Citigroup Reaches $7 Billion Mortgage-Bond Settlement

Citigroup Inc. agreed to pay $7 billion in fines and consumer relief to resolve government claims that it misled investors about the quality of mortgage-backed bonds sold before the 2008 financial crisis.

The bank took a $3.7 billion charge in the second quarter ended June 30 to cover the cost of the settlement, the New York-based firm said today in a statement. Citigroup climbed 3.6 percent to $48.68 at 11:46 a.m. in New York, the best performance among 84 companies in the Standard & Poor’s 500 Financials Index.

Citigroup was among lenders including Bank of America Corp. investigated by the Justice Department for allegedly misrepresenting the quality of mortgage-backed bonds as home prices plummeted in 2006 and 2007. JPMorgan Chase & Co., the biggest U.S. bank, agreed in November to pay $13 billion to resolve similar federal and state probes. The government has sought about $17 billion from Bank of America, a person familiar with those talks has said.

“The bank’s misconduct was egregious,” U.S. Attorney General Eric Holder said today at a press conference in Washington to discuss the Citigroup settlement. “The size and scope of this resolution goes beyond what could be considered the mere cost of doing business.”

About $2.5 billion of the settlement will be paid in various forms of consumer relief by the end of 2018, the bank said. The accord includes a record $4 billion civil penalty to the Justice Department, $300 million to state attorneys general and $200 million to the Federal Deposit Insurance Corp.

‘Move Forward’

“We also have now resolved substantially all of our legacy RMBS and CDO litigation,” Citigroup Chief Executive Officer Michael Corbat said in a separate statement. “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.”

The Justice Department has taken a tougher approach after drawing criticism that it hadn’t done enough to punish large financial firms for their role in the collapse of home prices and the economic turmoil that began in 2008. Prosecutors have also won multibillion-dollar penalties from banks for wrongdoing including sanctions violations and helping clients evade taxes. Holder said today that more settlements with banks over mortgage sales are coming soon.

45 Deals

In 2006 and 2007, Citigroup packaged thousands of residential-mortgage loans and sold them for tens of billions of dollars to investors, including federally insured financial companies, the Justice Department said in a statement of facts. Loretta Lynch, U.S. Attorney in Brooklyn, said the bank misrepresented the quality of loans in 45 bond deals.

The bank admitted that it received information through due diligence reviews of mortgage-backed bonds that significant portions of the underlying loans didn’t conform to the representations made to investors, the Justice Department said. The bank also agreed to install a monitor to evaluate the lender’s compliance with the accord.

Citigroup, the third-biggest U.S. bank, has been discussing a resolution with U.S. officials since April, a person familiar with the matter said last month. Discussions temporarily broke down in mid-June after the bank’s settlement offers failed to satisfy prosecutors, the person said. Government officials had demanded more than $10 billion, while Citigroup offered less than $4 billion, another person said.

Fewer Bonds

During settlement talks, Citigroup’s lawyers argued that the lender should face a far smaller penalty than JPMorgan because Citigroup sold fewer mortgage bonds, the person with knowledge of the deal said yesterday. The government rejected that position, citing what it considered Citigroup’s level of culpability based on e-mails, internal bank documents and the rates at which loans backing its bonds soured, the person said.

Holder said the Justice Department could still bring criminal charges against the bank or individuals.

Citigroup ranked ninth among non-agency underwriters of mortgage-backed securities in 2008, and wasn’t among the top 10 in the three previous years, according to data from Inside Mortgage Finance, a Bethesda, Maryland-based industry publication.

BofA Talks

On June 19, Charlotte, North Carolina-based Bank of America was ordered by a federal judge to face two government lawsuits in which it was accused of misleading investors about the quality of loans tied to $850 million in residential mortgage-backed securities.

The Justice Department broke off negotiations last month because it was dissatisfied with Bank of America’s offer to pay more than $12 billion, which included at least $5 billion in consumer relief, the person familiar with the discussions said at the time. The department’s latest settlement request was for about $17 billion, the person said.

Bank of America and firms it purchased issued about $965 billion of mortgage bonds from 2004 to 2008, while New York-based JPMorgan and companies it bought issued $450 billion, according to analysts at Sanford C. Bernstein & Co.

“It’s impossible to make everyone whole,” Holder said. “What we try to do is hold the institutions and individuals accountable and to do what we can to bring some degree of relief to the people whose lives were affected.”

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