Financial Sense

Numbers That Do Not Add Up

by Rob Kirby | February 15, 2008

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Having just learned about the plans of U.S. financial elites to cease publication of another swath of economic data, producing this short report took in a timely fashion has taken on new meaning � after-all, in another month or two � the data on which it is based may have disappeared too.

The Latest Data Scheduled to Disappear Behind the Iron Curtain:

Due to budgetary constraints, the Economic Indicators service (http://www.economicindicators.gov) will be discontinued effective March 1, 2008.

A few more bones to hide in the closet, ehhh?

Anyway, the real reason for this report [I'm typing quicker than usual] is the latest Qrtrly. Derivative Fact Sheet [Q2-07] � published by none other than the Office of the Comptroller of the Currency for the United States of America.

The following is segment of a table on page 32 of the latest quarterly derivatives report which shows the size of J.P. Morgan�s and Citibank�s outstanding notional amounts in derivatives in general � and specifically � the enormity of their exposure to Credit Derivatives, which is the root source of most of the problems that ail the financial system:

Source: Page 32 of Q2/07 OCC Quarterly Derivatives Report

The chart above shows at Q2/07 [or Sept. 30 07] Citibank had outstanding notional Credit Derivatives of 3 Trillion. At this point in time, remember, the sub-prime melt down was only about two months old [having been widely acknowledged in early August 07].

The deleterious effects on Citibank�s financial performance stemming from this excess only began to be reported in Q4:

New York, NY, January 15, 2008 � Citigroup Inc. (NYSE:C) today reported a net loss for the 2007 fourth quarter of $9.83 billion, or $1.99 per share��

Management Comment

"Our financial results this quarter are clearly unacceptable. Our poor performance was driven primarily by two factors � significant write-downs and losses on our sub-prime direct exposures in fixed income markets, and a large increase in credit costs in our U.S. consumer loan portfolio. Looking beyond these two factors, revenues and volumes continued to grow strongly in a number of our franchises and we generated record results in international consumer, transaction services, wealth management, and advisory," said Vikram Pandit, Chief Executive Officer of Citi.

Citibank Bleeds While J.P. Morgan Exceeds

Knowing that so much of what ails Citibank�s finances is effectively �fenced� by their 3 Trillion of notional Credit Derivatives � shouldn�t someone, somewhere be asking what's really going on over at J.P. Morgan who has 7.8 Trillion in notional of the same stuff that is burying Citibank?

The sub-prime meltdown is categorically and beyond a shadow of a doubt a credit derivatives induced / related event.

It behooves me that this institution manages to avoid any scrutiny in the mainstream financial press � unless perhaps one stops to consider this development [circa May, 2006] where Dawn Kopecki reported in BusinessWeek Online in a piece titled, Intelligence Czar Can Waive SEC Rules,

�President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006, that was opaque to the untrained eye.�

When one stops to consider this � suddenly all of the numbers, or lack thereof, make perfect sense!

Copyright © 2008 Rob Kirby
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