Citigroup To Pay $7 Billion Settlement For Misleading Investors About Toxic Mortgage Backed Securities

The age of mufti-billion dollar settlements by banks is fully upon us. On Monday, The U.S. Department of Justice (DOJ) and several states attorneys general (AGs) announced settlements with Citigroup to resolve allegations that the bank mislead investors about toxic mortgage-backed securities. The DOJ announcement:

"... a $7 billion settlement with Citigroup Inc. to resolve federal and state civil claims related to Citigroup’s conduct in the packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities (RMBS) prior to Jan. 1, 2009.  The resolution includes a $4 billion civil penalty – the largest penalty to date under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).  As part of the settlement, Citigroup acknowledged it made serious misrepresentations to the public – including the investing public – about the mortgage loans it securitized in RMBS."

The settlement includes a payment of $4.5 billion to resolve federal and state claims, and $2.5 billion in relief to affected consumers. Attorney General Eric Holder said about the settlement:

“The bank's activities contributed mightily to the financial crisis that devastated our economy in 2008.  Taken together, we believe the size and scope of this resolution goes beyond what could be considered the mere cost of doing business. Citi is not the first financial institution to be held accountable by this Justice Department, and it will certainly not be the last.”

The announcement described the bank's unlawful activities:

"... Citigroup made representations to RMBS investors about the quality of the mortgage loans it securitized and sold to investors. Contrary to those representations, Citigroup securitized and sold RMBS with underlying mortgage loans that it knew had material defects. As the statement of facts explains, on a number of occasions, Citigroup employees learned that significant percentages of the mortgage loans reviewed in due diligence had material defects..."

The breakdown of the $4.5 billion payment to settle federal and state claims:

• 4 billion civil penalty to settle DOJ claims under FIRREA,
• $208.25 million to settle federal and state securities claims by the Federal Deposit Insurance Corporation (FDIC),
• $102.7 million to settle claims by the state of California,
• $92 million to settle claims by the state of New York,
• $44 million to settle claims by the state of Illinois,
• $45.7  million to settle claims by the Commonwealth of Massachusetts,
• $7.35 to settle claims by the state of Delaware

The $2.5 billion payment of relief to affected consumers will include:

1. Loan modifications for homeowners with mortgages underwater,
2. Refinancing for distressed borrowers,
3. Down payment and closing cost assistance to homebuyers,
4. Donations to organizations assisting communities in redevelopment and affordable rental housing for low-income families in high-cost areas.

An independent monitor will review the payments to ensure that the bank satisfies its obligations. If Citigroup fails to satisfy the settlement agreement by December 2018, it must pay liquidated damages in the amount of the shortfall to NeighborWorks America. Perhaps, most importantly the DOJ stated in its settlement announcement:

"The settlement does not absolve Citigroup or its employees from facing any possible criminal charges."

The bank's quarterly earning fell by 96 percent due to the settlement payment. This latest settlement part of a long list of RBMS settlements by the Massachusetts Attorney General:

• May 2009: Goldman Sachs agrees to pay $60 million
• June 2010: Morgan Stanley agrees to pay $102 million
• November 2011: RBS agrees to pay $52 million
• September 2013: Barclays Bank PLC agrees to pay $36 million
• November 2013: JPMorgan-Chase agrees to pay $34 million
• December 2013: Countrywide Securities Corporation makes $17.3 million