Citi Reports $4.69 Billion in Fixed Income Trading

We’ll see if the rally in Aussie shares can keep on keeping on this week. We have our doubts. Not least because the optimism surrounding bank share is not only misplaced. It’s naive.

So the banks have returned to profitability have they? That was the theme on the market last week. And if it were true, a recovery in bank balance sheets is just the sort of thing that might precede a recovery in the economy. But it probably isn’t true. Here’s why…

The big three banks reporting last week-Citibank, Goldman Sachs, and JP Morgan-all reported huge revenues from their trading desks. As we reported last week, Goldman’s $6.6 billion in trading revenues was not only 70% of total revenues, but it was also a ten billion dollar improvement on a $4 billion loss in the fourth quarter.

JP Morgan reported nearly $5 billion in revenues from fixed income securities trading. And Citigroup reported $4.69 billion in fixed income trading. In fact, all of Citigroup’s other major operating segments reported declining revenues for the quarter. Its global credit card revenues fell by 10%. Consumer banking revenues were down 18%. And Citi’s Global Wealth Management revenues were down 20%.

But something magic happened in the fixed income trading group for Citi. This is pure gold if you like arcane financial statements packed with fictional earnings. If you dig into the quarterly report, you’ll learn than fixed income trading revenues were boosted by a “net $2.5 billion positive CVA on derivative positions, excluding monoclines, mainly due to the widening of Citi’s CDS spread.

That takes some sorting out. A CVA is a “credit value adjustment.” As you can learn here, it’s the credit risk premium of a derivative contract. Once you sort it out, you learn that Citi “made” $2.5 billion on a derivatives position designed to profit when the companies own credit default swaps spreads widen.

Or, in plain English, Citi profited because it made a bet that the cost of insuring itself against a default would go up. The credit default swap market is the place where you can bet on the credit worthiness of a firm, or, essentially, the chance that a firm might default on its bonds. Citi appears to have reported a $2.5 billion trading gain in the fourth quarter precisely because the market thought the company stood a good chance of failing (hence the widening CDS spread).

As far as we can tell, if you use this kind of perverted logic, the closer Citi gets to bankruptcy, the more money it would “make” on its derivatives. That shows you how bogus the quarterly number was. The company reported declining revenues in its core banking and lending activities. But thanks to fixed income and this handy $2.5 billion CVA, the company was able to report $1.5 billion in net income.

Also, don’t forget that all of the banks benefitted from what financial sector analyst Meredith Whitney called “back door financing.” Whitney described what amounts to Fed-sanctioned front-running of the fixed income market by the banks. The Fed publicly telegraphed its intention to buy $750 billion mortgage backed securities from Fannie Mae and Freddie Mac and $300 billion in U.S. Treasury bonds. And that was AFTER it announced in late November of last year it would be wading in as a buyer for all agency bonds to support the U.S. mortgage market.

Since the financial statements of the banks don’t break trading revenues out a line item basis, it’s hard to say how much money each bank may have made by front running the Fed’s actions in the bond market. And of course, there was nothing really illegal about it that we can gather.

But from the looks of it, what we have here is a kind of back door subsidy to bank profitability provided by the Fed. First quarter earnings were strongly boosted by an increase in the valuations of mortgage backed securities that went up with Fed buying. Before you get all excited about the recovery in financial stocks, you may want to keep that in mind.

Dear Dan,

May I add an important point from the ABS Housing Finance report, which you seem to have missed? In the report it stipulated that, “In original terms, the number of fixed rate loan commitments as a percentage of total owner occupied housing finance commitments decreased from 3.8% in January 2009 to 2.7% in February 2009.”

This alludes to the fact that, not only are the FHBs propping up the housing market on their own (with govt. support of course), but they seem to be doing it with variable rate borrowings. This is a recipe for disaster.

We are at or very near the bottom of the interest rate cycle, and people are taking on more variable rate borrowings? Are they mad? Wouldn’t it make more economic sense to lock in a low fixed rate for the next 15 years, or more, at this time?

There is much more upside potential on interest rates than downside. Why are borrowers not using the low rate environment, currently offered, to lock in a low fixed interest loan for as long as possible? The RBA cash rate is only 300 basis pts from ZERO, and I highly doubt that the RBA is even willing to cut another 150 basis pts.

I’m sure that the IRSwap books of every major Australian Bank cannot forever suppress the upwards pressure, currently building on medium & long term interest rates. Although that will not stop them from trying. It looks like this could get very, very ugly indeed…


Your well drafted article on the relaxing of the FAS 157 rules on security values seems to not want to acknowledge that this latest adjustment is to actually to correct yet another stupidity. Any lender who intends to hold the security for the life of the loan and has no need to sell while those about him are scrambling to shore up their balance sheets, should in my view feel free to snub their nose at the market price and soldier on.

These almost arbitrary market values now being set are a very recent innovation and almost coincide with the magical disappearing balance sheets that have been shrinking since mid 2007.

Why not get rid of the rule altogether and let the institution make its case in the market – transparency could be in vogue and investors and borrowers alike could judge the book by its contents.

Terence B.

New Zealand

More transparency? Now there’s a thought…

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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23 Comments on "Citi Reports $4.69 Billion in Fixed Income Trading"

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Michael Krause

Interesting. So if any company fully hedges with long CDS, then in essence they can never fail?

Quite a conundrum.

Anthony B
Interesting commentary and good analysis of the Citi Balance Sheet q/q. However, may I ask why this revelation troubles you? I gather it’s because C profited not from core business operations, but from its proprietary trading… and it seems corrupt that it effectively ‘bet against itself’ by buying its own CDS. I say, “WELL DONE VIKRAM!” This isn’t like Pete Rose betting against his own Cincinnati Reds, because Pete Rose’s bets were discrete–placed on single games, which means he could manage his team toward loss in those select games. Citi’s CDS positions are a hedge or insurance, that are a… Read more »

I reckon my house is worth $2 Trillion.
Does that mean I am fully at liberty to borrow $1 Trillion against its’ notional value.
I don’t think so, yet, the banks are doing so. We are to assume they know how much the assets they have on their books is worth and as such can mark their balance sheet accordingly.
So the era of fictional profits and fictional asset values leveraged to the maximum fee generating dilution possible, continues.

No point in having sensible rules if you can get by happily enough having none at all.



I think you have it a bit wrong…

“Or, in plain English, Citi profited because it made a bet that the cost of insuring itself against a default would go up.”

That statement is incorrect. The CVA is overlaid onto Citi’s liabilities, i.e. the debt they have outstanding in the wholesale market. Theoretically they could buy it all back several cents below par and make a “profit”, but obviously this is a bit circular as they would be short of funding from doing this.


[…] full article here Daily […]

cds ftw

They didn’t take out a derivative position against themselves, they are just marking-to-market their own debt, since if there bonds are trading at 80 in the market then this is the level at which they could theoretically buy them back.

This rule has been around for a couple of years. Get your facts right before criticising please.


CNBCs coverage of Goldman’s results: “It almost appears as if Goldman can generate trading profits at will..”. Now there’s a huge red flag. So could Madoff.


[…] Citi Reports $4.69 Billion in Fixed Income Trading By Dan Denning • April 20th, 2009 • Related Articles • Filed Under […]

John Lu

I posted a comment on my website. Quote, “The real kicker is: how is Citi going to unwind the trade now that the financials are stabilizing? will the profit stick?”


[…] Apesar dos bancos estarem dando “lucro” ele eh suspeito de ser mais uma acochambração contabil como alerta o The daily reckoning. […]


One of the reasons for fixed rates not doing as well:


Oh the short sighted market..


Don’t forget all the trading profits Citi (and other banks) have made from the AIG (and bear,lehman etc to a lesser extent) Unwinding process as they are forced to dump “toxic” assets at firesale prices.. these banks are snatching em up very very very cheap!


[…] In altri termini, Citi avrebbe comprato protezione creditizia sul proprio nome attraverso i credit default swap, scommettendo sull’allargamento degli spread, cioè sull’aumento del rischio del proprio […]

John Lu

I’d like to clarify that my previous comment specifically related to the statement in the article, quote, “Once you sort it out, you learn that Citi “made” $2.5 billion on a derivatives position designed to profit when the companies own credit default swaps spreads widen.”

Taken out of the context, i.e. without access to the full comment on my website, my previous post didn’t make much sense. If you are interested, you can find me at:


I think Joe is onto Terrence B.’s ruse.

Two points to add: 1) While it is true that Citi made 2.5B on the CVA in Q109, they lost 5.5B in Q408. And they have net loss on the CVA currently. Not hard to realize when one realizes that most of Citi’s counterparties have worse CDS marks than Citi does. Net net the CVA marks in Q1 represented the fact most major corporates that have Interest Rate Swaps on with Citi saw their credit improve 2) According the public disclosures on AIG, Citi had no meaningful CDS trades with AIG. They did have a securities lending relationship with one… Read more »

Hi Dan
If you want an example of citi group market manipulation, check out the volume of BLY on the asx. Daily 20-30 million traded, most trades have Citi as buyer and seller.

Through the Freedom of Information act and the TARP bailout money in side the Big Banks like Goldman Sachs or Citi or AIG we Investors should be able to see all the stock holders and Tier one investors that hold major interests in these banks ……… before investing in them . The laws should be specific in that the investments in these banks be staged in the USA , and that if foreign Investors want to sell their interests in these banks and take the money out of the USA , that Money should be not allowed to leave the… Read more »
D Man
JL Your question : Wouldn’t it make more economic sense to lock in a low fixed rate for the next 15 years, or more, at this time? The answer : The market is propped up by first home buyers. This means, prices are still too high relative to their income, they generally have lower job security, lower income, higher loan to val ratios and expectations of future spend on children. All of these factors lead to little or no excess cashflow. Banks are charging 2% or 3% to lock in long term interest rates. These FHB people have stretched their… Read more »
Thomas J. Spooner
This is another complex example of how the whole banking system is thoroughly corrupt, not because of the nature of banking, but because of the intertwining with corrupt government. It is honorable to get rich hnestly and productively, but thoroughly immoral to use government in any way to acquire wealth. This is because govenment is non-productive, can only steal from productive people, and uses the farce of “democracy” (one sheep and two coyotes deciding what to have for dinner) to redistribute the wealth. Establishment bankers are among the worst transgressors. More government regulation is not the answer, it is a… Read more »

[…] it’s no big deal), so I hunted around for a little more information on this and found this article that explains the situation pretty well. Are you sitting down? Here’s how it shakes […]

TAke Citi’s derivative book. Where they are paying (i.e. borrowing) they have revalued these risky cashflows using the Citi CDS curve. Where citi is receiving, they have revalued the risky cashflows using the swap counterparty’s CDS spread. Citi’s cash obligations are revalued using cash bond spreads. These are unchanged Q4 09 to Q1 09. Citi’s CDS spread widened from Q4 08 to Q1 09, therefore the ‘liability’ i.e. pay side of their derivative books decreased in PV after the credit valuation adjustment was done. You CANNOT buy protection on yourself. Citi is NOT doing that. So get your facts correct.… Read more »
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