Subprime Headaches for Citigroup and UBS

October 1, 2007 No Comments »

More mortgage woes weighed in Monday as Citigroup and UBS announced larger than expected losses in the third quarter due mainly to the poor performance of subprime loans.

Citigroup Inc., the largest U.S. bank, said its third-quarter profit fell 60 percent thanks to $5.9 billion in credit and trading losses on loans and mortgage-backed securities, citing “dislocations in the mortgage-backed-securities and credit markets, and deterioration in the consumer-credit environment.”

The banking giant said it lost $1.3 billion on subprime assets and would write down roughly $1.4 billion on loan commitments, while higher loan-loss reserves contributed to $2.6 billion in credit costs.

“Our expected third-quarter results are a clear disappointment,” Citigroup Chief Executive Officer Charles Prince said in the statement.

“We expect to return to a normal earnings environment in the fourth quarter.”

Meanwhile, UBS, one of Europe’s largest banks, predicted an unexpected loss in the third quarter because of a $3.42 billion write-down for the value of its mortgage-backed securities.

The loss will be the bank’s first since 1998 when it had to write down its investment in Long-Term Capital Management, and will come with 1,500 job cuts, including Clive Standish, its chief financial officer, and Huw Jenkins, the head of its investment bank, who are both stepping down.

“I am confident that, with these changes and by properly absorbing the lessons of this quarter, we will become a stronger bank. We have a strong balance sheet, a strong franchise, and leading positions in all businesses in all regions,” said UBS Chief Executive Marcel Rohner.

Rohner said that around $19 billion in subprime retail mortgage-backed securities remain with the bank, but that it is “quite comfortable owning” these positions at current valuations.

“You can always create a doomsday scenario which will result in further losses, but we see that we are positioned well within our earnings capacity,” he said.

Shares of both UBS and Citigroup rose on the news, as investors seemed to express that the worst is now behind us.

On September 17th, Citigroup launched its non-prime mortgage lending unit , Citi Residential Lending, a mortgage lender that specializes in Alt-A loans and non-prime mortgage programs.

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