Wall Street’s banking giants on Monday started to admit their problems, which began in the mortgage lending business and led to a summer of wild stock market swings.
The country’s biggest bank, Citigroup, will write off $5.9 billion in the third quarter, causing its profit to drop 60 percent from a year earlier. Europe’s biggest bank, UBS, said it had written down $3.4 billion in the value of mortgage-backed securities and would suffer a loss in the quarter. Other banks, including Merrill Lynch and Bank of America, have issued similar warnings.
Investors took the disclosures as a sign that the worst may be over for the banks and that any losses may be contained. At Citigroup, the announcement again raised questions about the future of its chief executive, Charles O. Prince III.
Still, all three major markets indexes closed higher on Monday. The Dow Jones industrial average set a record, rising 191.92 points to 14,087.55.
Analysts cautioned, however, that serious problems remained in the housing market and questioned whether consumer spending could continue to carry the broader economy.
“It’s a cleanup quarter,” said Michael Mayo, a financial services analyst at Deutsche Bank. “The industry cleaned up from the collapse of the technology bubble earlier this decade, from commercial real estate in the early 1990s and from Third World debt in the late 1980s. This quarter has the potential for a similar cleansing — only this time from private equity loans and mortgages.”
Banks and brokerage firms have been contending with the twin problems of the mortgage meltdown and credit market collapse in July and August. As mortgages to homebuyers with shaky credit soured, the fallout sent shockwaves through the financial system.
Investors lost faith in mortgage-backed bonds and other complex securities, causing prices to plummet. Demand for high-yield loans used to finance buyout deals all but dried up, leaving banks faced with the possibility of holding billions of dollars in debt. And higher financing costs and tighter lending terms caused mortgage underwriting to grind to a halt.
Investors, including many hedge funds, suffered heavy losses this summer. Now, Wall Street is also paying the piper.