In the expectations game, Citigroup (NYSE: C) $2.5 billion loss is great news for Wall Street. Bloomberg News reports that the analysts it surveyed expected a $3.67 billion loss, or 54 cents a share -- so Citi's results were $1.2 billion better than expected. But there were wide variations on what analysts expected Citi to lose -- from 51 cents to 67 cents.

This reminds me of the story of the boy who comes home from school to tell his mother about a grade he got on a test. Rather than bow his head in shame, he walks into the kitchen with head held high and a big smile on his face. And he announces: "Great news mom! I got a 70!"

The key reason for Citi's loss is the $7 billion in credit-related write-downs it took. These included reductions in the stated value of its subprime mortgage exposure and its investments in monoline insurance companies including Ambac Financial Group Inc. (NYSE: ABK) after they lost their AAA credit ratings. Analysts expected write-downs as high as $12 billion.

What will Citi do to start making money? It plans to cut $15 billion in costs in the next two to three years-- It canned 6,000 people in the quarter -- it will sell $400 billion in what CEO Vikram Pandit calls "legacy assets" and it will strive for 9% revenue growth.

Meanwhile, Citi has had some luck strengthening its capital base. It raised $13 billion in common and preferred stock during the second quarter which left it with a strong capital position -- a Tier 1 capital ratio of 8.7% -- well above its 7.5% target.

So is the worst over for Citi? Some think so -- its shares are up 10% in pre-market trading.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup stock.