Citigroup’s Toxic-Asset Costs Surge by 10 Times on Legal Expense

Citigroup’s Toxic-Asset Costs Surge by 10 Times on Legal Expense

By Donal Griffin | July 15, 2013 | Bloomberg Businessweek

Citigroup Inc. (C:US), the third-biggest U.S. bank by assets, said first-half costs at a unit holding some of the lender’s most toxic loans and securities multiplied by almost 10 times from a year ago on higher legal expenses.

The Special Asset Pool’s operating expenses climbed to $1.25 billion for the first six months of the year from $129 million in the same period last year, according to figures on the New York-based bank’s website. That’s more than double the unit’s $619 million in total costs for 2012 and 2011 combined.

Swelling expenses in the unit, one of three that house distressed and unwanted assets in the Citi Holdings division, point to the continuing legal costs facing Chief Executive Officer Michael Corbat. Total expenses rose 1 percent to $24.4 billion even as Corbat cuts thousands of jobs and sells businesses in an effort to make the bank more efficient.

“One of the legacy issues that we’ve got is continuing litigation coming out of our business in Holdings,” Chief Financial Officer John Gerspach, 59, said on a conference call with reporters. “We continue to put aside legal reserves to cover our potential exposures there.”

While Gerspach declined to comment on what’s producing the spike in legal costs, he said “it’s fair to assume” that private-label securitization remains one of the bank’s “legacy issues.”

Private-label mortgage-backed securities aren’t guaranteed by government-sponsored enterprises such as Fannie Mae or Freddie Mac. Investors can force banks to repurchase the underlying mortgages if they are faulty.

Faulty Mortgages
Citigroup agreed this month to pay Fannie Mae $968 million to compensate the taxpayer-backed mortgage firm for more than a decade of claims tied to faulty home loans. The bank hasn’t reached a settlement with Freddie Mac or with investors who bought private-label securities.

The original principal balance of private-label claims against Citigroup was $900 million for the first half of the year, according to a company presentation. Claims were $1.5 billion during 2012, the lender said.

Citigroup stands to lose about $2.94 billion from private-label claims, according to Kevin Barker, an analyst with Compass Point Research & Trading LLC. He told clients in a research note last August that the lender needed to add $2.6 billion to its reserves to cover future losses.

“It’s definitely a concern,” Barker said in a phone interview. “I’d expect these charges to continue for most banks that haven’t put up enough reserves related to private-label litigation.”

Assets Decline
The costs at the Special Asset Pool grew even as losses in Citi Holdings tumbled 37 percent to $570 million for the second quarter. That’s the smallest loss at the division since 2009, according to the company’s financial reports. Assets fell 31 percent from a year earlier to $131 billion.

Citigroup executive Keith Pinniger runs the Special Asset Pool, which traces its roots to Citigroup’s bailout in 2008, when U.S. taxpayers guaranteed some of the bank’s riskiest holdings. Then-CEO Vikram Pandit created the unit as a home for those assets along with “other non-strategic” investments, according to a statement at the time.

Assets in the pool fell 53 percent to $15 billion, according to a financial supplement. Remaining investments include mortgage-backed securities, equities and corporate loans, according to the presentation. Some of the securities are worth a fraction of their original value, the presentation shows.

To contact the reporter on this story: Donal Griffin in New York at dgriffin10@bloomberg.net

To contact the editors responsible for this story: Christine Harper at charper@bloomberg.net; David Scheer at dscheer@bloomberg.net