Citigroup downplayed the risks of subprime mortgages when selling them. Citi reaches $7B deal with feds

Citigroup has agreed to pay $7 billion in a deal with the government for misleading investors about the riskiness of mortgage-backed securities sold in the run up to the 2008 financial crisis, the Justice Department announced Monday.

The deal marks another notch for a task force formed by President Barack Obama in 2012 to investigate whether major banks knew they were packaging shoddy loans into securities sold to investors, which included pension funds, local governments and other financial institutions.


The settlement struck with Citi follows several months of talks that at one point broke down over the size of the penalty and federal authorities last month were preparing to sue the bank before the negotiations got back on track.

Citigroup, which received $45 billion in taxpayer bailouts during the 2008 financial crisis, is one of the largest banks yet to be penalized by the task force. The fine includes a $4 billion civil penalty, which Attorney General Eric Holder said is the largest of its kind, and $2.5 billion for programs intended to help struggling borrowers.

“The penalty is appropriate given the strength of the evidence of the wrongdoing committed by Citi,” Holder said at a news conference on Monday. “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.”

The settlement did not include any criminal charges against the bank or its executives, something advocates of tougher penalties for big banks say is needed in order to send a message to Wall Street.

Holder said the deal does close out the possibility of bringing criminal charges against the bank’s executives, but added that he believes the settlement and others like it will serve as a deterrent and prevent this type of fraud in the future.

“It boggles my mind that this would not have deterrable impact, but if it does not we will hold people accountable yet again,” Holder said.

The investigation into Citi focused on the part of its mortgage business responsible for checking loans it bought from other firms before deciding whether to package them into securities for sale.

According to a statement of facts Citi agreed to, the bank’s employees were told by due diligence firms that some loans did not meet certain guidelines, laws and regulations but the bank put them into the bonds for sale anyway.

For instance, in one deal, roughly 44 percent of a sample of loans were initially flagged for problems, which included credit scores that were too low, missing documentation or inflated appraisals of the homes being sold. Citigroup employees then directed the due diligence firm to change some of the grades of the loans in the pool so that they appeared less risky.

One trader said in an email obtained by investigators that he “went thru the Diligence Reports and think that we should start praying…I would not be surprised if half of these loans went down.”

U.S. Associate Attorney General Tony West said that investigations into several other institutions are “ramping up in very significant ways.”

Justice has been criticized for not more aggressively pursuing cases related to the 2008 financial crisis and in recent months Holder and his deputies have emphasized that their work isn’t done.

“This action is merely the latest step in our active and ongoing pursuit of those whose activities defrauded the American people and inflicted grave damage on our financial markets,” Holder said. “Citi is not the first financial institution to be held accountable by this Justice Department, and it will certainly not be the last.”

A $13 billion settlement was reached with JPMorgan Chase in November over similar problems. Talks continue between Justice and Bank of America over a potential settlement that could surpass the one struck with JPMorgan. The task force also reached settlements with Credit Suisse and Jefferies & Co. Other financial institutions, such as Capital One, have disclosed subpoenas and ongoing investigations from the task force.

But critics have charged that the settlement figures are misleading and fall short of equaling the damage done to the economy and the amount of wealth that was wiped out in the wake of the housing market’s collapse.

Justice has also been criticized for not bringing criminal charges against individual executives at these large banks who may have known loans in the securities they sold were riskier than advertised.

In a sign that federal authorities are becoming more aggressive overall against financial institutions, French bank BNP Paribas was forced into a rare guilty plea in federal court last week to helping clients skirt U.S. sanctions in Sudan and Iran for which it paid nearly $9 billion in fines. Credit Suisse pleaded guilty to similar charges in May.

Justice has also been criticized in the past for striking deals that allow banks to get a tax break on some of the fine.

In Citi’s case, the $4 billion penalty will not be tax deductible, but the bank may be able to write off the $500 million it will pay to state attorneys general offices and the Federal Deposit Insurance Corp., officials said.

The $2.5 billion in aid for homeowners will be disbursed among several programs aimed at helping distressed borrowers.

According to a breakdown of the funds, the relief includes $820 million for mortgage modifications and debt forgiveness that Citi would provide to qualified homeowners in order to help them get “above water” — meaning they would no longer owe more on their loan than their home is worth.

Justice said that much of this relief will go to the “hardest hit areas” as defined by the Housing and Urban Development Department. Another $299 million will be provided to homeowners in the form of refinancing, which includes a reduction of at least two percentage points on interest rates.

Citi will also be able to meet its relief obligations by providing down payment assistance and paying closing costs for low-income borrowers who have been shut out of the market since its collapse.

Another $50 million will be donated to community development funds, legal aid organizations and housing counselors.

Also, Citi agreed to provide $180 million in financing for affordable rental housing, which DOJ said is “a new form of assistance not contemplated in previous settlements.”

The Obama administration has been searching for new ways to address the lack of affordable apartments and rental properties since the foreclosure crisis. Under the agreement, Citi will provide “gap” financing for these developments for cities that have had to cut funding for these projects due to the recession.

Citigroup will take a one-time charge of $3.8 billion for the second quarter in connection with the settlement. The bank’s CEO Michael Corbat said that Citi has now resolved substantially all of its mortgage bond litigation.

“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 a statement.

Holder touted the settlement as a legitimate penalty that will be felt by the bank.

“Taken together, we believe the size and scope of this resolution goes beyond what could be considered the mere cost of doing business,” he said.