This market gets curiouser and cursiouser.
In its last earnings report, Citigroup noted a $2.5 billion credit due to the fact that their debt is cheaper. In mark-to-market terms, they discounted their debt, and so recorded a profit. On the other hand, Morgan Stanley’s credit quality improved, so they had to record a $200 million charge. So Citi is profitable because their credit is worse, and Morgan lost money because their credit is better. As Dave Barry would say, I am not making this up.
This illustrates why the whole concept of mark-to-market has to be carefully re-thought. Sure, if Citi could buy back all their debt at discounted levels they could record a profit. But they can’t, so why should we pretend that they can? The real question is: “What is Citi’s value as a going concern?” Everything else just gets in the way of this analysis.
There are a lot of regulators who never made a loan passing judgment on banks and a lot of accountants who never had to manage a portfolio. There is no substitute for real-world experience. Let’s hope that our latest experience will make us all more realistic.
Douglas R. Tengdin, CFA
Chief Investment Officer
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