Why UBS's (UBS) pain exceeds Citigroup's (C)

This morning UBS AG (NYSE: UBS) said it expects a loss of up to $690 million while Citigroup (NYSE: C) said it expects a 60% decline in profit -- but still managed to expect a profit. The difference? European banks like UBS were only marginally brighter than the poor U.S. subprime mortgage borrowers because they actually fell for the line that packages of subprime mortgages were safe, high yielding investments.

It's worth remembering that the mortgage industry value network is complex. No longer does a mortgage bank issue a mortgage and keep it on its books. What happens now is that a mortgage broker convinces a borrower to sign a mortgage contract. The originating mortgage bank then turns around and sells that mortgage to a Wall Street investment bank that packages the mortgage into a mortgage-backed security (MBS) which it quickly gets off its books -- and onto those of European and Asian investors, like UBS, which are now paying the price for their gullibility.

How big of a price? UBS is taking a $690 million loss and firing 1,500 workers due to the $3.4 billion writedown of the value of its MBSs -- but I think it's curious that it still has $19 billion of MBSs with which it is "comfortable." Meanwhile Citigroup's problems are more complex -- it will take $1.4 billion in pretax write-downs on leveraged buyouts it is helping to finance, $1.3 billion in pretax losses on subprime MBSs and $600 million in pretax losses on fixed-income trading.

Citigroup looks like a better diversified sucker. While Citigroup took pain from its MBSs, it also suffered from LBO loan writedowns. Nevertheless, Citigroup looks like it will stay in profitable territory.

But with its shares down 16% in 2007, its performance is nothing to cheer about.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup shares and has no financial interest in UBS.