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"...Our losses greatly exceeded the profits we made in this field over several years,"
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Citigroup admits subprime investments were losers
Reuters
Tuesday, December 4, 2007
LONDON: Citigroup, the largest U.S. bank by assets, said Tuesday that it had lost more money than it had made from financial instruments based on U.S. subprime mortgages.
At the same time, the share prices of major U.S. securities firms fell on Wall Street amid fears about the effect of the mortgage crisis on earnings.
William Mills, chief executive of Citigroup's markets and banking division in Europe, said the bank had suffered "reputational damage" from the fallout even though the bank had made "adequate disclosures" to customers who were trading in collateralized debt obligations and similar instruments.
"Our losses greatly exceeded the profits we made in this field over several years," Mills said at a hearing of the Treasury Committee of the British Parliament. The panel is investigating the finance industry after the collapse of the British mortgage lender Northern Rock.
Executives from Deutsche Bank, Goldman Sachs and UBS were also at the hearing in London. An executive with UBS said it had probably lost more money than it made on the securities.
In a heated hearing lasting more than an hour, lawmakers accused the banks of losing sight of risks, failing to do enough to explain complex products to investors and acting recklessly, particularly in the sale of structured credit products.
All of the bank representatives at the hearing dismissed accusations that investors, particularly those trading in collateralized debt obligations, or CDOs, and other complex instruments, were not warned of the risks involved.
Securities firms and banks have announced about $66 billion of losses and write-downs for assets linked to the collapse of the U.S. subprime mortgage market this year. Merrill Lynch, UBS and Citigroup ousted their chief executives as a result, and senior executives left Morgan Stanley and Bear Stearns.
E. Gerald Corrigan, managing director for risk management at Goldman Sachs, told the parliamentary panel that his bank had fared better than Citigroup. "On balance, we probably made money," Corrigan said. "We have had a measure of success in hedging some of our exposure."
Jeremy Palmer, who runs the UBS investment banking unit in Europe, told the committee that his bank had probably lost more than it made.
Deutsche Bank probably made money from marketing CDOs than it had since lost, said Charles Aldington, chairman of its London unit.
An official from the Financial Services Authority, Clive Briault, issued a separate warning on the state of the British mortgage market and credit conditions, telling lenders to prepare for bleak times. Briault, head of retail markets for the financial industry regulator, said British borrowers were likely to come under strain in 2008, with many unlikely to be able to refinance their home loans at attractive terms - and some unable to do so at all.
According to the agency, at least 1.4 million short-term, fixed-rate mortgages will end in 2008.
On Wall Street, Citigroup and the four largest U.S. securities firms had their earnings estimates cut Tuesday by analysts amid concerns that additional write-downs for fixed-income assets and a slowdown in mergers and acquisitions, or M&A, would hurt profit.
Kenneth Worthington, an analyst with JPMorgan Chase, said Goldman Sachs, Morgan Stanley, Merrill Lynch and Lehman Brothers would probably face weak credit markets for the next two to three quarters. Shares of the companies were lower in New York trading Tuesday.
"We expect write-downs of fixed-income inventory and a slowdown in M&A," Worthington said in a research note. "Large write-downs reflect failed risk management and business strategies and should negatively impact valuation longer term."
JPMorgan lowered its 2008 earnings estimate for Goldman to $22.57 a share from $23.50, while also cutting earnings estimates on Morgan Stanley, Merrill Lynch and Lehman Brothers.
The UBS analyst Glenn Schorr reduced his 2008 profit estimate for Citigroup, and said the stock was "still not compelling" after a 41 percent drop this year through Monday.
In late trading Tuesday, Citigroup was down 6 cents at $33 while Goldman declined $6.50, or 2.9 percent, to $220.39. Morgan Stanley dropped $2.37, or 4.5 percent, to $49.91; Merrill slipped $1.79, or 3 percent, to $57.27; and Bear Stearns fell $4.64, or 4.7 percent, to $93.76.
Richard Bove, an analyst at Punk Ziegel, changed all of his ratings on the top five securities firms on Tuesday to "sell." Bove previously rated Goldman, Lehman and Bear Stearns "market perform" and had "sell" ratings only on Merrill and Morgan Stanley.
The ripple effects from the subprime crisis were not confined to banks Tuesday. H&R Block, the biggest U.S. tax preparer, said that it had shut its subprime home lending unit after an agreement to sell Option One Mortgage to Cerberus Capital Management unraveled. About 620 people will lose their jobs. The closure of the unit affects three offices and will result in a $75 million pretax charge. An additional $125 million pretax charge may come after the servicing business is evaluated, the company said.
Separately, part of the junior-ranking debt of Sedna Finance, a unit of Citigroup, was downgraded 12 levels by Fitch Ratings after declines in the assets of a structured investment vehicle.
