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Citigroup smacked by reckless bets

Citigroup reported a 57% decline in profits for the third quarter of 2007. Apparently it received some nasty wounds from souring fixed-income investments and sinking consumer loans. This sad quarter reflected approximately $5.9 billion of write-offs; once light was shed upon faltering securities prices and proprietary trades gone terribly wrong.

Much of the damage inflicted upon Citigroup and other esteemed U.S. financial institutions such as Morgan Stanley and Bear Stearns has its roots in the subprime mortgage implosion and ensuing credit crunch that has unfolded over the past few months.

It seems that leveraged loans and subprime mortgage securities are falling rapidly in value, contributing close to $3 billion in write-offs. And, trading losses were $636 million. Together, these areas contributed heavily to an 87% drop in investment banking revenue.

Citigroup’s massive global consumer division was racked by $2 billion in both current losses and efforts to increase reserves for damage yet to come. Most importantly, upper management backed away from previous statements that the worst is over. The continuing deterioration in the housing market – declining prices and swelling inventories – is causing pain all across the financial landscape.

As fancy, yet insidious subprime mortgage products reset to obscene interest rates, more homeowners are forced into foreclosure due to the negative equity they are carrying on their homes. This process is still in its early stages with, most likely, at least another year to go. And these dubious mortgages, along with the hefty issuance of consumer loans, have been a major source of profits for America’s financial giants. The long and reckless ride enjoyed by the financial community is coming rapidly to an end. Sure was wild and whacky while it lasted!

© 2007 Splendid Marbles.