Farrell: Citi vs. GS vs. SEC

Poor Vikram Pandit. The guy can't catch a break. Citi finally puts up a good number and the market has to concern itself with Goldmanfallout, Icelandic volcanic fallout and Grecian fallout. Citi surprised everyone with an earnings number of $0.14 a share when the consensus had been for a flat earnings report.

Revenues were strong, expenses contained, and it looks like credit losses are peaking. Return on equity was around 13% and tier one capital a healthy 9.1%. In a confused market day the stock finished up 7%. The bank has repaid $20 billion of the $45 billion rescue package in December of last year. The remaining $25 billion was converted into common stock on which the government has a handsome profit.

The Greek issue is sort of on hold while the volcanic cloud grounds aircraft all over Europe. The EU/IMF/ECB/NFL/CIA/FBI summit has been put off a few days while they try to converge on Athens. What are they going to do ? Take a look and say. "Gee, you guys are broke." Stay home and wire the money since that's what you will be doing for a few years. Greece has a debt to gross domestic product ratio of 125%.

They need to raise $68 billion each of the next five years to roll over existing debt and pay interest. That's about equal to 100% of Greece's GDP. But figure with "fiscal austerity" (yeah, right) GDP is likely to fall so tax revenues are likely to suffer. And the immediate issue is they need to raise 11.6 billion Euros by the end of May to roll existing debt.

They may be forced to activate the emergency measures in two weeks or so, which puts the bailout ahead of regional elections in Germany which puts Angela Merkel in a tough political spot. Morgan Stanley economist, Joachim Fels, said in an April note that the bailout creates a moral hazard problem and may prompt Germany to leave the current monetary union.

That makes a degree of sense in that it will be Germany's deep pockets everyone will need to pick. Greece faces an 11.6 billion euro roll of its debt by the end of May which could mean they will trigger the bailout call within two weeks. The EU just said Portugal needs to address its deficit as a percent of GDP. Public debt in Portugal is 86% of GDP compared to 125% for Greece, but private debt is almost 240% of GDP while Greece's is 123%.

Total debt matters and if they come into the international crosshairs of the bond/derivative guys who can they run to but Germany. And Germany is not going to bail out a second country and may still balk at bailing out the first. The 10-year Greek bond was trading north of 7.5%, almost as bad as it has recently been, so the market is highly doubtful about the rescue package. What is needed is to face the situation as it truly is and restructure/default and try to pick up the pieces. And give poor Vikram his day in the sun.

The Goldman mess didn't send the market skittering when trading opened Monday despite headlines around the world. The FT said the "Regulators conclusions are damning: 'Goldman's marketing material for Abacus 2007 AC1 were false and misleading because they represented that ACA selected the reference portfolio while omitting any mention that Paulson, a party with economic interests adverse to CDO investors, played a significant role in the selection of the reference portfolio."

In fact, says the SEC complaint, "Goldman made investors think that the reverse - that Paulson, widely respected for its investment views, was buying into the equity to the tune of $200 million." Not to nitpick, but when this deal was put together nobody knew who Paulson was. But what is that when political hay is to be made.

The timing of this was so perfect coming on top of the push for financial regulatory reform. Late in the day, however, the story went around that the vote at the SEC to bring charges was 3 to 2, showing considerable doubt about the strength of the case (if true) and the market turned and wound up for the day. Give the credit for the up day to Vikram. He needs an attaboy.