PSA - Citigroup profits plunge 57 percent

Citigroup profits plunge 57 percent

Citigroup and other major banks including Bank of American and JPMorgan Chase agreed to start a $100 billion fund to help revive the asset-backed commercial paper market.

(10/15/2007)

Citigroup Inc. reported a 57 percent drop in profits during the third quarter after the biggest U.S. bank took a hit of more than $3 billion in mortgage-backed security losses, leveraged debt write-downs, and fixed-income trading losses.

Citigroup, which also boosted loan-loss provisions by $2.24 billion, said net income fell to $2.38 billion, or 47 cents per share, in the July to September period. That's down from $5.51 billion, or $1.10 a share, in the same period a year earlier. Revenue in the quarter rose 6 percent to $22.66 billion from $21.42 billion a year earlier.

The results included a $729 million pretax gain due to the sale of shares of Redecard SA, a company that signs up merchants in Brazil for Mastercard Inc.

Excluding the Redecard gain and acquisitions, Citigroup's revenue fell 3 percent to approximately $20.8 billion. That's below the revenue forecast by Thomson Financial analysts, who predicted earnings of 44 cents a share and revenue of $21.76 billion. Analyst forecasts don't typically include one-time gains.

The results were slightly better than Citigroup previously estimated. On Oct. 1, Citigroup Inc. had warned that its third-quarter profit would fall by about 60 percent.

"This was a disappointing quarter, even in the context of the dislocations in the subprime mortgage and credit markets," said Chairman and Chief Executive Charles Prince in a statement. "A significant amount of our income decline was in our fixed income business, where we have a long track record of strong earnings, and this quarter's performance was well below our expectations."

Citigroup, along with other large banks including Bank of America Corp. and JPMorgan Chase & Co., agreed to start a $100 billion fund to help revive the asset-backed commercial paper market. The talks were initiated by the Treasury Department, which is playing a key advisory role

The fund will buy assets from structured investment vehicles, units set up to finance purchases of securities such as corporate bonds and subprime mortgage debt, the banks said in a joint statement. The master liquidity enhancement conduit, or M-LEC, will be operational in 90 days, the banks said.

The aim would be to avert a scenario in which bank-affiliated funds are forced to unload massive portfolios of mortgage-backed securities and other assets, stoking a meltdown that would require banks, brokerages, and hedge funds to take huge write-offs, the Wall Street Journal reported.

Policymakers and others fear such a scenario could spark a broader credit crunch that would slow the economy.

Discussions in the past two weeks have centered on concerns about structured investment vehicles, the Bloomberg news agency reported. In one plan under consideration, lenders would set up a fund of as much as $100 billion to buy assets from the SIVs, which are units set up by banks to finance purchases of subprime mortgage debt and other assets, Bloomberg said.

The talks come amid ongoing concerns about liquidity in the credit markets. Federal Reserve officials say efforts to restore liquidity have been partly successful, but they worry that pockets of illiquidity remain.

Investors have grown worried in recent weeks about the size of bank-affiliated funds with huge sums invested in subprime mortgage-related securities and other assets, according to the Journal report. Citigroup has about $100 billion in seven SIVs, the report said.

Citigroup has proposed the creation of a "superconduit" that would issue short-term debt and buy assets currently held by SIVs affiliated with the participating banks, the Journal reported.

JPMorgan and Bank of America, neither of which have SIVs, have been in discussions with Citigroup regarding the fund. JPMorgan and Bank of America would earn fees by helping to arrange the superconduit, and the fund's debt would be fully backed by participating banks.