The story could be copied from the previous week’s headlines for Goldman Sachs (GS:NYSE) and JPMorgan Chase (JPM:NYSE), only with the company names replaced with Citigroup (C:NYSE), and we’d learn nothing new about the state of our financial system…

But the news does give some investors a little cheer… This quarter is the first positive quarter for Citi in the last 18 months, and that certainly has shareholders smiling. At least some of them.

Profits clocked in at $1.6 billion, which is a great number compared to the $14.1 billion in write-downs in the first quarter of 2008. One of the reasons for the profits swing was a 23% drop in operating costs.

But the common shareholder didn’t see any of that money. Here’s what happened, as reported by CNNMoney:

Citi calculated its profit before deducting the costs related to preferred shares. Paying for the preferred shares has gotten expensive, as a look at Friday’s earnings statement shows. In the first quarter alone, Citi paid out $1.2 billion in preferred stock dividends. It also took a $1.3 billion hit when the price on some convertible preferred shares it sold in January 2008 reset. Those costs come out of common shareholders’ pockets – which is why the bank ended up posting a loss of 18 cents a share in a quarter that was otherwise profitable.

That’s why Citi shares first rallied on the news but have since dropped into the red.

These leaner financial institutions have been putting on quite a show this earnings season, but underlying problems still persist.

For example, its Tier 1 capital ratio jumped to 11.8% in the first quarter, up from 7.7% a year ago. (Anything above 8% is considered healthy.) But quarter over quarter shows a slight drop from 11.9%. Quarterly revenue nearly doubled to $24.79 billion, but its credit costs jumped 76% to $10.3 billion.

Zachary Scheidt, editor of Taipan’s New Growth Investor, writes, “The pre-market futures [were] bouncing around after Citigroup ‘beat estimates’ early this morning. I find it a bit ironic because Citigroup was actually the catalyst that started this whole rally back in March when the CEO stated that 2009 was turning out to be a ‘good year.’”

Interestingly, Zach wrote just ahead of the market open, “It wouldn’t be surprising at all if the rumor (we’re having a good year) marked the beginning of our current rebound, and the news (the actual first quarter earnings release) marks the beginning of another wave of selling.”

With Citi turning to red, Zach’s call could be spot on…

Other Related Topics: Bank Bailout , Economic Growth , Sara Nunnally , Taipan Insider

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