Updated, 11:49 a.m. | Citigroup
and the Justice Department have agreed to a $7 billion deal that will
settle a federal investigation into the mortgage securities the bank
sold in the run-up to the financial crisis.
The settlement,
announced on Monday morning, includes a $4 billion cash penalty to the
Justice Department – the largest payment of its kind – as well as $2.5
billion in so-called soft dollars earmarked for aiding struggling
consumers and $500 million to state attorneys general and the Federal
Deposit Insurance Corporation.
The deal, after months of contentious negotiations,
averts a lawsuit that would have proved costly for both sides and
resolves a civil investigation into Citigroup’s packaging and selling of
mortgage securities that soured during the financial crisis, causing
large losses to investors.
“The bank’s misconduct
was egregious,’’ Attorney General Eric H. Holder Jr. said in a
statement. “As a result of their assurances that toxic financial
products were sound, Citigroup was able to expand its market share and
increase profits.”
The consumer relief
will involve financing for the construction and preservation of
affordable multifamily rental housing, principal reduction and
forbearance for residential mortgages and other direct consumer benefits
from various relief programs, the bank 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,” Citigroup’s
chief executive, Michael L. Corbat, said in a statement.
The bank said the settlement would result in a charge of about $3.8 billion before taxes in the second quarter.
At the outset, the
bank expected to pay a fraction of that $7 billion. Citigroup’s first
offer to settle the case was $363 million back in April, revealing a
wide disparity between what prosecutors and bank officials thought was
an appropriate penalty.
That disparity stemmed
largely from a disagreement over how to calculate the suspected harm
that Citigroup’s mortgage securities caused investors. Citigroup linked
its initial offer to the bank’s relatively small share of the market for
mortgage securities, people briefed on the talks said. The Justice
Department, however, rejected that argument, emphasizing instead what it
saw as Citigroup’s level of culpability based on emails and other
evidence it had uncovered.
“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, ’’ Mr. Holder said.
He said the settlement on Monday did not absolve “Citigroup or its individual employees” from facing future criminal charges.
While Citigroup was a
relatively small player in the mortgage security market, it was a leader
on Wall Street in the sale of collateralized debt obligations, or
C.D.O.s, which were often tied to mortgages.
In a boon for Citigroup, the deal with the Justice Department forgoes any potential cases against the bank related to C.D.O.s.
The deal also sets the
stage for negotiations between the Justice Department and Bank of
America, which had essentially been on hold while Citigroup worked out
an agreement. In recent months, talks between Bank of America and
prosecutors had stalled over a disagreement about whether the bank
should be held liable for mortgage problems by its Merrill Lynch unit.
The bank had argued that it did not want to go through with its purchase
of Merrill in the depths of the financial crisis, but was pressured by
regulators to complete the acquisition.
The Citigroup deal was
also intended to send a message to other banks like Bank of America
that future penalties would be determined largely by the evidence.
At one point last
month, the Justice Department delayed a plan to sue Citigroup, fearing
that the arrest of a lead suspect in the 2012 attacks on the American
consulate in Benghazi, Libya would overshadow their case against the
bank.
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