U.S. Attorney General Eric Holder and Citigroup announced today that Citigroup will pay $7 billion to settle a U.S. Department of Justice (DOJ) investigation into allegations that it defrauded investors by selling shoddy mortgages ahead of the financial crisis. The civil settlement does not rule out future criminal charges again Citigroup or individual employees. Citigroup stock rose 1.49% Monday in early trading following the announcements.
Citigroup will pay a $4 billion civil penalty to the DOJ, $500 million to the Federal Deposit Insurance Corp. and will set aside $2.5 billion in “consumer relief” to assist struggling mortgage holders. The settlement covers not only residential mortgage-backed securities but also collateral debt obligations (CDOs) issued between 2003 and 2008. The relief to consumers will include Citigroup receiving credit for modifying mortgages for struggling borrowers. The settlement marks a reversal from mid-June when the DOJ had threatened filing suit unless Citigroup significantly raised its offer.
The $7 billion settlement doubles what most analysts expected Citigroup to pay to resolve the litigation. Citigroup will pay far less than the $13 billion paid in November by J.P. Morgan Chase in a settlement that did not release claims concerning CDOs. J.P. Morgan Chase, which purchased failing Bear Stearns and Washington Mutual in 2008, securitized $450 billion in mortgages. Citigroup packaged and sold $90 billion in mortgages in the years leading up to the financial meltdown.
In a related investigation, it is anticipated that Bank of America could face penalties in excess of $12 billion relating to allegations that it sold risky mortgages. The Citigroup settlement comes on the heels of the $8.9 billion settlement between the DOJ and BNP Paribas, the French bank that pled guilty to criminal charges relating to a violation of U.S. sanctions.
Several factors may have contributed to the decision of Citigroup to resolve this matter. Privately, Citi executives had expressed concern that a long and expensive lawsuit would present a public relations nightmare for Citigroup, even if it was ultimately victorious. In a statement released in advance of the DOJ announcement, Citigroup CEO Michael Corbat said that the settlement “allows us to move forward and to focus on the future, not the past.”
In addition, Holder has indicated that it will be a priority for him to wrap up the handful of cases still under investigation relating to bank conduct before the 2008 financial crisis. Washington insiders anticipate that Holder may leave office shortly after the November mid-term elections.