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Emac's Bottom Line

Citi's Paper Gains

Two-thirds of Citigroup’s (NYSE:C) $21.9 billion in total net income for the last two years came from an accounting maneuver.

Citigroup’s accounting moves helped paper over its losses from its equity trading desks and investment banking division, as well as its sour assets housed at its bad bank, Citi Holdings.

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Specifically, Citi drew down a total of $13.9 billion out of its cookie jar loan loss reserves over the past two years, letting them flow into its bottom line. It reported $21.9 billion in total net income for 2011 and 2010.

Its $1.2 billion reported net profit for the fourth quarter 2011 would have been a deeper loss without this move, and its earnings per share would have been negative.

Here’s the question for bank investors: What happens to Citi’s numbers if recession takes hold again in the U.S. or across Europe in its entirety? Wouldn’t the bank have to rebuild loan reserves? And wouldn’t that mean Citi’s reported profits could sink, because it wouldn’t be able rely on these cookie jar reserves?

Citigroup says its fourth quarter total provisions for credit losses and other claims dropped 41% from the fourth quarter of 2010, to $2.9 billion.

That figure includes a $1.5 billion drawdown from its loan loss reserves.

Citigroup’s 2011 results also benefited from a paper gain of $1.8 billion, reflecting a sharp increase in the perceived riskiness of its debt — a move that helped JPMorgan Chase (NYSE:JPM) with its disappointing earnings last week.

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