Credit crisis strikes UBS, Citi, Credit Suisse

[TexasLawyer]

Source: Reuters

Credit crisis strikes UBS, Citi, Credit Suisse
Mon Oct 1, 2007 10:09am ET

By Andrew Hurst and Christian Plumb

ZURICH/NEW YORK (Reuters) - The credit crisis struck at the heart of the global financial industry on Monday as Swiss bank UBS AG said it faced a shock loss in the third quarter and Citigroup warned its profits had collapsed. UBS's chief domestic rival Credit Suisse Group also said its third quarter results would be "adversely impacted" by the credit market turmoil but said it would remain profitable in the third quarter.

The announcements are the latest from a lengthening queue of banks who have taken hits from a meltdown in U.S. subprime mortgages, which has set off a global liquidity crisis.

UBS said it would write down a net 4 billion Swiss francs ($3.4 billion) in its fixed-income portfolio and elsewhere, resulting in a third-quarter loss of 600 million to 800 million francs, its first quarterly loss in nine years. UBS also said it would shed 1,500 jobs in its investment bank -- a sharp reversal of its recent buildup.

Citigroup, the world's largest bank by market value, said it was expecting a fall of about 60 percent in third-quarter net income. Among the main culprits for the profit warning were $1.4 billion in pretax writedowns on funded and unfunded leveraged loan commitments.


Read more: http://today.reuters.com/news/articleinvesting.aspx?type=hotStocksNews&storyID=2007-10-01T140928Z_01_L01888868_RTRUKOC_0_US-BANKS-CREDIT.xml

[Eurobabe]

1. Yet, Yahoo main story is...

"Stocks soar on new hopes for rate cut"

http://news.yahoo.com/s/ap/20071001/ap_on_bi_st_ma_re/wall_street;_ylt=AkQWpj13Yj2mCVSVTJMrdAeyBhIF

[EVDebs]

2. Contraction of credit leads to what .... ?

Recession or Depression ?

[Dr.Phool]

3. Both

We'll have a recession, and I'll get depression.

[TrogL]

4. Stagflation

[aquart]

5. We have stagflation.

We are both inflated and depressed. It is the worst of all possible worlds.

[robinlynne]

13. believe me, it can get a lot worse than this. (I lived in the third world for 20 years.)

[Andy Canuck]

6. The Credit Crunch

To be honest, if it stays in the low billions then all will be okay. The credit crunch could go on to affect $400 trillion, if it hits that amount, then the game of Monopoly called the US economy (let alone the global economy) will be over.

Some simple math, 16 million sub-prime mortgages over the last 3 years. If 1/4 of them default on (conservative estimate of) $100,000 you get 4,000,000 x $100,000= $400 billion, then add in home equity loans, unpaid credit cards, and the selling and reselling of bad debt over and over again. Each transaction involves a promise of repayment.

As houses flood the market, prices go down, and it will spiral until it crashes. The Fed can't keep pumping money into the financial markets (and can't stop the spiral of the real estate markets) because it makes the dollar worthless, and that is why the US dollar is collapsing. On tp of that the Fed has doubled the money supply in the last six years, literally halving the value of the dollar. It is quite a mess, thank God your President has an MBA.

[SpiralHawk]

7. "Yup, I'm a regular genius with an MBA - smirk" - Commander AWOL

"Smirk, smirk, smirk" - Commander AWOL

[MissMillie]

15. I work at the institution that gave him an MBA

let me assure you that fully 25% of the students here do NOT KNOW THEIR OWN NAMES.

[Theres-a]

9. Welcome Andy!

:hi:

[loudsue]

10. Hi Andy! And welcome to DU!!

:hi: You're quite right. It doesn't look good for the old red-white-&blue.

[TexasLawyer]

8. More detail on Citibank losses

with signs of more trouble to come.

Citigroup also was big in the business of repackaging mortgage-backed securities and LBO loans into new debt instruments. When buyers for those securities disappeared this summer, banks like Citigroup were stuck with warehouses of securities whose values were falling. The bank wrote down $1 billion in the value of mortgage assets it was holding to repackage into so-called collateralized debt obligations, and another $250 million for loans held for repackaging into collateralized loan obligations.

Mr. Crittenden said Citigroup held $13 billion in secured subprime exposure in its lending and structuring business at the end of June, a number that fell only slightly by the end of the quarter.

"Despite our efforts to reduce our exposures to subprime, which began early this year, and while we were partially hedged, we still incurred significant losses," Mr. Prince said in the transcript on the Web site.

Citigroup also suffered in its big business of lending to consumers. Consumer-credit costs will be some $2.6 billion higher on a pretax basis largely due to increased reserves against future loan losses. About a quarter of the costs are due to higher credit losses.

http://online.wsj.com/article/SB119123763857044747.html?mod=hpp_us_whats_news

[loudsue]

11. And guess whose tax dollars are going to bail them out?

Yep, ours.

We need to get corporations OUT of our government, and back into a "regulated" category.

Right now, it's CITIZENS' RIGHTS that are being "regulated", and corporations that are being given all the freedom in the world, to screw whomever they want to, and to act as socially irresponsible as they please.

[loudsue]

12. Ooops!

Web-page time-out police pulled another "dupe".

[robinlynne]

14. I don't understand economics, but how can a bank lose money? They can have a smaller

profit margin, of course, but. If someone can't pay for their home, the bank gets the house, which is worth more than what is owed, since the bank gets to keep the whole house. And the article says it had prepackaged loans which noone bought. So, the bank still has the money it was going to loan out. Just not a whole bunch of interest it wanted to earn. So doesn't this mean that the bank isn't generating the smae billions in interest it wants? I mena it can't actually lose anything, being a bank. My ignorance of economics is obvious, just thinking out loud, and with simple framing, looks to me like the banks are crying wolf.

[Andy Canuck]

17. What happened is

the big banks don't lend to high risk customers, so they create mortgage companies and/or other high risk lenders step in. So three years ago the high risk lenders started lending to high risk clients at below prime interest rates and then three years into their mortgages the interests rates go up to above prime rates. The high risk mortgage holder is struggling to pay the low rate mortgage payments, so when the new high rate comes in they can't pay and the bank forecloses on the house. That was the theory, with the idea that there would be an ever increasing value in real estate. But the real estate market is going down, so a high risk lender lends $100,000 for a house, that is now worth $80,000, poof $20,000 is gone, but $100,000 still owed on paper. And as there are more foreclosures, there will be more houses on the market, and prices will drop even more, and as credit dries up lenders won't be able to give mortgages to buy up all the properties that are out there.

Had the the high risk debt stayed in the hands of the high risk lenders this would be contained, but high risk lenders sell their debt to the big banks and hedge funds. Financial institutions sell debt as an investment or to get cash to loan out, they will sell it for 5% and the debt is meant to get a return of 8% so the debt buyer gets 3% when the debt is paid back. So this means a big chunk of the sub-prime debt is now infused into all debt around the globe.

So they may hold (for eg.) 1 trillion dollars of debt of which only 900 billion may be actually asset backed. So as the housing prices go down, the amount they are owed stays the same but the amount of debt they can get payment on declines.

[robinlynne]

18. Thank-you!

[MissMillie]

16. well, when the banks put the squeeze on their customers

then sooner or later they have to know that the customers are going to run out of money.

Interest rates in the high teens and higher??? Outrageous late fees and spikes in interest rates for late payments.

Citibank spends (I don't know how much) money every month to send me credit card offers that I will continue to ignore because the interest rates are too high and the penalties for missing a payment are ridiculous.

So....