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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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March 3, 2009 3:37 PM ET
The amount of capital that Citigroup holds for purposes of meeting regulatory requirements may not be as sizable as it is reported to be, according to an analysis of the troubled bank’s accounting practices. The company currently reports $44.5 billion in deferred tax assets based on its losses for the past three years. Since these can be used to reduce its taxable income, and thus its tax liability, the losses are counted by regulators as so-called Tier One capital. Citi’s tax assets far outstrip the $29 billion it has in common equity, and thus account for more of Citi’s 11.9% ratio of Tier One capital as a percentage of assets. With regulators requiring a minimum of 6%, Citi has recently boasted that its Tier One capital is among the highest in the industry and constitutes evidence that its capital base is strong. But in a research note released today, tax and accounting expert Robert Willens pointed out that Citi has not set up a valuation allowance that U.S. accounting rules generally require to back up its conclusion that it would be more likely than not to earn enough income to use those losses. In its recent 10-K, Citi reported that it would have to earn about $85 billion in taxable income within the next 20 years to be able to use all of those losses, and insists it is more likely than not to do so. If its operations don’t supply enough income, the company indicated that it would reduce deductions for interest payments by issuing preferred shares rather than debt to fund its operations, repatriate foreign earnings, and/or sell operating assets that have appreciated in value. But Willens noted that projecting specific amounts of income for as long as 20 years without considering that at least some is less likely to be realized, as Citi has done, contradicts the spirit if not the letter of U.S. GAAP. “You can’t be an incorrigible optimist,” he said. Willens said Citi’s decision not to establish such an allowance is “a judgment call,” but is “aggressive” in light of the size of the bank’s tax assets and its recent performance. That casts doubt on the value of those assets, and suggests that Citi’s actual Tier One capital may be significantly lower than 11.9%. Citigroup failed to respond to a request for comment. Deferred tax assets aren’t included in more conservative measures of capital, such as tangible common equity, which Citigroup doesn’t report. And neither are preferred shares, though they, too, are included in Tier One capital. In a note yesterday, Christopher Whalen of Institutional Risk Analytics estimated that Citi’s ratio of tangible common equity was likely to remain well below 3% based on a conservative estimate of the amount of preferred shares that are likely to be converted to common under the terms of the Treasury’s latest bailout. A ratio of 3% for tangible equity is widely considered the minimum required for a bank to be deemed solvent. Under the most optimistic scenario for the Treasury’s induced conversion of Citi preferred to common, Whalen estimated that the bank’s tangible equity ratio would rise to 3.8%.
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