Citigroup Inc. will provide $7 billion in cash and consumer relief to settle federal and state investigations into the sale of defective mortgage investments during the subprime housing boom, the Wall Street giant and federal officials said Monday.

California is among several states that will share in the settlement, which includes a record $4 billion in civil fines and $500 million in repayments for public pension fund and other losses, plus $2.5 billion in consumer relief.

Citi will pay California $102.7 million to offset losses in its public pension funds, according to Atty. Gen. Kamala Harris’ office. California also is guaranteed at least $90 million in consumer relief, the most of any state.

The agreement follows a series of similar settlements by Wall Street firms that packaged high-risk loans during the housing boom to create bonds they sold to investors around the world. Buyers included public employee retirement funds, which suffered significant losses, as well as smaller financial firms that failed.


JPMorgan Chase & Co.’s $13-billion settlement of mortgage-related claims, announced in November, was the largest of these settlements so far. U.S. Atty. Gen. Eric Holder said more are to come.

“Citi is not the first financial institution to be held accountable by this Justice Department, and it will certainly not be the last,” Holder said at a Washington news conference.

The federal civil penalty is twice what JPMorgan Chase paid. Justice Department officials said it was the largest such penalty levied under a 1989 federal financial fraud law. The settlement came after a two-year investigation and extensive negotiations.

Holder said Citigroup learned of serious and widespread defects among the increasingly risky loans its employees were using as the basis to create securities but, nonetheless, “concealed these defects” from investors.


In an internal email quoted by federal officials, a Citi trader said that “we should start praying” after a review of a sample of thousands of mortgages the bank bought in 2007 showed a large amount of them had “material defects.”

“It’s amazing that some of these loans even closed at all,” the trader said.

The settlement “does not in any way absolve Citigroup or its individual employees from facing any possible criminal charges in the future,” Holder said.

“The bank’s activities shattered lives and livelihoods throughout the country and also around the world,” he said. “They contributed mightily to the financial crisis that devastated our economy in 2008.”


The consumer relief will come from principal reductions and other assistance for struggling borrowers as well as financing that the bank will provide for building and preserving affordable rental housing, Citigroup and federal officials said.

The settlement “goes beyond what could be considered the mere cost of doing business,” Holder said. But although the settlement would help many victims, he said it would not completely make up for the damage the bank’s actions caused.

“The reality is that for substantial numbers of people, we will not be able to make them whole,” he said.

The settlement socked Citigroup with a 96% decline in second-quarter earnings. Officials at the New York bank said in a call with analysts that the great majority of its settlement payments would not be deductible from its taxes -- a feature of some previous settlements. Consumer groups and legislators had criticized settlements that allowed banks to deduct some penalties and fines from taxes.


“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 Michael Corbat.

Because of the settlement, Citigroup took a charge of $3.8 billion on its second-quarter earnings. Net income to the bank’s common shareholders fell to $80 million, or 3 cents a share, from $4.1 billion, or $1.34 per share, in the second quarter of last year.

Puzzanghera reported from Washington; Reckard from Los Angeles.

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