Citi's Fogged-Up Crystal Ball

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Looking Fishy

Another reason Citigroup's lack of allowance looks fishy is that the bank has reported a cumulative loss for the past three years. Under the Financial Accounting Standards Board's rules on the subject, "forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years."

In its financial filings, Citigroup has said it overcame that presumption by concluding it "more likely than not" will generate at least $85 billion of taxable income over the next two decades. It also has said it has "sufficient tax-planning strategies" to fully realize the asset. That Citigroup was able to raise $20.5 billion last week, including $17 billion from sales of common stock, could help the company's case, too.

Still, the notion that Citigroup can credibly make far-ranging forecasts cries out for skepticism.

Making News

"It's a mystery to me," says Robert Willens, a tax and accounting specialist who teaches at Columbia Business School in New York. "They have the strongest possible negative evidence and the weakest source of taxable income, and somehow when you put those together they don't need a valuation allowance."

Citigroup's deferred-tax assets were in the news again this month, after the Internal Revenue Service granted the company an exemption so that it wouldn't lose any of them as a result of the Treasury's planned stock sales. Normally, such sales would be deemed an ownership change under the tax code, in which case Citigroup would have lost its right to use much of the assets.

Even with the IRS exemption, though, Citigroup still must demonstrate it can use them all, to avoid writing them down for financial-reporting purposes.

It wasn't until 1992 that the FASB began letting companies record deferred-tax assets that depend on future taxable income. Banking regulators limit the amounts lenders can count toward their capital measures, because such assets can't be used to absorb future losses. At Citigroup, $21.9 billion of its deferred-tax assets were disallowed for purposes of calculating its regulatory capital as of Sept. 30.

Rich History

There's also a rich history of companies with large deferred-tax assets waiting until they're on the verge of collapse to write them off. Among them: Fannie Mae, Freddie Mac, General Motors Corp., Bethlehem Steel Corp. and Nortel Networks Corp. Citigroup's tax assets would have been rendered worthless last year had the government not bailed the company out.

Other assets at Citigroup may need major writedowns, too. The company now has a $93 billion stock-market value, including the government's 27 percent stake. That's $47.5 billion less than the common shareholder equity it reported as of Sept. 30, which tells you investors still don't trust its balance sheet.

Maybe they know something Citigroup doesn't.

Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.

To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net.

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