Bloomberg’s analysis of Citi’s earnings release shows it taking advantage of accounting changes:

“Citigroup posted a $2.5 billion gain because of an accounting change adopted in 2007. Under the rule, companies are allowed to record any declines in the market value of their own debt as an unrealized gain.”

This is really funny – as if Citi can, or would buy back its debt…  WSJ‘s reporting shows it relying on nonrecurring investment banking gains like the other banks:

“The institutional clients group, which includes securities and investment-banking operations, reversed a year-earlier loss caused by write-downs. Several other big banks recently, including Goldman Sachs Group Inc. and J.P. Morgan Chase & Co., have seen their results given a large boost from their investment-banking businesses. In fact, some analysts have said those two banks’ results wouldn’t have been nearly as good in the quarter if not for the investment-banking segments.”

With the new MTM rules and the governments backdoor assistance to the banks through canibalization of AIG’s assets, investors will have to anticipate future realized losses themselves rather than depending on the banks to anticipate them for investors through writedowns. The good news is that realized losses, if they occur, cannot be hidden.  Ultimately, losses arise when the return on assets is less than the actual cost of funding those assets.  The FDIC’s Quarterly Banking Profile for the end of 2008 shows the current spread between rates on earning assets and cost of funds for all banks at about 2%, down from 3.5% in late 2006.  As more of the banks assets become nonperforming (that is non-earning), this spread will continue to narrow until there is no hiding the fact that it is negative.