It’s all to do with tax: Tax Assets, and the new U.S. corporate rate of 21%, down from 35%.
So what then, you might ask, is a Tax Asset?
Companies typically get these tax discount coupons for two reasons.
Firstly, they made a loss previously. When you make a profit, you pay tax. But when you make a loss, you don’t get tax back. Pity. You do, however, get a pay-less-tax-in-the-future coupon, to use when you make your next profit.
Secondly, companies get discounts for future tax when they've paid too much tax, for various reasons.
Here’s the important thing to know: When the tax rate is 35%, that little tax discount coupon doesn’t say “Worth $35." Rather, it says “Discount for the tax on $100 of profit." Even though those two amount to the same thing.
But if the tax rate drops to 21%, the discount on $100 of profit is now worth $21, a 40% drop in value.
And that’s what happened to Citigroup. They had a tax discount on future profits of $135 billion. That discount is now worth $19 billion less. Hence the reported loss of the same amount.
So why did Citigroup shares jump? Markets are always forward focused. Sure, the new tax law cost Citi $19 billion this quarter, but it will save them many billions more going forward.