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.

Bloomberg News reports that Bank of America Corporation (NYSE: BAC) thinks that mortgages have further to fall. And Bank of America names specific companies which it believes will be damaged the most.

The bank believes that mortgage losses so far are "the tip of the iceberg." That's due to the enormous volume of variable rate mortgages scheduled to reset in the next couple years -- specifically $515 billion in 2007 and another $680 billion worth in 2008. If that's not bad enough, interest payments on about $900 billion of the riskiest subprime home loans are due to increase in 2007 and 2008.

I've been posting about real estate problems since last October. But Bank of America seems to think that two of the stocks most exposed to the mortgage mayhem have further to fall because they hold mortgages themselves as well as selling them on to investors and may not have set aside enough money to cover losses. These two:

• IndyMac Bancorp (NYSE: IMB) looks cheap. Its Price Earnings to Growth (PEG) ratio of 0.2 -- based on a P/E of 7.4 and earnings growth of 35% to $3.97 in 2008 -- makes it look extremely cheap to me unless the analysts who track IndyMac are way off the mark.
• Countrywide Financial Corp. (NYSE: CFC) looks cheap. Its PEG ratio of 0.5 -- based on a P/E of 9.7 and earnings growth of 19% to $4.55 in 2008 -- makes it look inexpensive to me unless the analysts who track Countrywide are way off the mark.

What investors need to figure out is whether their current stock prices reflect all the bad news or whether things will get still worse. I'd be inclined to think that the bad news is reflected in the stocks already and Bank of America is wrong about these two stocks. What do you think?

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned in this post