By Christina Rexrode and Andrew Grossman
Citigroup Inc. will pay $7 billion to settle the U.S.
government's accusations that it misled investors about the quality
of mortgage securities it sold in the run-up to the financial
crisis.
According to the Justice Department, Citigroup knowingly sold
mortgage-backed securities with loans that contained "material
defects" and concealed that information from investors in what
Attorney General Eric Holder described as "egregious" misconduct
that helped fuel the 2008 financial crisis.
Citigroup admitted to many of its misdeeds "in great detail" the
Justice Department said Monday. A statement of facts released by
the government--and agreed to by the bank--detailed a pattern of
Citigroup repeatedly ignoring its own red flags about sub-par
mortgages and making misrepresentations to investors about the
quality of loans being securitized.
On several occasions, bank employees learned that significant
percentages of mortgage loans reviewed were defective but sold them
to investors anyway. One Citigroup trader, in an internal email
cited by the government, stated the bank "should start praying"
because so many of the loans were likely to go sour. "It's amazing
that some of these loans were closed at all," the email stated.
Despite those concerns, Citigroup pooled those loans into
residential-mortgage backed securities that were sold to
investors.
"The bank's activities contributed mightily to the financial
crisis that devastated our economy in 2008," Mr. Holder said.
"Taken together, we believe the size and scope of this resolution
goes beyond what could be considered the mere cost of doing
business."
The settlement doesn't absolve Citigroup or its employees from
facing any possible criminal charges, the Justice Department
said.
In a call with reporters Monday morning, Citigroup Chief
Financial Officer John Gerspach declined to comment on whether the
bank had asked for release from any potential criminal charges as
part of the settlement.
"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 Citigroup Chief Executive Officer
Michael Corbat in a statement.
In its settlement, Citigroup will pay a $4 billion civil penalty
to the Justice Department, plus $500 million to the Federal Deposit
Insurance Corp. and several states. Citigroup also agreed to spend
$2.5 billion on "consumer relief," where it will get credit for
modifying mortgages for struggling homeowners and similar
actions.
The pending settlement and other legal problems have been an
overhang for the bank. Citigroup's penalty, unlike a similar
settlement between the Justice Department and J.P. Morgan Chase
& Co. in November, releases it from potential liability for
CDOs, or collateralized debt obligations, not just mortgage
securities. The settlement covers residential mortgage-backed
securities and CDOs issued in the run-up to the financial crisis,
from 2003 to 2008.
The bank has "now resolved substantially all of our legacy RMBS
and CDO litigation," Mr. Corbat said in his statement.
Citigroup also released its second-quarter earnings Monday, with
the bank disclosing its profit dropped 96% in the quarter thanks in
part to a pretax charge of about $3.8 billion related to the
settlement. Still, the company's earnings came in better than
analysts' expectations.
Citigroup's $7 billion agreement comes after a long negotiation.
The bank in May had opened with an offer to pay $363 million in
cash, plus more for "consumer relief," or money the bank will set
aside to help customers in financial trouble. The Justice
Department came back with a far higher number: $12 billion,
including consumer relief.
The bank had argued that it shouldn't have to pay so much
because it was a relatively small player in the mortgage-securities
market. But the Justice Department lawyers saw Citigroup's conduct
as so egregious that it merited a high penalty.
At one point in mid-June, the government came to within a day of
filing a lawsuit against the bank.
Citigroup is the second of the U.S. megabanks to settle with the
government over mortgage securities. J.P. Morgan settled similar
charges in November for $13 billion. Talks between the government
and Bank of America Corp. are under way.
The negotiations were seen as a flash point for both Mr. Corbat,
who was given the top job in 2012 with a mandate to improve
relations with the government, and for Mr. Holder, who has faced
constant criticism that his Justice Department has been too soft on
banks.
In May, the Justice Department extracted from Swiss bank Credit
Suisse Group AG its first guilty plea from a major financial
institution in two decades, and French bank BNP Paribas SA pleaded
guilty last week to charges over its dealings with countries
sanctioned by the U.S.
It has been a tough year for Citigroup so far. In February it
disclosed an alleged accounting fraud against its Mexico unit. In
March the Federal Reserve rejected its stress-test request for a
higher dividend and share buyback, citing a need for the bank to
improve its overall risk managements systems.
Write to Christina Rexrode at christina.rexrode@wsj.com and
Andrew Grossman at andrew.grossman@wsj.com
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