Citi's Fogged-Up Crystal Ball

Citi's recent assumptions about its deferred-tax assets look "awfully bold", says Bloomberg columnist Jonathan Weil

By Jonathan Weil

(Bloomberg) — When the Treasury Department shelved its plans to sell $5 billion of Citigroup Inc. (C) common stock in a public offering last week, the news came only two days after the bank had said the sale was a go. The delay was a reminder that predicting the future can be a tough exercise.

So imagine how difficult it must be for Citigroup to predict the amount of taxable income it will generate during the next 20 years.

If you think its executives can do that, then you just might believe the $38 billion net value for an item on Citigroup's balance sheet called deferred-tax assets, which represent 27 percent of the company's shareholder equity. Keep in mind, this is the same Citigroup that didn't see the credit crunch coming until it was too late, and wouldn't have survived without a government rescue.

Deferred-tax assets generally consist of tax-deductible losses and expenses carried forward from prior periods, which companies can use to reduce future tax bills. The catch is they are valuable only to companies that are making money and paying income taxes.

Citigroup probably will record its second straight annual net loss, according to the average estimate of analysts surveyed by Bloomberg. It reported a $27.7 billion loss for 2008, which eclipsed its previous two years of earnings. The way it's been able to keep those assets on its books is by assuming it will earn enough taxable income in the future so it can use them all.

Otherwise, it would have to write them down by recording an offsetting reserve called a valuation allowance. This is where Citigroup's recent assumptions look awfully bold.

Always a Zero

Citigroup's allowance was zero as of Sept. 30, the same level it's been at since 2006, when Citigroup was posting near-record profits and its net deferred-tax assets were just $4.7 billion. None of the other three U.S. commercial lenders with more than $1 trillion of assets has adopted such an extreme stance. Their tax assets also are much smaller than Citigroup's.

Even the strongest of those too-big-to-fail banks, JPMorgan Chase & Co. (JPM), had included a $1.3 billion valuation allowance in its $13 billion net deferred-tax asset as of last Dec. 31, which was the last time it disclosed a complete tax footnote in its financial filings. Wells Fargo & Co. (WFC) and Bank of America Corp. (BAC) also had set up at least some allowance against theirs.

How could it be that Citigroup didn't need an allowance, while those other banks did? A Citigroup spokesman, Jon Diat, declined to answer that question. This result might make sense to me if Citigroup were the healthiest, most profitable bank of them all. It's anything but that.

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