Citigroup and UBS Brace For Losses, but Dow Jones Sets Record Above 14,000

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By Jason Simpkins
Staff Writer

On a day that two huge banks took major profit hits because of the subprime market crisis, stocks soared to record highs yesterday (Monday) on the belief that the worst of the ensuing credit crisis had passed.

Citigroup (C) and UBS AG (UBS), the largest banks in the United States and Europe, said yesterday that their third quarter earnings would reflect the heavy toll taken by the collapse of the U.S. subprime market. Citigroup thinks its earnings will drop 60%, while UBS anticipates losing as much as $690 million in the third quarter.

Citi’s shares jumped $1.05 each, or 2.3%, to close at $47.72, while UBS, the largest Swiss Bank, soared $1.69 per share, or 3.2%, to close at $54.94, as investors put credit conditions behind them and sent the Dow rocketing to a new all-time record close.

The Dow rose 191.92, or 1.38%, to close at 14,087.55, surpassing its closing record of 14,000.41 set in mid-July. The blue-chip bellwether index rose as high as 14,115.51 to eclipse its previous intraday high of 14,021.95, set July 17.

It was the first day of trading in the new quarter. During the third quarter, a volatile Dow still managed to post a 3.6% gain.

Stocks advanced broadly yesterday. The Standard & Poor's 500 Index rose 20.29 points, or 1.33%, to close at 1,547.04. That’s close to its all-time trading high of 1,555.90, which was established in the middle of July.

The tech-laden Nasdaq Composite Index jumped 39.49 points, or 1.46%, to close at 2,740.99.

The Nasdaq is nowhere near its all-time high of 5,048.62, reached in March 2000, in the middle of the dot-com bubble.

Citigroup said it would write down approximately $1.4 billion on loan commitments and record $1.3 billion in losses related to the subprime mortgage market. The company will release its third quarter results on Oct. 15.

UBS will write down $3.42 billion in mortgaged backed securities. The company will also cut 1,500 jobs, or about 2% of its workforce. The company’s management will see some changes as well. Chief Executive Marcel Rohner will take over as Investment Banking Chief, replacing Huw Jenkins, who will be relegated to an advisory position. Group Chief Financial Officer Clive Standish will retire. Rohner replaced Peter Wuffli as Chief Executive in July.

The subprime collapse and credit conditions have had an adverse effect on the buyout market as well. Because of the higher perceived risk, the debt required to finance acquisitions is now more expensive, meaning that deals struck at the height of the private equity boom have lost their original luster and are being abandoned.

Silver Lake and ValueAct Capital called off the $2.2 billion buyout of Acxiom (ACXM).

The $25 billion buyout of Sallie Mae and $8 billion deal for Harman International Industries are also in jeopardy. The current backlog of pending U.S. buyouts stands at approximately $400 billion. That means that more stalled buyouts may well loom.
However, further fueling the general feeling that the credit crunch is ending, Homebuilding stocks roared after several of the largest players were upgraded by Citicorp. A report by the bank’s brokerage arm said that large-cap builders with stronger balance sheets should benefit in the coming quarters.
Lennar Corp. (LEN) rose 62 cents, or 2.7%, to $23.27; D.R. Horton Inc. (DHI) added 65 cents, or 5.1%, to $13.46; and Pulte Homes Inc. (PHM) was up $1.18, or 8.7%, at $14.79.

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