Banking Law

Citi to pay $7B in latest settlement of US claims that sub-par mortgages caused financial crisis

A $7 billion pact with Citigroup is the latest announced settlement of claims by the U.S. that sub-par mortgages knowingly sold by banks to unwitting investors in the form of derivative products, including Citi’s securitized loans caused the financial crisis that began in 2008,

The bank will pay $4 billion of that amount in cash to the Department of Justice as a civil penalty, which is a record amount for a settlement of that type, reports the DealBook page of the New York Times (reg. req.). Another $500 million will go to the Federal Deposit Insurance Corp. and a handful of states. The final $2.5 billion will be in so-called soft dollars for “consumer relief,” including mortgage modifications for struggling homeowners, according to the Times and the Wall Street Journal (sub. req.).

CBS News, CNNMoney, Reuters and USA Today also have stories.

“The bank’s activities contributed mightily to the financial crisis that devastated our economy in 2008,” said U.S. Attorney General Eric Holder, who called the bank’s conduct “egregious.”

Even as the bank assured investors of the purported soundness of toxic financial products, behind-the-scenes email told a different story, the DOJ says. In one, a Citi trader urged the bank to “start praying” due to the likelihood many mortgages would go into default, due to the high percentage of substandard loans. “It’s amazing that some of these loans were closed at all,” the trader wrote.

Bad loans issued by multiple banks damaged investors ranging from large institutions to individual homeowners as a mortgage meltdown that surged after the failure of Lehman Brothers in 2008 decimated real estate values. Meanwhile, many lost jobs or wound up with lower-paying work due to the devastated economy, making it difficult or impossible to come up with mortgage payments for their often-underwater homes.

“Despite the fact that Citigroup learned of serious and widespread defects among the increasingly risky loans they were securitizing, the bank and its employees concealed these defects,” Holder said.

It is still possible Citi or its employees could face criminal charges, he said.

“We believe that this settlement is in the best interests of our shareholders, and allows us to move forward and to focus on the future, not the past,” said the bank’s chief executive officer, Michael Corbat, in a written statement provided to the Wall Street Journal.

The settlement avoids litigation that would have been costly for both sides by resolving, prior to suit, an administrative investigation of Citi’s sale of mortgage-backed securities, the DealBook article notes.

Related coverage: (Sept. 2013): “No criminal or civil charges against top Lehman execs, five years after investment bank collapse” (Oct. 2013): “JPMorgan said to reach tentative deal to pay $13B to resolve civil probes, a record amount” “At least $12 billion sought in DOJ talks with Bank of America to resolve mortgage probes”

Wall Street Journal (sub. req.): “Behind the Scenes of Citigroup’s $7 Billion Settlement”

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