We've all heard the phrase "too big to fail," but how about "too big to succeed?" Citigroup's (NYSE: C) earnings report released last week was a convoluted brew which contained very little optimism and led an observer to wonder if Citi is now relegated to the "zombie world" of banks.

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Citi's Earnings - or Losses
Citigroup broke down its third-quarter earnings with $101 million in net income, but a per share loss of 27 cents. Revenues were $20.4 billion, while Citi also had $8 billion in net credit losses.

Accounting for preferred shares was $288 million, along with the debt exchange which gave the government a 34% stake in the company, so this came to a $3.24 billion loss.

Confused? These are just the highlights, not the whole report. No wonder portfolio manager Walter Todd of Greenwood Capital Management remarked "it can give you brain damage trying to figure it out." He further indicated investors should look for other opportunities in the financial area.

What Do the Numbers Mean For Citi?
This is the question analysts, money managers, commentators and investors ask. Citi continues to work off massive credit losses (the $8 billion net credit losses) because their consumer lending business, mortgages and credit cards, remains unhealthy.

The consumer lending business right now is difficult anywhere. JPMorgan Chase (NYSE: JPM), had $3.6 billion in profits in its third quarter, but $1.9 billion of that came in its fixed income trading division, while cautions remain about its consumer lending business. Bank of America (NYSE: BAC) in its third-quarter report had $1 billion in losses with 14% credit card charge-offs, yet similar to JPMorgan had its own Merrill Lynch division bring in $2.2 billion in investment banking profits.

Credit card issuer Capital One Financial (NYSE: COF), has seen its delinquencies continue to rise, with its annual net charge-off rate rising last month to 9.77% from 9.32% in August. Even thriving Wells Fargo (NYSE: WFC), another consumer-heavy bank, is looking at more loan losses despite its record earnings this quarter. So it is apparent that Citi is swimming in difficult banking waters along with the other consumer lenders. But Citi has greater problems.

Citi Holdings And More
Citi Holdings is a kind of bin that some parts of the once ultra-mega-sized Citi, namely its toxic assets and soured derivatives, were thrown into. How much did Citi Holdings have on its books? $891 billion at peak levels in the first quarter of 2008. How much still? $617 billion. Does anyone really know what these assets are worth? How they'll ultimately be disposed of?

Citi Holdings is a sobering reminder of the hangover from the subprime mortgage-derivative excesses from not that long ago.

Why Zombies?
Citi possibly faces the forced sale of Banamex, its highly successful Mexican banking unit, due to politics. While the sale may fetch $20 billion, it will remove a profit-making asset that may generate as much as 15% of Citibank's profits according to Financial Times, illustrating another huge problem beyond the considerable one of having a heavy core of inert toxic assets.

Despite amassing additional capital reserves, Citibank does not have the strong profit-producing areas that it needs to become a profitable bank. Instead, it looms as a potential zombie, a bank, as Morgan Housel has written, that is technically alive but has an "unviable business model."

The Crux For Citi And Its Stock
The heart of the issue for Citi is finding a way not only to survive but to profit. Its business model, while not failing due to the government prop-up, is hardly succeeding. And simply waiting for the credit cycle to turn, which might work for some of the other consumer lenders, still does not address the toxic waste pile simmering at Citi's center, the ongoing massive credit losses, far flung and seemingly disconnected operating divisions, and a lack of leadership.

The Bottom Line
Savvy traders flipping Citi stock to and fro is one thing, but investing in it? We're with Walter Todd on this one. Maybe Citi's not too big to succeed, but it may be just too damaged, too unwieldy or too poorly run. (To learn more, check out our Investopedia Special Feature: SubPrime Motrgage Meltdown.)

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