-and-answer session after Pandit and Gerspach's presentation.

"Glenn," Pandit responded, "not at this time."

But both executives highlighted the repayment of Tarp as one of the two most important goals for the company — the other being a return to sustained profitability. And on a separate conference call with reporters, Gerspach indicated that Citi was priming itself for repayment.

"If you take a look at our capital position as well as our improved liquidity position, our view certainly is that we have the capacity to begin to pay back Tarp," he said. But he declined to put a timetable on the matter.

Whether government officials will arrive at the same conclusion is unclear.

In keeping with their long-standing practice, regulators have been reticent to discuss their involvement with, or assessment of, individual institutions. But in the case of Citi, where the relationship with Washington has moved well outside the traditional boundaries between private enterprise and public overseers, the government has to weigh staying mum — thus avoiding the chance of disclosures that could threaten public confidence in the banking system — against the ideals of transparency in government.

"The government has potentially conflicting governance obligations here," said Joseph Carcello, a business professor at the University of Tennessee and director of the school's corporate governance center. "They clearly have obligations to the taxpaying public. But they also now, as a very large shareholder [in Citi], have governance responsibilities to the individual and institutional shareholders of that entity, and in some instances, what's best for the shareholders of a financial institution may be different than what's best for the taxpayers of the United States."

But before public officials decide how much to talk about Citi, they need to decide what to make of the company.

For example, they have to parse out a gain from exchange offers and an accounting adjustment that recognized an improvement in spreads on Citi derivatives. They also may want to more closely examine mortgage delinquencies - some home loans were characterized as such simply because they had been modified, even if borrowers paying on time under their modified terms.

There have not been enough policy fixes to ensure that regulators are better equipped to assess banks than they were in the years leading up to the crisis, said Joseph Mason, a Louisiana State University finance professor.

"What the crisis showed was that in many cases, the reporting issues were so complex that even the examiners couldn't make sense of what was going on," Mason said. "I'd like to believe that examiners have a better idea now, but I don't have any evidence that can suggest to me" that they would.

Still, the longer the government stays tangled up in Citi, the better off private investors in the firm may be, suggested Boston University finance professor Mark Williams, a former bank examiner with the Federal Reserve.

"They are a black box, but to counter that black box is the government ownership, which is sort of a hedge for investors," Williams said. "It's enough they wouldn't walk away from that investment. If the government removes itself from that investment partnership, then that's where I see it becomes a little more dicey for investors."

Citi shares lost 5%, closing at $4.70 a share.