Citigroup feels the heat of the credit crisis and brings fresh fears for UK banks

06 November 2007
Another week, another financial head rolls – the latest casualty of the credit crisis to make the headlines is Citigroup’s chairman and chief executive Charles ‘Chuck’ Prince, who has resigned after announcing that the world’s largest bank has suffered losses of £3.1 million as a result of the sub prime crisis.

The storm being weathered by American banks is cause for concern in the UK financial market, where banks are fearful about the likelihood of the credit crunch impacting on this side of the pond in a similar way. Northern Rock has already illustrated that British banks are not immune to the effects of the sub prime crisis in America.

The crisis has hit Citigroup hard because it is heavily involved with sub prime mortgages which have been bundled up and sold off. High numbers of repossessions have led to an American housing market crash which has now rendered these investments worthless, but it is difficult to discern how much will be lost in total, because the whereabouts of these bundles is not known once they are sold off. Essentially, the bank was lending too much money to people with bad credit who were unable to pay it back.

European banks are also feeling the heat because the mortgages were sold internationally and these toxic bundles are gradually making themselves known – within the last few days, UBS, Credit Suisse and Deutsche Bank have all put multi-billion dollar provisions in place to prepare for potential losses as the credit crisis spreads. Further banking turmoil, high oil prices and a weakening dollar are doing nothing to quash fears of a worsening financial outlook.

In the wake of Prince’s revelation regarding an additional six per cent ($11 million) loss to profits, confidence is waning and Wall Street shares of the company fell a further 6.8 per cent yesterday to $35.16, after an 11.5 per cent drop last week, bringing them to their lowest level in four years.

Morgan Stanley, Goldman Sachs and the Bank of America have also felt the effects of the credit crisis with their shares falling 5.6 per cent, 4.8 per cent and 1.4 per cent, respectively. In the UK, Barclays, RBS, Lloyds TSB, Alliance & Leicester and Bradford & Bingley have all seen declining share values.

While the UK has yet to experience the level of repossessions currently underway in the US, it is said to have an over valued property market, and unexpectedly poor performances have been reported in the retail, services and manufacturing industries. Falling interest rates and a slowing housing market are also taking their toll on public confidence, heightening fears of a property crash akin to that in the US.

© Fair Investment Company Ltd