Citigroup Settlement Gives the Government a Financial-Crisis WinBy
Following in the fine tradition of big banks shrugging off multibillion-dollar settlements of accusations of wrongdoing, Citigroup announced better-than-expected earnings the same morning it agreed to pay $7 billion to resolve claims of mortgage fraud. “Despite the significant impact of today’s settlement on our net income, our capital position strengthened,” the bank’s chief executive, Michael Corbat, said, seeming to channel several other bank CEOs who recently agreed to pay huge sums to resolve civil and criminal cases while insisting that it would have no effect on their businesses.
The bank will pay $4.5 billion in cash and $2.5 billion in relief to consumers, in the form of financing for affordable housing and mortgage modifications. The agreement resolves a civil investigation by the Justice Department, the Federal Deposit Insurance Corp., and several state attorneys general of sales and underwriting of mortgage securities leading into the financial crisis.
“The bank’s misconduct was egregious,” U.S. Attorney General Eric Holder said. “And under the terms of this settlement, the bank has admitted to its misdeeds in great detail.”
Although the bank ended up paying considerably more than it had hoped—only a few weeks ago, the bid-ask in the negotiations was $4 billion (Citigroup’s offer) to $10 billion (requested by the DOJ)—the agreement resolves all the company’s litigation over mortgage securities. According to the company, its capital ratio actually increased, and Citigroup shares went up after the news.
For the Justice Department, the settlement gives it a bona fide financial-crisis case that it can point to in the face of criticism over the lack of prosecutions of mortgage fraud. According to news reports, publicity concerns were a significant driver of events in the Citigroup case. At one point the bank and the DOJ were so far apart in their discussions that government lawyers scheduled a press conference to announce the filing of a lawsuit against the bank. The arrest of a suspect in the Benghazi attacks prompted them to postpone it out of concern that it would be overshadowed, the New York Times reports. The delay inadvertently led them to a resolution that avoided a lawsuit. The DOJ is now expected to turn its attention to Bank of America.