Here's the full article again, not sure why it didn't show up in the previous post:
Investment banks
Feeling the pinch
Oct 1st 2007
From Economist.com
Investment banks are suffering from the effects of the credit crunch
HOPES that the worst of the credit crunch is over took a battering on Monday October 1st. UBS, a Swiss investment bank, announced that it had sustained a third-quarter loss and Citigroup, an American bank, warned that its profits for the quarter would plummet by 60% compared with the same period of 2006. Their travails took the gloss off earlier results from a number of Wall Street banks, which had seemed to indicate that the impact of the subprime-mortgage meltdown on the investment-banking sector was less severe than first feared.
UBS is the worse-hit but its management is better-placed to ride out the storm. The Swiss bank expects to post a loss of between $515m and $690m in the third quarter, thanks largely to a $3.4 billion writedown on its fixed-income assets, many of them securities backed by those notorious subprime mortgages. UBS is the first of the heavyweight banks to suffer losses as a result of the financial turmoil. To compound the embarrassment, Credit Suisse, a perennial rival, announced that it still expected to post a profit this quarter.
The response was swift. Marcel Rohner, UBS’s chief executive, announced around 1,500 job losses, turfed out some senior managers and appointed himself as head of the investment-banking division. Mr Rohner can credibly claim that the mess was not of his making. He was only installed in the top job in July after the failure of Dillon Read, UBS’s hedge-fund unit. He came in promising a more conservative approach to investment banking, a business to which he says he remains committed.
Chuck Prince, the boss of Citigroup, has much more egg on his face. Mr Prince’s ill-timed comment in July that Citigroup was still dancing to the music of the buy-out boom will be replayed endlessly now that things have ended in such discord. Citigroup announced writedowns of $1.4 billion of leveraged-buyout commitments, as well as further substantial losses on mortgage-backed securities and fixed-income trading. Unlike UBS, however, Citigroup expects to have remained heavily in profit during its third quarter.
Nasty surprises from UBS and Citigroup has fuelled expectations of more hefty writedowns at banks that have yet to own up to bad news. Particular pessimism surrounds forthcoming results for Deutsche Bank and Merrill Lynch, but investment banks will not be the only ones to suffer. The biggest culprit for Citigroup’s decline in earnings was its consumer business, where losses and higher reserve requirements chewed up a whopping $2.6 billion.
The initial glow thrown off by last month’s better-than-expected results from Wall Street has faded as a result. In fact, the relief generated by those early results was arguably overdone. The banks that reported last month still showed significant losses but included still-bouncy June and July in their third quarter, meaning that the credit crunch had less time to pull down earnings. The reporting calendars for UBS and Citigroup, by contrast, mean that their third-quarter results include the darker days of both August and September.
By the same token, bad results now can also provoke too much gloom. If banks are able to persuade others that the worst effects of the credit crunch have been absorbed, then the credit markets have a better chance of ungumming. Citigroup’s Mr Prince, tempting fate once again, said that conditions will return to normal in the fourth quarter. He may not be around to see it.
