The Curious Case Of Citigroup Running For Cover

As sad as it is to say, it is impossible to gauge whether Citigroup Chief Executive Officer Vikram Pandit is cooking the books to save his job and his company. Or is the troubled gigantic financial institution really on a road to recovery.

Pandit reported in a letter to employees Monday Citigroup had an operating profit of $8.3 billion before taxes and “special items” through the first two months of the 2009 quarter, according to The Associated Press.

Investors frantic to find any positive news in the financial sector apparently believe Pandit as stocks rallied by 302 points in early trading. Citigroup closed at $1.05 a share Monday, down 84% from its previous year-long high.

In scouring news reports from AP, the New York Times and Wall Street Journal, the timing of Pandit’s released letter is curious.

During this past weekend, Treasury officials called in Citigroup representatives and told them they were performing a “stress test” to determine the company’s financial viability in case the economy worsened.

On Sunday, several U.S. senators proposed allowing Citigroup to fail rather than risk more billions of taxpayer bailout money used as equity to right its sinking ship.

In his letter, Pandit did not provide the “special items” provisions that could offset all or part of the operating profit that would include credit losses, write-downs and additions to loan-loss reserves.

The New York-based bank has posted five consecutive quarterly losses, including a 2008 fourth-quarter loss of $8.29 billion. During January and February, operating revenue was $19 billion, just $2 billion shy of the full-quarter average during 2008, according to Pandit’s letter.

The government provided $45 billion in two rescue installments last year. In January Citigroup and Treasury agreed on a deal giving taxpayers a 36% stake by converting preferred stock into common shares.

No question Citigroup is making bold efforts to return to profitability. Among its plans, the bank is shedding assets and reducing staff to streamline operations. It announced a plan to sell a majority stake in its Smith Barney brokerage unit to Morgan Stanley.

Citi is also pursuing a plan to split its operations, separating the traditional banking businesses from the riskier operations that have been the primary driver of losses in recent quarters.

Citi and Goldman Sachs were among the leaders lobbying for deregulation that allowed banking and investment operations to merge. In hindsight, the scheme backfired with unscrupulous practices fueled by greed that ultimately triggered the economic meltdown.

In the letter, Pandit said Citi has run its own stress tests for the bank at levels worse than those being used by the government. He said he is confident in the bank’s capital position based on those tests.

Citigroup is one of those banks considered by both the Bush and Obama administrations too big to fail. We shall see.

Cross posted on The Remmers Report