(Adds details of wrongdoing, quotes from press conference)
By Aruna Viswanatha
WASHINGTON, July 14 Citigroup Inc has agreed to
pay $7 billion to resolve claims it misled investors about
shoddy mortgage-backed securities in the run-up to the financial
crisis, in a deal that includes the largest civil fraud penalty
ever levied by the U.S. Justice Department.
The settlement, announced on Monday, is more than twice what
many analysts expected but less than the $12 billion the
government sought in negotiations with Citi, the third
largest U.S. bank.
The accord came roughly six years after the height of the
financial crisis. It is one of several Justice Department probes
into the packaging and sale of risky home loans.
Many of the securities were marketed as safe, even though
the banks knew they were destined to collapse. The widespread
implosion of the securities fueled the 2007-2009 financial
Bank of America Corp has been negotiating with the
Justice Department over similar claims, though those talks have
stalled in recent weeks amid a multibillion dollar difference in
"We're not letting up, and we're not going away," Tony West,
the Justice Department's No. 3 official, said in announcing the
"We will continue to pursue these cases," he said, adding
that related announcements could come "in the very near future."
Citigroup acknowledged it was aware that "significant
percentages" of sample loans did not comply with underwriting
guidelines but the bank pooled them into securities anyway.
In one 2007 deal, a Citigroup trader told colleagues in an
email he had reviewed a due diligence report on the poorest
quality loans, and that they "should start praying," according
to the document.
Many of the loans listed unreasonable borrower incomes or
home values below the original appraisals, the trader wrote,
saying he "would not be surprised if half of these loans went
down." Citigroup still securitized loans from the pool,
according to the document.
The settlement, signed over the weekend, capped months of
negotiations, during which the government threatened to sue the
"The penalty is appropriate, given the strength of the
evidence of the wrongdoing committed by Citi," U.S. Attorney
General Eric Holder said in a statement 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," Holder added.
Earlier Monday, Citi said it took a related pretax charge of
about $3.8 billion in the second quarter, which led the bank to
report a 96 percent drop in earnings.
Citi shares rose 3.2 percent at $48.52.
Under the agreement, Citi will pay $4.5 billion in cash and
provide $2.5 billion in aid to low-income tenants and struggling
The cash portion consists of a record $4 billion civil
payment to the Justice Department, double rival JPMorgan Chase &
Co's penalty in November, and $500 million to resolve
claims from five state attorneys general and the Federal Deposit
The Justice Department penalty resolves claims over both
mortgage securities and more complicated securities known as
collateralized debt obligations that the bank structured or
underwrote between 2003 and 2008.
The consumer portion of the deal will include financing for
the construction of affordable multifamily rental housing and
principal reduction and forbearance for residential loans, due
by the end of 2018.
Citi is the second major bank to settle with authorities
since U.S. President Barack Obama in 2012 ordered the formation
of a task force to investigate misconduct in the mortgage
JPMorgan, the No. 1 U.S. bank, has agreed to pay $13 billion
to resolve related claims, including those from the Justice
Department and regulators, and a $4 billion deal with the
Federal Housing Finance Agency (FHFA).
Last year Citi settled with the FHFA for $250 million. The
regulator of Fannie Mae and Freddie Mac had sued the bank over
soured mortgage securities sold to the taxpayer-owned entities.
Investigators at the U.S. Attorney's offices in Brooklyn and
Colorado and the FHFA inspector general's office collected some
25 million documents through nearly 50 subpoenas as part of the
Citi probe that lead to the new settlement, authorities said.
(Reporting by Aruna Viswanatha in Washington, with additional
reporting by Anil D'Silva in Bangalore; Editing by Karey Van
Hall, Saumyadeb Chakrabarty and Jeffrey Benkoe)