Citigroup agrees to $7 billion settlement over mortgages

Bank misled investors, triggering housing boom, bust
Attorney General Eric Holder (center) with Tony West, Justice Department's lead negotiator (left) and Colorado US Attorney John Walsh announces at the Justice Department in Washington that Citigroup will pay $7 billion to settle an investigation into risky subprime mortgages, the type that helped fuel the financial crisis.

 

 

WASHINGTON — Citigroup agreed Monday to pay $7 billion to settle a federal investigation into its handling of risky subprime mortgages, admitting to a pattern of deception that Attorney General Eric Holder said “shattered lives” and contributed to the worst financial crisis in decades.

The settlement represents a moment of reckoning for one of the country’s biggest and most significant banks, which is now accountable for providing some financial support to Americans whose lives were dismantled by the largest economic meltdown since the Great Depression.

In addition to a $4 billion civil penalty being paid to the federal government, the bank will also pay $2.5 billion in consumer relief to help borrowers who lost their homes to foreclosure and about $500 million to settle claims from state attorneys general and the Federal Deposit Insurance Corporation.

The agreement does not preclude the possibility of criminal prosecutions for the bank or individual employees in the future, Holder said.

The $7 billion settlement, which represents about half of Citigroup’s $13.7 billion profit last year, is the latest substantial penalty sought for a bank or mortgage company at the epicenter of the housing crisis.

The Justice Department, criticized for not being aggressive enough in targeting financial misconduct, has in the past year reached a $13 billion deal with JPMorgan Chase & Co., the nation’s largest bank, and also sued Bank of America Corp. for misleading investors in its sale of mortgage-linked securities.

Yet the settlement packages pale in size compared to the broader damages caused by the Great Recession. The unemployment rate spiked to 10 percent as millions lost their jobs and their homes, causing losses that totaled in the trillions of dollars. Consumer groups criticized the settlement as a sweetheart deal.

The settlement stems from the sale of toxic securities made up of subprime mortgages, which led to both the housing boom and bust that triggered the Great Recession at the end of 2007. Banks, including Citigroup, minimized the risks of subprime mortgages when packaging and selling them to mutual funds, investment trusts and pensions, in addition to other banks and investors.

The securities contained residential mortgages from borrowers who were unlikely to be able to repay their loans, yet were publicly promoted as relatively safe investments until the housing market collapsed in 2006 and 2007 and investors suffered billions of dollars in losses. Those losses triggered a financial crisis that pushed the economy into the worst recession since the 1930s.

Investors shrugged off the settlement, a sign they expect Citigroup will continue to operate without much disruption. Shares in Citi rose $1.42 – or 3 percent – to $48.42 because the bank beat the expectations in the market, after adjusting for the second-quarter $3.8 billion charge related to the Justice Department settlement.

The bank said its net income dropped in the second quarter after the settlement was arranged. On a per-share basis, net income was 3 cents, compared with $1.34 in the second quarter a year earlier. Excluding the charges and an accounting loss, the bank’s second-quarter profit rose 1 percent to $3.93 billion, or $1.24 a share.

Revenue was $19.4 billion, excluding the accounting loss, compared with $20 billion a year earlier.

 

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