By Christina Rexrode
Citigroup Inc.'s mortgage securities settlement isn't proceeding
as quickly as the company would like.
The trustees involved in Citigroup's $1.13-billion settlement
with private investors said they need an extension to decide
whether they should approve the pact.
Citigroup announced the settlement in April with 18 investors,
including BlackRock Inc.'s BlackRock Financial Management Inc., the
Federal Home Loan Bank of Atlanta, Goldman Sachs Group Inc.'s asset
management unit and Pacific Investment Management Co.
The investors said in a news release at the time that they
supported the deal, which settled claims they had been misled over
the quality of 68 trusts, which issued some $59 billion of
residential mortgage-backed securities that Citigroup sold from
2005 to 2008.
But the trustees who work for those investors aren't moving
quickly. The settlement gave the trustees until June 30 to accept
the offer, with the option to extend the deadline 45 days. Late
Wednesday, the trustees posted a notice saying they would exercise
the right to that delay, which now gives them a deadline of Aug.
14.
The trustees basically serve as administrators for investors in
a structured deal such as a mortgage-backed security. Their roles
include maintaining records and distributing payments.
The notice, which was signed by trustees including Deutsche Bank
National Trust Company, HSBC Bank USA N.A. and U.S. Bank N.A., said
the trustees were still reviewing the proposed settlement and had
not made any decisions about "the reasonableness of, or the
advisability of accepting" the proposed settlement.
The relationship between investors and the trustees that assist
them can be complicated. BlackRock and Pimco last week sued six
trustees, including HSBC and U.S. Bank, for failing to fulfill
their role in overseeing the servicing of loans in some $2 trillion
in mortgage-backed securities. The investors claim that trustees
have ignored "pervasive" signs of flawed mortgages, which should
have resulted in the repurchase of loans at full value from the
bonds. The investors also argue that the trustees have a fiduciary
duty to their investors. Trustees have argued that their
responsibilities are far narrower than what some investors believe,
however.
The lawsuit against the trustees, and the trustees' decision to
ask for an extension as they decide whether to accept the Citigroup
proposed settlement, were first reported by The Wall Street
Journal.
Citigroup and other big banks are eager to convince investors
that their legal troubles are coming to an end, while the
government has pushed to prove that it is being tough on the
banking industry in the wake of the financial crisis.
Citigroup is in the midst of negotiating a mortgage-securities
settlement with the Justice Department, though the two sides remain
far apart on how much Citigroup should have to pay. The Justice
Department has sought roughly $10 billion, while Citigroup has
offered about $4 billion, The Wall Street Journal reported this
month. Bank of America is also wading through Justice Department
settlement negotiations, while J.P. Morgan Chase & Co. settled
a group of related cases in November for $13 billion.
There is reason to be cautious in pronouncing any settlement to
be the final word in crisis-era cases. Private investors agreed to
an $8.5 billion settlement with Bank of America Corp. in 2011, with
Bank of New York Mellon Corp. acting as trustee. But some of the
investors, including American International Group Inc., protested,
saying Bank of New York should have brokered a better deal. After a
prolonged court battle, a judge approved most of the settlement
this year.
AIG isn't an investor in the trusts included in the Citigroup
settlement.
Private investors also agreed to a $4.5 billion mortgage-backed
securities settlement with J.P. Morgan in November, though the
trustees in that settlement have yet to offer their final approval.
They were originally supposed to approve the deal by Jan. 15, but
they have asked for several extensions and now face a deadline of
Aug. 1.
The investors in all three cases have been represented by the
Houston law firm Gibbs & Bruns. A Citigroup spokeswoman
declined to comment.
Al Yoon contributed to this article.
Write to Christina Rexrode at christina.rexrode@wsj.com
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