Mike Mayo vs. Citigroup: score it yourself

The Mayo prediction

Mike Mayo, the heralded bank analyst of Calyon Securities, predicted late last year that Citigroup would write down its deferred tax asset account, on the books at a net value of $44.6 billion, by $10 billion at yearend.

The 10-k is out

Reporting time has come and gone.  C filed its 10-k, all 272 pages of it, with the SEC about a month ago.  No writedown.  In fact, deferred taxes are up $1.5 billion on a net basis, at $46.1 billion.  This despite three consecutive years of substantial pre-tax losses.  Further, C’s auditor, KPMG, has given C an unqualified audit opinion–meaning KPMG agrees that the accounts give a fair and accurate picture of the company’s finances.

C’s reasoning

in not writing down its deferred tax assets:

1.  Foreign operations aren’t a problem.  The company’s domestic–federal, state and NYC–deferred taxes expire in twenty years.  Over that time the company needs to generate $86 billion in pretax income to use them up fully.  That would be an average of $4.3 billion in pretax a year. (What isn’t said is that if we look back a decade ago, well before the current financial mess, C was earning $10 billion+ annually.)

2.  C has $27.3 billion in profits from foreign operations that are “indefinitely invested” abroad.  Were that money repatriated to the US, $7.4 billion in US income taxes–after allowance for (lower) foreign taxes already paid–would be due.  A reasonable guess (read: my very rough calculation) is that doing so, which would arguably give C greater flexibility in using this capital, would use up about $14 billion of the deferred taxes.

3.  If all else fails, C could sell assets.  Presumably, there are some where C still has a profit.  They might be businesses or physical assets that have been on the books for ages.  Or they could be the money-making side of hedged investment positions.

What to make of this?

Not a lot.

As far as I can tell, Mr. Mayo is keeping a low profile, which is what brokerage analysts do when they make a dramatic, headline-grabbing prediction that doesn’t come true.

C is also leaving well enough alone.  It would be unseemly for a big company to gloat–especially prematurely–over an unfavorable analyst comment.  It will doubtless hope that Mr. Mayo’s future comments about it will be more tempered.  Good luck with that.

KPMG isn’t making a strong statement, either.  Yes, its “unqualified” opinion means it doesn’t see the situation at C as being as dire as Mr. Mayo has been contending.  As far as deferred taxes are concerned, KPMG sees no convincing evidence to say C is crippled enough to be unable to start earning profits at half the rate it did a decade ago.

What makes this news?

Nothing, really.  I just thought I should follow up on the Mayo prediction, since I wrote about it in the first place.  And also, this illustrates a bit about how Wall Street works.

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