By Christina Rexrode and Andrew Grossman
Citigroup Inc. 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.
The bank, which announced the deal early Monday, ahead of a
Justice Department news release, 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.
"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.
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 Chase
& 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, which will release second-quarter earnings results
later this morning, said it would take a pretax charge of about
$3.8 billion for the quarter.
Attorney General Eric Holder is expected to say, at a news
conference later today, that the bank engaged in "egregious"
misconduct by covering up problems with loans it was packaging into
securities and selling to investors.
"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,"
Mr. Holder plans to say, according to a prepared copy of his
remarks.
Mr. Holder plans to say that the bank's misdeeds--which it
admitted to "in great detail" as part of the settlement--allowed it
to dupe investors and win market share. That, he said, hurt
endowment and pension funds, municipalities and charities.
In his prepared remarks, Mr. Holder noted the civil settlement
doesn't rule out future criminal charges against Citigroup or its
employees.
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.
Mr. Holder is expected to say later today that it was "not at
all inevitable in these last few weeks that this case would be
resolved out of court. But in all of its cases, the Justice
Department is committed to delivering outcomes that are
commensurate with the misconduct at issue."
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 at andrew.grossman@wsj.com
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