[NYTr] As Citigroup profits collapse, Wall St Drools for Short-term Profits

[All the News That Doesn't Fit]

The Guardian - Oct 2, 2007
http://business.guardian.co.uk/useconomy/story/0,,2181637,00.html

As Citigroup profits collapse, New York shares hit record

Wall Street yesterday took the banking debacle as the cue for the
Federal Reserve to step in with more rate cuts

by Patrick Collinson

Shares on Wall Street climbed to a record high yesterday amid
speculation that interest rates will be slashed after a gloomy report
from US manufacturers and a profits collapse at the world's biggest
bank, Citigroup.

The Dow Jones Industrial Average jumped nearly 200 points to close only
13 points short of 14,100, significantly above its previous record
close of 14,021.95 reached in July. In London, the FTSE 100 closed up
0.6% at 6,506 and markets across Europe joined in the gains.

A closely watched index of US manufacturing activity from the Institute
of Supply Management came in weaker than economists predicted, but the
news raised hopes that the Federal Reserve, which cut interest rates
half a percentage point this month, will continue to cut rates to
support a weakening economy.

Markets also shrugged off a profits warning by Citigroup that
third-quarter earnings will fall by 60% and sub-prime and trading
losses of $3.4bn (£1.7bn) at the Swiss bank UBS.

Analysts talked of a "reverse psychology" taking hold in the stock
market, with investors comforted by a belief that the write-offs are a
sign of the underlying strength of balance sheets, as banks junk their
sub-prime and hedge-fund losses into their third-quarter figures then
bounce back in the fourth quarter helped by lower interest rates. Lower
rates could also, analysts say, reignite the private equity buying
spree that drove stock markets in the first half of the year before the
onset of the credit crunch.

Yesterday Citigroup became the biggest bank to see its profits collapse
at the hands of the global credit crunch and losses on private-equity
deals. The bank, which has 11,500 employees in the UK, including 9,000
at its European headquarters in London's Canary Wharf, revealed that
third-quarter earnings will be down by 60% after a $1.3bn loss on
sub-prime mortgages and a $1.4bn writedown of "highly leveraged"
finance commitments.

Among the major investment banks only Goldman Sachs has so far avoided
a steep decline in profits.

When the credit crunch began to bite in July, Citigroup brushed aside
concerns about its exposure to private equity deals, where it has been
responsible for around 10% of the bank loans behind the buyouts. Its
chief executive, Charles "Chuck" Prince, told the Financial Times: "As
long as the music is playing, you've got to get up and dance ... We're
still dancing."

But yesterday the bank all but admitted the dancing stopped in summer.
"Our expected third-quarter results are a clear disappointment," Mr
Prince said. "The decline was driven primarily by weak performance in
fixed-income credit market activities, write-downs in leveraged loan
commitments and increases in consumer credit costs."

The trading arm of the bank lost $600m in fixed-interest markets and
the consumer side reported a $2.6bn provision for defaults and other
loan losses.

The profits meltdown is the latest setback for Mr Prince, who since he
became chief executive in 2003 has faced sustained criticism for the
bank's sluggish share-price performance. This year he revealed that the
London office of Citigroup will bear a share of 17,000 job cuts to
eliminate "organisational clutter".

However, Mr Prince yesterday insisted that poor trading over the summer
was "an aberration" and added: "We expect to return to a normal
earnings environment in the fourth quarter."

After an early fall, shares in Citigroup, which have been under
pressure for several months, recovered and ended up during hectic
trading.

But despite the US market's calm reaction to Citigroup's losses, some
investors remain deeply concerned about the outlook for banks.

"It's the opacity of the situation that worries me," said Ian
Henderson, who runs JP Morgan's £250m Global Financials Fund. "There is
still huge amounts of invisible leverage and I'm not confident that
there are not more surprises to come. I can't predict where the bottom
is, and when the knife is still falling you don't know where the ground
is."

The former Federal Reserve chief Alan Greenspan, who has been outspoken
throughout the credit crunch, said yesterday that the US housing market
- at the heart of the lending crisis that has savaged banks across the
globe - has a long way to go before stabilising.

"As in similar situations of inventory excess, I would expect home
price declines to continue until the rate of inventory liquidation
reaches its peak," he said. "There is little relevant American history
to guide us in judging the ultimate extent of home price decline or the
timing of a new price recovery or, by extension, the economic impact on
the rest of our trading partners."

Profile: Chuck Prince CEO, Citigroup

Is Chuck Prince still on the dancefloor? The head of the world's
biggest bank dismissed fears in July that the buyout boom was coming to
an end, declaring that Citigroup was "still dancing".

"When the music stops, in terms of liquidity, things will be
complicated. But as long as the music is playing, you've got to get up
and dance. We're still dancing," he said in an interview with the FT.
But yesterday's profit warning makes it look like the music has been
abruptly switched off.

It is not the first time that the 57-year-old banker has had to weather
a storm during his four years at the helm. He has tried to stamp a more
moral tone on Citi's business practices after a private banking scandal
in Japan and dodgy European bond deals dealt severe blows to its
reputation. Two years ago, the bank was told by the US Federal Reserve
not to make any more acquisitions until it had cleaned up its act.

Mr Prince has controversially told the bank's 300,000 employees that he
would prefer to do less business than risk its reputation. He has also
said he wants to keep the bank out of the headlines. But that has so
far proved impossible.