Mike Mayo: Citigroup Cooking the Books

CLSA analyst Mike Mayo isn't pulling any punches when he accuses Vikram Pandit and Citigroup of cooking the books. For their part, Citigroup is proving that where there is smoke there is fire by freezing Mayo out and refusing to talk to him.

At issue are the losses on $50 billion worth of deferred-tax assets (DTA's), losses that amount to $10 billion according to Mayo. By refusing to write down the losses, he believes Citigroup is committing accounting fraud. There's no doubt that the write down would push Citigroup deep into the red, which explains the bank's reluctance to claim the loss.

Mayo is something of a maverick in the analyst world, and it hasn't won him many friends at the banks he's downgraded over the years. Credit Suisse is believed to have fired him because his downgrades were costing the bank business, revealing the inherent conflict of interest in equity research. The analysts who play team ball and overstate banks' outlooks get continued access to management; the analysts who tell it like it is get frozen out.

Charlie Gasparino has been all over the story, coming out in defense of Mayo and pointing out the various and obvious weaknesses in Citigroup's argument. And he says Mayo has a legitimate ax to grind:

DTA's are tax credits that banks can use to offset tax bills that come in the future. But there's a catch: They can't be used if a bank has three years worth of cumulative losses. Citigroup despite being profitable so far this year, recorded a net loss in 2009, 2008 and 2007. According to Mayo, and several accounting experts I've come across, that means the firm is required to give a chunk of the money back, and take a large multibillion writedown.

Gaz explains the issue here on FBN:

So what's the deal? I'd love to hear from any ER guys out there. Are you really restricted in what you can say out of fear that you might lose access or your bank might lose business if you're a little too honest about a given company? What would a $10 billion write down do to Citi? And will Vikram Pandit be joining Barry Ritholtz's Perp Walk?

Comments (10)

12y
Jorgé, what's your opinion? Comment below:

This guy's been doing this since the 90's and was apparently good but over time has had mixed results, supposedly put a buy on Lehman a week before bankruptcy. If he's right with Citi then more power to him, and Pandit's pretty much screwed.

People like Coldplay and voted for the Nazis, you can't trust people Jeremy
12y
aleph, what's your opinion? Comment below:

Basically this a Hail Mary by Pandit. The only way the DTA's can be justified, is if Citi has a large enough profit stream going forward(and therefor use the DTA's to offset). Mayo thinks that's overly optimistic, and for the most part he is right. On the flip side, Pandit will lose his job any way if the company doesn't deliver on earnings, and so he is doing what he can to make the company look as attractive as possible, in order to hold on to his jobs. If the feds at any point decide that Citi is being overly optimistic, you will of course see a massive write down, and most likely my boy Vikram is gonna be looking for a new job..... I don't cover financials, and this only my perspective.....

Best Response
12y
IlliniProgrammer, what's your opinion? Comment below:

Edmundo, you've got a record of getting incredibly pessimistic right near the bottom over the past few months- along with the rest of the market.

The fact of the matter is that if Citigroup needs another bailout, that's actually bullish for anything USD-denominated.

In particular, I find it interesting that stocks are trading at about 11x forward earnings projections, one of the lowest levels we've seen since they bottomed in March, and at a lower multiple than before the October crash. When we ignore analyst optimism and look at trailing earnings, stocks are still historically cheap at about 13x.

12y
IlliniProgrammer, what's your opinion? Comment below:

Well, if a loaf of bread costs $50K, there's a good chance you're going to become a millionare and/or billionaire if you've invested in the stock market.

Actually, the same situation happened in the Weimar Republic back in the '20s. People who were invested in stocks became "billionaires" and made out much better than folks who stayed in cash while inflation was running at 5%/day.

So yes, if the federal government is printing money to bail out financial institutions (or pay off WWI debts), that's "bullish" for anything that's not directly associated with the currency.

"What's the best way to make a small fortune off of banks needing a bailout and the feds printing money to do it?"

"Start with a large fortune and short equities against dollars."

12y
LIBOR, what's your opinion? Comment below:

Aren't the books at all the banks cooked? Mark-to-fantasy accounting.

looking for that pick-me-up to power through an all-nighter?
12y
danjay72, what's your opinion? Comment below:

Print more money and print it faster.

Numbers are pointing towards deflation even.

And of course Citi is cooking the books - they pay people to make it look as nice as possible - as does everyone else.

Get a no bull$hit, straightforward as possible, uniformed accounting measure in FFS.

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12y
Anonymous Monkey, what's your opinion? Comment below:

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