Huh.

Citigroup Traveled Back in Time to Lose More Money

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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How much money did Citi make over the three months of July, August and September of this year? Its earnings release on October 14 said $3.4 billion, though there was another possible answer right in the headline. ("Net Income of $3.4 Billion; $3.7 Billion Excluding CVA/DVA.") But that was wrong. Or so says Citi now:

Citi announced today that it is adjusting downward its third quarter 2014 financial results, from those reported on October 14, 2014, due to a $600 million increase in legal accruals. The increase resulted from rapidly-evolving regulatory inquiries and investigations, including very recent communications with certain regulatory agencies related to previously-disclosed matters. The financial impact lowers Citi’s third quarter 2014 net income from $3.4 billion to $2.8 billion.

Oops! Sort of amazing that Citi can't even count how much money it made over those three months.

Except of course it has nothing to do with how much money Citi made over those three months. That $600 million reduction is for legal accruals, apparently for foreign-exchange-fixing investigations. Here's a rough timeline:

  • Until, say, 2013 at the lastest, Citi did some bad stuff in FX trading, for which it will eventually be fined.
  • Sometime in the last two weeks -- since October 14 -- Citi had "communications with certain regulatory agencies" about its 2013ish naughtiness.
  • At some point in the future -- after October 30 -- Citi will agree to pay, and pay, a big honking fine for that 2013ish bad stuff.
  • The "very recent communications" have persuaded Citi that the big honking fine will be $600 million bigger than it had previously thought.

Which of those things happened in July, August or September of this year? None of them, right? The bad stuff was in 2013 or earlier. The fines seem unlikely to actually occur tomorrow, so that takes you into November, at the earliest. The summer of 2014 was, for Citi, a blissful time of not doing stuff for which it currently knows it will be fined, and not paying fines for the stuff it previously did.

And yet somehow it lost $600 million doing that! I mean, $600 million more than it already knew it had lost; it had already booked legal accruals in the third quarter, though apparently not enough. Sometime between October 14 and October 30, Citi found a way to lose $600 million before September 30, because of fines that it will pay in November or December or 2015. Finance is magic!

We talked a while back about how bank earnings are just the center of a very hazy probability distribution. No one could possibly know how much money a bank made in any quarter. A bank is just a network of estimates of future cash flows. To compute its earnings for a quarter, you add up the estimates of future cash flows at the end of the quarter, subtract the estimates from the beginning of the quarter and adjust for the actual cash flows during that quarter. If your estimates change, your earnings change. If your estimates about what you should have estimated in the past change, your past earnings change. If you can understand how that's supposed to work, well, you're ahead of Citigroup.

  1. If you told me that it continued into the summer of 2014, or that there was other bad stuff happening then, I wouldn't be all that surprised. But the $600 million of increased reserves for "previously-disclosed matters" does seem to relate to the FX fixing stuff, which was well known by this summer and, you'd hope, no longer occurring. You'd hope.

  2. The total amount does not seem to be broken out in the supplement (unadjusted) or 10-Q (adjusted), though I'm skimming.

  3. Don't take this as, like, a guide to generally accepted accounting principles. It's just sort of a hypothetical description.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matthew S Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net