Citi losses expose tip of billion-dollar iceberg

By Walden Siew - Analysis

NEW YORK (Reuters) - Citigroup's bombshell that it faces as much as $11 billion more in credit losses has made one thing clear. No one really knows what's hidden in the subprime bond basement.

JPMorgan thinks the financial services industry is sitting on $60 billion in undisclosed losses. Bill Gross, manager of PIMCO, the world's biggest bond fund, characterizes the U.S. subprime issue as a "$1 trillion problem."

Whatever the number, the lack of clarity is raising worries that Wall Street and investors don't have the basic information to judge the severity of the current crisis.

Two massive write-downs by Citigroup since early October and a rash of related losses for Merrill Lynch, the world's biggest brokerage, illustrate how difficult it is to evaluate risky debt tied to subprime mortgages.

Analysts and investors expect the situation to worsen as banks reveal more losses and rating companies continue to downgrade some top bonds that trade like junk.

The bigger write-downs stem from banks' exposure to giant, complicated bonds. Many investors didn't realize they could lose their entire investments due a decline in subprime loan values that was largely masked by the repackaging of the bonds and opaque accounting.

"We will see a train wreck happening if the industry does not get together to develop a systematic way to deal with these distressed loans," Sheila Bair, chairwoman of the Federal Deposit Insurance Corp, said in an interview on Monday.

"Right now, nobody knows what is going to happen," Bair said. "If this is a train wreck, you are just going to see greater skepticism about the value of these mortgages."

Citigroup said on Sunday it expected potentially $11 billion in losses from its exposure to bad mortgages which banks had bundled together into large bonds known as collateralized debt obligations, or CDOs. A month ago Citigroup said it had cut the value of those assets by $5.9 billion.

Merrill last month announced a $7.9 billion write-down, up from $4.5 billion from just a few weeks earlier.

"No one is going to believe anybody anymore (about CDOs)," said Cantor Fitzgerald LP Chairman and Chief Executive Howard Lutnick. "It's not just about the rating. You have to run your own math and come to your own view."

Lutnick, whose firm controls one of the world's largest bond brokerages, said the CDO market has shut down.

"The big CDO market is gone," Lutnick told the Reuters Finance Summit. "The buyers are gone."

Gross, of Pacific Investment Management Co., said the subprime mortgage market is a "$1 trillion problem" made up of "garbage loans" during an interview on CNBC.

Citi and Merrill's revelations led to the departure of Citi's Chief Executive Charles Prince on Sunday about a week after the resignation of Merrill's Chief Executive Stanley O'Neal.