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Citigroup’s Costs for Toxic Assets Soar on Legal Fees

Citigroup's Costs for Toxic-Assets Unit Soar on Legal Expenses
The increase helped boost Citigroup Inc.’s total expenses by 1 percent to $12.4 billion, showing that debris left over from the 2008 credit crisis can still put a surprise drag on profit. Photographer: Victor J. Blue/Bloomberg

Citigroup Inc., the third-biggest U.S. bank, said expenses at a unit holding some of its most toxic assets surged as legal costs mounted.

The Special Asset Pool, or SAP, had operating expenses of $572 million for the three months through March, compared with $63 million in last year’s first quarter, according to data released today by the New York-based bank. SAP, which manages a portfolio of securities that Citigroup seeks to divest, had total expenses of $619 million for all of 2011 and 2012 combined, filings show.

The increase helped boost Citigroup’s total expenses by 1 percent to $12.4 billion, showing that debris left over from the 2008 credit crisis can still put a surprise drag on profit. SAP is one of three divisions at Citi Holdings, which houses distressed and unwanted assets. SAP’s $18 billion of investments includes corporate debt, equity stakes and subprime mortgage bonds, some worth a fraction of their original value.

“It’s hard to see what’s out there that wasn’t anticipated or wasn’t known,” said David Knutson, a credit analyst with Legal & General Investment Management America. “There’s some detail that we’re missing.”

Moshe Orenbuch, an analyst with Credit Suisse Group AG, had predicted that Special Asset Pool costs for the quarter would be $85 million. David Trone, a JMP Securities LLC analyst, had estimated $75 million.

Firing Workers

“We don’t comment on specific legal accruals unless we’re announcing a settlement of some sort,” Chief Financial Officer John Gerspach said on a call with analysts in response to questions about the SAP costs.

The increase drove up total expenses just as Chief Executive Officer Michael Corbat is seeking to cut the lender’s costs. Corbat, 53, a former CEO of Citi Holdings, is firing workers and shutting branches to make the bank more efficient.

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

Assets in the unit fell 50 percent to $18 billion for the year through March, according to the bank, as Citigroup found buyers for some of the holdings and didn’t replace loans that expired. The SAP lost $417 million for the quarter, exceeding the $367 million the business lost for all of 2011 and 2012 combined.

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