This past Monday, as reported in the Wall Street Journal, Citigroup agreed to pay $7 billion in a wide ranging settlement with the Government. The wrongdoing stemmed from the poor quality mortgages the bank packaged and sold as securities to investors.
The settlement includes a $4 billion civil penalty to the Justice Department, $500 million to the Federal Deposit Insurance Corp. and several states, and $2.5 billion earmarked for consumer relief which includes the Governments assertions that Citi knowingly sold toxic mortgages at the outset of the housing crisis.
The Attorney General indicated that the settlement would not absolve Citi from criminal charges. Mr. Holder indicated that the bank sold the mortgage securities that contained widespread defects. He described the conduct as “egregious.” “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.”
Citi engaged in a scheme whereby the bank failed to identify low-grade mortgages such as those to poor credit borrowers or those loans that lacked proper documentation. In those situations, instead of rejecting those loans, they would re-classify them as better performing and then misrepresented their quality to investors. The Justice Department found 45 mortgage-security deals in 2006 and 2007 whereby the bank made such misrepresentations concerning the quality of the loans.
The Government’s case against Citi mirrors the conduct outlined in the Justice Department's case against J.P. Morgan. In both these cases, the banks admitted to giving misleading information to investors about the mortgages underlying the securities. While in several cases the mortgages didn’t meet internal underwriting guidelines, but were packaged and sold to investors anyways.