1st Boston Says Trades Cost Up to $50 Million : Cites Problem Deals in Mortgage Instruments

First Boston Inc. said Friday that it lost $10 million to $50 million over several months due to problem trades in its mortgage-backed securities operations.

The losses came to light recently when the brokerage took delivery of certain mortgage-backed securities it had contracted to buy that turned out to be less valuable than the firm thought they would be, the spokesman said.

Subsequently, the firm launched an investigation of the matter and discovered that the discrepancy was not an isolated incident.

“It would have appeared that the problems evolved over several months,” the spokesman said.

He said the trades were generated by former managing director Howard Diamond, the principal mortgage-backed trader, who left First Boston earlier this year. The problems were discovered after his departure, the spokesman said. Diamond has set up his own firm.

Diamond said the firm’s problems were known to senior officials months ago. “First Boston management was well aware of this several months ago,” he told reporters.

Management Changes

First Boston said it launched an investigation through internal auditors to discover the causes and exact scope of the trading losses.

“We’re working on it intensively right now,” the spokesman said. “We feel that we’ve pretty much narrowed the parameter of the loss.”

The spokesman said he did not know how the losses would affect First Boston’s earnings. “The quarter’s not over,” he said. “I don’t know what the tax implications will be.”

First Boston, as part of a strategic review, recently reorganized management of its fixed-income department, which includes mortgage-backed trading. In the process it laid off a number of employees, although it has not disclosed the total number of people affected.

A major source of financing for homes, mortgage-backed securities are financial instruments secured by a pool of home mortgages and issued by such major agencies as the Federal Home Loan Mortgage Corp., Federal National Mortgage Assn. and the Government National Mortgage Assn.

These agencies take home loans originated by banks, savings and loan associations and others and package them as bonds, for which investment banks create a market.