Shares of Citigroup, the biggest US bank, dropped five percent Monday after the company dismissed its top management and revealed much bigger than expected losses from bad mortageg loans. VOA's Barry Wood has more.
New York-based Citigroup revealed that its losses stemming from sub-prime mortgage loans may be as large as $11 billion. Third quarter earnings were also reduced and there are fears that the bank could incur more losses in the current fourth quarter. Al Goldman, an analyst at St. Louis-based AG Edwards brokerage, says Citigroup's problems are a big drag on the US stock market.
"It's almost as if the bad news reached a crescendo today when it finally gets around to a capitulation in management at Citi and the announcement of another major, major write off. So, we'll see," said Al Goldman.
Goldman, speaking to Marketwatch dot com, says the stock market, which fell 1.5 percent last week, will be unable to rally until the sub-prime mortgage problem is resolved.
Citigroup's board of directors met over the weekend and accepted the resignation of company chief executive officer Charles Prince. Last month another major financial services company, Merrill Lynch, fired its chief executive because of previously undisclosed losses associated with sub-prime loans.
The two institutions had been major purchasers of sub-prime loans, which were then packaged together and traded as derivative products (called collateralized debt obligations). Jason Goldberg is an analyst at Lehman Brothers in New York.
"You know, basically the markets [for these derivative products] are frozen so you don't have prices to value assets you have on your balance sheets," So basically you have to use models and make your best guesses on these things," said Jason Goldberg.
Goldberg spoke to Bloomberg Television.
The sub-prime problems surfaced in August when many poor credit risk American families were failing to make their monthly payments on mortgage loans. Tens of thousands of prospective homebuyers were encouraged by low interest rates and disreputable lenders to buy homes that they couldn't afford.
Charles Dallara, the head of the Institute of International Finance, as association of global financial institutions, concedes that some US based lenders acted irresponsibly.
"These are clearly failures of standards of risk management and business practices," said Charles Dallara. "And certainly it is hard to argue against clearly framed and more effective supervision and even regulation of some of this mortgage activity."
Dallara spoke during the association's annual meeting last month.
Citigroup, the institution now at the center of the sub-prime problem, has seen its share price decline by 35 percent this year.