By Saabira Chaudhuri and Christina Rexrode
Citigroup Inc. will pay $7 billion to settle the 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.
The pending settlement and other legal problems have been an
overhang on 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
collateralized debt obligations, not just mortgage securities. The
settlement covers RMBS and CDO's issued in the run-up to the
financial crisis, from 2003 to 2008.
Chief Executive Michael Corbat said in a statement that the bank
has "now resolved substantially all of our legacy RMBS and CDO
litigation."
"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," Mr. Corbat said.
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, according
to prepared remarks--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 process of
negotiations and brinkmanship. 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.
Citigroup is the second of the U.S. megabanks to settle with the
government over mortgage securities. J.P. Morgan Chase & Co.
settled similar charges in November for $13 billion. Talks between
the government and Bank of America Corp. are under way.
Citigroup's deal with the Justice Department comes after 2 1/2
months of tense negotiating. Last month, the two sides were far
apart on a potential deal, with the DOJ demanding $10 billion and
Citigroup offering about $4 billion: a discrepancy big enough to
nudge the Justice Department to threaten a lawsuit.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com and
Christina Rexrode at christina.rexrode@wsj.com
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