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Citibank Posts a Profit?

Mar 10, 2009

The stock market has jumped 300 points this morning. They say it is because Citibank announced that it had made a profit of $19 billion in the first two months of 2009.

Really? According to AOL News, some are questioning this "profit," on the grounds that their profits would have been swamped by writedowns if they had actually written off more of their toxic mortgages.

The problem is, in some ways, at the heart of bank troubles. Under mark-to-market accounting rules, while a big financial firm can have good performance at some of its operations, these may be swamped by writedowns of its deteriorating holdings of different financial instruments and debt.


It seems too coincidental to me that they would make such an announcement right after AIG got bailed out with another $30 billion. AIG insured a half-trillion dollars worth of toxic mortgages, and so the government is bailing out AIG. Where did the money go? It looks to me like AIG paid off billions of dollars worth of toxic mortgages held by Citibank, allowing Citibank to declare a "profit."

Citibank has also gotten bailout money directly from the federal government, so it is probably getting money both directly and indirectly (through AIG). Stock brokers don't seem to care about the long-term problem. All they know is that the herd will run, and they want to run with them, knowing that they can make some short-term money by pretending to believe the "good news" for at least one day.

The bailout money does have a short-term effect to prop up Citibank, AIG, and other insolvent corporations. The real problem will come when there is no more bailout money to be thrown at the problem, and the public learns that only a tiny fraction of those toxic mortgages, CDS's, and derivatives have been paid off. But for now, it is still possible to create more money to throw at the problem.

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Category: News Commentary

Dr. Stephen Jones

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