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Credit Crunch Crushes Citi

Citi (C) said it expects to post a 60% drop in third-quarter earnings, as the big bank is hit by losses tied to the seize-up of the credit markets this summer.

New York-based Citi said it will take a $3.3 billion hit in its securities and banking unit, tied to the collapse of the markets for mortgage securities and leveraged buyout debt. Citi joins UBS (UBS), which set plans Monday for a writedown of similar size, as the first big Wall Street banks to take multibillion-dollar hits from the swooning credit markets.

Citi's losses include $1.4 billion of writedowns on funded and unfunded highly leveraged finance commitments, and $1.3 billion worth of losses on the value of sub-prime mortgage-backed securities warehoused for future collateralized debt obligation and other structured securities. Citi will also take losses of approximately $600 million pre-tax in fixed income credit trading due to significant market volatility and the disruption of historical pricing relationships.

Citi also said credit costs rose by $2.6 billion from a year ago in the latest quarter in its global consumer business, due largely to larger loan loss reserves.

"Our expected third quarter results are a clear disappointment. The decline in income was driven primarily by weak performance in fixed income credit market activities, write-downs in leveraged loan commitments, and increases in consumer credit costs," said CEO Charles Prince.

"Our fixed income trading business has a long history of earnings power and success, as shown in this year's record first half results. In September, this business performed at more normalized levels and we see this quarter's overall poor trading performance as an aberration," Prince added. "While we cannot predict market conditions or other unforeseeable events that may affect our businesses, we expect to return to a normal earnings environment in the fourth quarter."

Analysts were looking for the bank to make $1.10 a share, up from $1.06 a year ago. A 60% drop from year-ago levels would put Citi's third-quarter profit at around 42 cents a share.

Last month, brokerage companies ranging from Lehman (LEH) to Goldman (GS) posted third-quarter results that were generally not as dire as expected, in spite of some big writedowns. The gains led to some hope among investors that profits wouldn't be hit as hard as feared.

But early Monday, even before Citi's comments, UBS said it would post a third-quarter loss, driven by writedowns tied to subprime mortgages. The company also shook up management and set 1,500 job cuts.

Citi shares fell 88 cents to $45.79.

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