Some Fallout From Sub-Prime

Some of the results of the sub-prime credit markets are coming in, and they aren't looking good. According to the Financial Times, Citigroup will see a third quarter decline in net earnings of about 60 percent compared to last year. In fact, here's the Citigroup press release:

"Our expected third quarter results are a clear disappointment. The decline in income was driven primarily by weak performance in fixed income credit market activities, write-downs in leveraged loan commitments, and increases in consumer credit costs," said Charles Prince, Chairman and CEO of Citi.

Ouch. here are some of the sources of revenue reduction, according to the release:

• Write-downs of approximately $1.4 billion pre-tax, net of underwriting fees, on funded and unfunded highly leveraged finance commitments. These commitments totaled $69 billion at the end of the second quarter, and $57 billion at the end of the third quarter. Write-downs were recorded on all highly leveraged finance commitments where there was value impairment, regardless of the expected funding date.


• Losses of approximately $1.3 billion pre-tax, net of hedges, on the value of sub-prime mortgage-backed securities warehoused for future collateralized debt obligation ("CDO") securitizations, CDO positions, and leveraged loans warehoused for future collateralized loan obligation ("CLO") securitizations.


• Losses of approximately $600 million pre-tax in fixed income credit trading due to significant market volatility and the disruption of historical pricing relationships.


• An increase in credit costs of approximately $2.6 billion pre-tax versus the prior-year quarter due to continued deterioration in the credit environment, organic portfolio growth, and acquisitions. Approximately one-fourth of the increase in credit costs was due to higher net credit losses and approximately three-fourths was due to higher charges to increase loan loss reserves

And then there's the FT story, published yesterday, that UBS AG is writing down its fixed income portfolio by $4.3 billion, mostly due to US sub-prime investment losses. There has been some recent good news, but only when you don't look at it in context:

In recent weeks, Lehman Brothers and Goldman Sachs reported better-than-expected results and Bear Stearns, the bank seen as most exposed to the US mortgage market, still recorded a profit. However, all those banks reported results for the three months to the end of August, allowing them to include profits from June, before the downturn began.

Top investment officials at UBS and Warren Spector have lost their jobs. How many more will? Probably only a fraction of the total number of people when all the intricacies of the problems finally play out over the next few years.