You don't have to read very far into the coverage of the recent bank earnings announcements to see that there's a lot of dodginess involved. First Goldman reported a $1.8 billion profit, which was great until we learned that they conveniently left December out of their quarterly numbers--December being the date of some enormous losses.

Now, Citigroup is touting its $1.6 billion profit--except that, once you read a little further, you notice that what drove it was a $2.7 billion one-off gain that's entirely an artifact of accounting alchemy. Citigroup was apparently able to book this $2.7 billion because the value of its outstanding debt declined. Yes, that's right. A development those of us who observe the physical laws of this universe would normally regard as bad turns out to be the difference between a billion-dollar loss and a $1.6 billion profit. The Times' Eric Dash had a good explanation yesterday:

Here is how it worked:

Citigroup’s debt has lost value in the bond market because of concerns about the company’s financial health. But under accounting rules, Citigroup was allowed to book a one-time gain approximately equivalent to that decline because, in theory, it could buy back its debt cheaply in the open market. Citigroup did not actually do that, however.

“It’s junk income,” said Jack T. Ciesielski, the publisher of an accounting advisory service. “They are making more money from being a lousy credit than from extending loans to good credits.”

When Citigroup CEO Vikram Pandit said a first-quarter profit was essential, he wasn't kidding around.

I understand why Goldman is playing these games--they desperately want to give back their TARP money so they can get on with paying their top brass mammoth bonuses. But Citigroup isn't going to wriggle free of the government's grip any time soon, regardless of what happens. You'd think it would be in their long-term interest to try to rebuild some credibility. Instead, it sounds like Pandit is so concerned about his own job that he's casting his lot with these transparent shenanigans. (Practically every other week you read that Treasury's on the verge of axing him.) Maybe Treasury should just end the misery already and give him the Rick Wagoner treatment. It might send a healthy message to the rest of the industry.

--Noam Scheiber