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Credit Suisse Warns on First Quarter

Debra Borchardt

Credit SuisseCS shares were slipping 3.5% Thursday, after it warned of an unprofitable first quarter and wrote down $2.7 billion worth of assets mispriced by traders.

The Zurich-based bank cited "difficult market conditions in March" and a group of traders who "intentionally" mispriced assets for the writedown of 2.9 billion Swiss francs, or $2.7 billion. The employees have either been terminated or suspended or disciplined under local employment law, the bank said in its annual report. The computer modeling that was in place to price the instruments failed and trading has been reassigned while internal controls are enhanced.

"Obviously these events and the actions of these employees are unacceptable," CEO Brady Dougan said in the report. "We have responded promptly to reduce the possibility of this type of situation occurring again."

Credit Suisse had warned it had to revalue some asset-backed positions in its collateralized debt obligation business on Feb. 19. At that point it had written down 384 million Swiss francs for the fourth quarter of 2007 and expected to take a hit of $2.9 billion upon the discovery of the trader's misconduct.

Now as a result of the loss, the reported revenue is 789 million Swiss francs lower. The recorded income for the fourth quarter is now 540 million Swiss francs and for the full year 7.76 billion Swiss francs, a drop of 6% over 2006. The $2.7 billion writedown ended up being lower than anticipated.

"Credit Suisse continues to be well positioned through the challenging and volatile markets that have existed since the middle of 2007," Dougan said. "We are one of the world's best capitalized banks, and our funding is conservative."

Credit Suisse shares plunged on the news. Shares, which hit a low of $46 Thursday, recently were falling 3.7% to $48.

Still, Derek Chambers of Standard & Poor's continues to rate the stock a buy and has a target price of $59. "While market conditions remain difficult so for this year, we believe [Credit Suisse's] relative standing has been improved, notwithstanding recent losses in asset-backed positions."

Rival bank UBS UBS, which had a much tougher go of it weathering the market, initially slipped on the news, but has since recovered. Shares recently were up 3.8% to $27.67. UBS had previously written down $14 billion in residential products and also warned of a difficult year ahead.

The sector outlook by the Standard & Poor's analysts isn't very positive either. "We believe investors should underweight the sector as credit-related write-downs at key sector constituents will likely persist over the near term as the housing market continues to weaken and collateralized debt obligations remain difficult to value," the ratings agency said in a report.