Citi, UBS Announce Losses

The subprime mortgage mess in the US was always going to hurt the banks when the bubble finally burst. America’s Citi (formerly Citigroup) and Switzerland’s UBS have announced losses on the far side of $1 billion, and a shake-up will likely follow at both. With rumors of a similar loss at Deutsche Bank (and they are only rumors at this stage) and Credit Suisse saying it had been “adversely impacted,” the banking sector is going to have a rather unhappy time of things for the next few months.

Citi, which last year had a net income at this stage of the game of $5.5 billion, warned that its net income for third quarter 2007 will be more like $2.2 billion. Now, that’s still better than nothing, but investors expected much more. Expectations are everything these days. Citi will report its numbers officially two weeks from today, but the figure for net income was so far out of whack, the bank was legally obligated to warn the market. The bank will write down $1.4 billion on its leveraged debt business and record a loss of $1.3 billion on the value of its sub prime mortgage-backed securities.

Charles Prince, Citi’s CEO, issued a statement saying that the poor performance was driven “by weak performance in fixed-income credit market activities, write-downs in leveraged loan commitments, and increases in consumer credit costs.” That’s true in so far as it goes, but one must remember that he told the Financial Times back in July that his company was “still dancing” in the private equity market well after that business had tanked across the board. The real problem lies with Citi’s strategy and its inability to shift gears.

Over in Switzerland, UBS will be writing down CHF4 billion (CHF1=US$0.856), a loss about two-and-a-half times as large as Citi’s in the subprime mortgage market. The bank has warned that around 1,500 will lose their jobs, and managers who survive the purge can expect changes to their responsibilities and operations.

The BBC’s business editor Robert Preston pointed out that UBS was more than big enough to take this hit. However, he also noted, “The mess is doubly embarrassing for UBS since it took a substantial hit in the dry-run for this summer's market mayhem, the crisis afflicting the giant hedge fund, Long Term Capital Management, in 1998.” In other words, they didn’t learn much from the events of 9 years ago.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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