Monday, April 20, 2009

Financial Stocks Earnings Are Phony

I would like to speak directly to those people who are currently buying financial stocks based on their "fabulous earnings". How dumb are you? Haven't you lost enough of your money to Wall Street? If you really insist on giving your money away, please contact me directly and I will gladly accept your "donation".

Let's take a closer look at the biggest Wall Street problem child - Citigroup - and their earnings. Its global credit card revenues were down fell by 10%, its consumer banking revenues were down by 18% and its Global Wealth Management revenues were down by 20%.

However, Citigroup overcame all of that with $4.69 billion in revenues from its fixed income trading. Here is where the fictional earnings came in. If you dig into the quarterly report, you will see that fixed income trading revenues got a $2.5 billion "booster".

The "booster" was a net $2.5 billion positive 'credit value adjustment' on derivative positions, excluding monoclines, mainly due to the Widening of Citi's own Credit Default Swaps Spreads! A credit value adjustment is the credit risk premium of a derivative product.

So once you figure everything out, you learn that Citi "made" $2.5 billion on a derivatives position designed to profit when the company's own credit default swaps spreads widen! Basically, Citi profited because it made a bet that the cost of insuring itself against a default would go up!

Following this logic to its conslusion, the closer that Citi gets to bankruptcy - the more money it would "make" on its derivatives! This should show everyone how phony their quarterly "earnings" number was.

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