Settlement Includes $4 Billion Civil Penalty, $2.5 Billion in 'Consumer Relief'
Updated July 14, 2014 10:58 a.m. ET
According to the U.S. Justice Department, Citigroup knowingly sold mortgage-backed securities with loans that contained "material defects." Associated Press
Citigroup Inc. C +3.62% will pay $7 billion to settle the U.S. government's accusations that it misled investors about the quality of mortgage securities it sold in the run-up to the financial crisis.
According to the Justice Department, Citigroup knowingly sold mortgage-backed securities with loans that contained "material defects" and concealed that information from investors in what Attorney General Eric Holder described as "egregious" misconduct that helped fuel the 2008 financial crisis.
Citigroup admitted to many of its misdeeds "in great detail" the Justice Department said Monday. A statement of facts released by the government—and agreed to by the bank--detailed a pattern of Citigroup repeatedly ignoring its own red flags about sub-par mortgages and making misrepresentations to investors about the quality of loans being securitized.
Attorney General Eric Holder announces that Citigroup will pay $7 billion in a settlement with the U.S. Justice Department for misdeeds in 2008. Photo: Getty
On several occasions, bank employees learned that significant percentages of mortgage loans reviewed were defective but sold them to investors anyway. One Citigroup trader, in an internal email cited by the government, stated the bank "should start praying" because so many of the loans were likely to go sour. "It's amazing that some of these loans were closed at all," the email stated.
Despite those concerns, Citigroup pooled those loans into residential-mortgage backed securities that were sold to investors.
"The bank's activities contributed mightily to the financial crisis that devastated our economy in 2008," Mr. Holder said. "Taken together, we believe the size and scope of this resolution goes beyond what could be considered the mere cost of doing business."
The settlement doesn't absolve Citigroup or its employees from facing any possible criminal charges, the Justice Department said.
In a call with reporters Monday morning, Citigroup Chief Financial Officer John Gerspach declined to comment on whether the bank had asked for release from any potential criminal charges as part of the settlement.
Read the Settlement Documents
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"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 Officer Michael Corbat in a statement.
In its settlement, Citigroup will pay a $4 billion civil penalty to the Justice Department, plus $500 million to the Federal Deposit Insurance Corp. and several states. Citigroup also agreed to spend $2.5 billion on "consumer relief," where it will get credit for modifying mortgages for struggling homeowners and similar actions.
The pending settlement and other legal problems have been an overhang for the bank. Citigroup's penalty, unlike a similar settlement between the Justice Department and J.P. Morgan ChaseJPM +1.51% & Co. in November, releases it from potential liability for CDOs, or collateralized debt obligations, not just mortgage securities. The settlement covers residential mortgage-backed securities and CDOs issued in the run-up to the financial crisis, from 2003 to 2008.
The bank has "now resolved substantially all of our legacy RMBS and CDO litigation," Mr. Corbat said in his statement.
Citigroup also released its second-quarter earnings Monday, with the bank disclosing its profit dropped 96% in the quarter thanks in part to a pretax charge of about $3.8 billion related to the settlement. Still, the company's earnings came in better than analysts' expectations.
Citigroup's $7 billion agreement comes after a long negotiation. The bank in May had opened with an offer to pay $363 million in cash, plus more for "consumer relief," or money the bank will set aside to help customers in financial trouble. The Justice Department came back with a far higher number: $12 billion, including consumer relief.
The bank had argued that it shouldn't have to pay so much because it was a relatively small player in the mortgage-securities market. But the Justice Department lawyers saw Citigroup's conduct as so egregious that it merited a high penalty.
At one point in mid-June, the government came to within a day of filing a lawsuit against the bank.
Citigroup is the second of the U.S. megabanks to settle with the government over mortgage securities. J.P. Morgan settled similar charges in November for $13 billion. Talks between the government and Bank of America Corp. are under way.
The negotiations were seen as a flash point for both Mr. Corbat, who was given the top job in 2012 with a mandate to improve relations with the government, and for Mr. Holder, who has faced constant criticism that his Justice Department has been too soft on banks.
In May, the Justice Department extracted from Swiss bank Credit Suisse Group AG its first guilty plea from a major financial institution in two decades, and French bank BNP Paribas SA pleaded guilty last week to charges over its dealings with countries sanctioned by the U.S.
It has been a tough year for Citigroup so far. In February it disclosed an alleged accounting fraud against its Mexico unit. In March the Federal Reserve rejected its stress-test request for a higher dividend and share buyback, citing a need for the bank to improve its overall risk managements systems.
Write to Christina Rexrode at christina.rexrode@wsj.com and Andrew Grossman atandrew.grossman@wsj.com
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