Feb. 19 (Bloomberg) -- Credit Suisse Group said worsening credit markets and pricing errors on bonds will cut first-quarter profit by about $1 billion, sending the shares down 6.6 percent in Swiss trading.

Switzerland's second-largest bank took $2.85 billion of writedowns on asset-backed securities after an internal review found ``mismarkings'' by a group of traders and debt markets deteriorated. The Zurich-based bank said in a statement today that it's assessing whether 2007 earnings were also affected.

The announcement comes two days after Qatar said it was buying shares in Credit Suisse and a week after the company reported net writedowns of 2 billion Swiss francs ($1.8 billion) for 2007, a fraction of those disclosed by bigger Swiss competitor UBS AG. Chief Executive Officer Brady Dougan said on Feb. 12 that the bank tried to be ``extremely transparent'' about its debt holdings and related risks.

``I'm speechless,'' said Georg Kanders, an analyst at WestLB in Dusseldorf with a ``buy'' rating on Credit Suisse. ``To announce this just a week after reporting earnings is a major blow. This will again put the whole sector under pressure.''

Credit Suisse fell 3.75 francs to 53 francs, cutting the company's market value to 54.1 billion francs. UBS, the biggest Swiss bank, fell 0.6 percent.

`Loss of Confidence'

Credit-default swaps on Credit Suisse's subordinated debt rose to a record, according to Deutsche Bank AG. Credit-default swaps, used to speculate on a company's ability to repay debt, rise as perceptions of credit quality worsen.

Credit Suisse blamed the writedowns on ``adverse first quarter 2008 market developments'' and pricing errors ``by a small number of traders'' in the structured credit trading business. The company estimated that it remained profitable so far in the first quarter.

The announcement raises questions about oversight at the bank less than a month after Paris-based Societe Generale SA reported the worst trading loss in banking history following unauthorized bets by trader Jerome Kerviel. Companies ranging from Paris-based Credit Agricole SA to D. Carnegie & Co. of Stockholm have also been hurt by unauthorized trading.

``The big question mark is about the bank's control systems,'' said Stefan Raetzer, who helps manage about $28 billion at Allianz Global Investors in Frankfurt. ``The writedown isn't as much of a problem here as the loss of confidence.''

Credit Suisse spokesman Marc Dosch said a ``small number'' of traders had been suspended, declining to provide their names. The internal review will be finished before the publication of the annual report, scheduled for March 18, he said.

Didn't Know

Dougan told reporters and analysts on a conference call that the bulk of the writedown ``was attributable to first-quarter market movements, but the issue is still under review.''

He said he didn't know there were issues related to the pricing of securities when the company reported earnings last week. The discrepancies were discovered during the bank's normal risk management procedures, he said.

The bank marked down holdings of residential mortgage-backed securities and collateralized debt obligations that the company disclosed last week, Dougan said.

``Even with today's announcement we feel we have managed our risk fairly well,'' especially compared with competitors, Dougan said on the conference call. ``We will always continue to improve our risk management practices and procedures.''

Dougan said the bank may review the terms of $2 billion of subordinated bonds it sold last week.

More Writedowns

The loss is the biggest setback for Dougan, 48, since he took over as CEO from Oswald Gruebel in May after heading the investment bank for three years. Gruebel returned the bank to stable earnings after a decade of management turnover, bungled acquisitions and the first criminal conviction of a bank in Japan. Credit Suisse's writedowns follow about $19 billion in debt and loan markdowns at UBS.

``It unfortunately just reinforces the reputation that the large Swiss banks have generated over the last year for financial ineptitude,'' Peter Thorne, a London-based analyst at Helvea Ltd., said in a note to clients. ``Whilst we had received some assurance that the Credit Suisse balance sheet is not as laden with problem securities as UBS, this disclosure just raises the prospect that they may be simply bad at knowing what problems they do have.''

Qatar Investment

Rising U.S. subprime mortgage defaults led to more than $145 billion in writedowns and loan losses at the world's biggest financial companies. The banks may be facing as much as $203 billion in additional writedowns, largely because of a worsening bond insurance crisis, UBS analyst Philip Finch said last week.

``The management team of Credit Suisse had done a very good job of convincing investors that they're in control, that they're navigating the waters very well,'' said Andy Lynch, who helps manage about $10 billion at Schroder Investment Management in London. ``Suddenly that confidence has gone and the question everyone is asking is what's next, what else might they find in this review?''

Qatar's prime minister, Sheikh Hamad bin Jasim bin Jaber al- Thani, said in an interview two days ago that the Gulf state was buying Credit Suisse shares. He declined to specify the size of the holding. Kenneth Shen, head of strategic and private equity at the Qatar Investment Authority, didn't answer three calls to his mobile phone today. The authority has no press office or official spokesman.

Last week, the bank said it reduced holdings of commercial mortgage-backed securities to 25.9 billion francs during the fourth quarter from 35.9 billion francs. The bank also held 8.7 billion francs in residential mortgages as of Dec. 31, down from 16.3 billion francs; and 2.7 billion francs in collateralized debt obligations, compared with 2.3 billion francs.

To contact the reporter on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

Last Updated: February 19, 2008 12:10 EST