Citigroup Settles with DOJ for $7 Billion

by Bilzin Sumberg
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Citigroup announced last week that it will pay $7 billion to end an investigation by the U.S Department of Justice into misconduct related to its mortgage securitization practices. The blockbuster settlement came days before DOJ lawyers were expected to file a lawsuit. $4.5 billion will go towards settling civil claims related to the DOJ probe, of which $500 million will be split among the FDIC and the attorney generals of California, Delaware, Illinois, Massachusetts, and New York. The remaining $2.5 billion in consumer relief is expected to help borrowers struggling with their home payments.

The settlement results from Citigroup’s securitization and sale of high-risk subprime mortgages, knowingly misrepresenting their quality and associated risk, which ultimately contributed to the financial crisis at the end of 2007. At a recent news conference, Attorney General Eric Holder stated that Citigroup’s misconduct had “shattered lives and livelihoods throughout the country and around the world.”

The large check that Citi will write amounts to a 96 percent drop in its quarterly earnings. Moreover, the majority of the settlement funds will not be tax deductible. This amount is in addition to the billions Citi has already paid in settlements to resolve mortgage buyback lawsuits.

Misconduct Mattered More than Market Share

The DOJ pushed for the large settlement despite Citigroup’s claim that it was not among the biggest banks involved in mortgage securitizations leading up to the financial crisis, because Citi securitized a higher percentage of bad loans than other big banks. It’s clear that the DOJ’s focus is on the extent of misconduct, and not market share. The settlement figure is in line with the deal the DOJ reached with JPMorgan Chase for $13 billion in November. All indications point to the DOJ pursuing similar claims against other too-big-to-fail banks.  Next on the agenda is believed to be Bank of America, with demands expected to reach $17 billion. Wells Fargo and Goldman Sachs are also rumored to be future targets of the DOJ.

Citigroup Admits to Misrepresenting Risk

Citigroup provided the DOJ with a comprehensive statement of facts outlining its conduct in packaging and selling mortgage-backed securities in 2006 and 2007. The DOJ’s claims were centered on the fact that the bank and its employees knew the home loans were of lower quality than advertised in deal documents. Citigroup employees, in many cases, persuaded outside due diligence firms to change their ratings for the loans with a high risk of default.

An internal email from one of Citi’s traders states that he “went through the diligence reports and think[s] [they] should start praying… [he] would not be surprised if half of these loans went down… it’s amazing that some of these loans were closed at all.” According to Holder, “they misrepresented the facts, including the level of risk.”

While the settlement resolved all pending civil investigations against Citigroup for its residential mortgage-backed security and collateralized debt obligation underwriting, it does not eliminate the possibility that criminal charges could be brought against the bank, especially considering Citi’s extensive statement of facts. However, given the age of the case and size of the settlement, it is unlikely that the Justice Department will pursue claims against any individuals. One would hope that big settlement pay-outs are enough to deter big bank misconduct, and that criminal charges are not necessary to focus the biggest banks on the virtues of better lending programs and business practices.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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