Citigroup to pay $7 bn to settle mortgage-backed securities probe

Citigroup will pay $7 billion to settle an investigation into its sale of residential mortgage-backed securities prior to the financial crisis and global recession that started in 2008, the company and the US Justice Department (DOJ) had announced on Monday.

The settlement includes a $4-billion civil penalty, which the DOJ said was the largest to date under a reform of the banking sector that followed the crisis.

“As part of the settlement, Citigroup acknowledged it made serious misrepresentations to the public... about the mortgage loans it securitised in [residential mortgage-backed securities],” US Attorney General Eric Holder said.

“This historic penalty is appropriate given the strength of the evidence of the wrongdoing committed by Citi.” The bank’s activities “contributed mightily to the financial crisis that devastated our economy in 2008,” he said, adding that the settlement does not absolve Citigroup or its employees from facing possible criminal charges.

Citigroup and other US banks have been probed for allegedly misrepresenting the quality of loans before they were bundled into mortgage-backed securities and sold to investors.

In addition to the $4-billion civil penalty, Citigroup will pay $500 million to the federal government. The remaining $2.5 billion will be paid in various forms of consumer relief and will be distributed by the end of 2018, according to Citigroup and the DOJ.

The settlement resolves civil claims by DOJ, several state attorneys general and the Federal Deposit Insurance Corporation (FDIC) relating to residential mortgage-backed securities issued, structured and underwritten between 2003 and 2008, Citigroup chief executive Michael Corbat.

“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,” Corbat said.

In connection with the settlement, Citigroup, the country’s third-largest bank by assets, will take a charge of approximately $3.8 billion pre-tax in the second quarter of 2014, the bank said.

The bank reported $181 million in net income for the second quarter of this year, far less than the $4.2 billion in the same quarter last year. Revenue in the quarter was $19.2 billion compared with $20.5 billion in the same quarter last year.

Citigroup in April had settled a legal fight with institutional investors by paying more than $1.1 billion. Though it counted among the losers in the financial crisis, it turned itself around and last year recorded an impressive profit of $13.9 billion, representing an increase of 84 per cent.

Other banks, including JPMorgan Chase, the country’s largest bank, have agreed in recent months to pay hefty fines and damages to resolve Government claims over mortgage-backed securities.

JPMorgan Chase agreed to pay $13 billion in fines and damages, while Bank of America is also under investigation and could face billions in penalties, according to news reports.

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