On Monday, Citigroup announced that it has agreed to pay the Department of Justice $7 billion to end the U.S. government’s investigation into the bank’s mortgage-backed securities trading that leading up to the financial crisis in 2008. The settlement marks the end of a two-year investigation into the bank’s shady trading practices of subprime mortgage securities and months of fruitless negotiations between the bank and the U.S. authorities.
The settlement comes in three parts: a $4 billion cash penalty, $500 million to the state attorneys general and the Federal Deposit Insurance Corporation (FDIC), and $2.5 billion set aside for consumer relief.
Citigroup is one of several banks accused of issuing, structuring and underwriting mortgage securities – bundles of home loans – that had been warned to have a high risk of default to investors, who were uninformed of the poor quality of the securities. When the housing bubble burst in 2006, these securities became worthless, starting a chain of financial losses and failures whose scale was too large for the financial system to handle, eventually leading to the global recession in 2007. Citigroup then received a $45 billion bailout from the government over concerns of its massive losses.
Attorney General Eric H. Holder Jr. said at a news conference 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. They misrepresented the facts, including the level of risk. They sold defective loans to countless investors, including federally-insured financial institutions.”
Citigroup is the second bank to settle with the Department of Justice over investigations into the financial crisis after JPMorgan Chase’s $13 billion settlement last November, which included $9 billion in federal and civil claim settlement and $4 billion in consumer relief. Bank of America is currently in talks with the DOJ to end its ongoing investigations and has offered more than $12 billion. The DOJ has asked for much more than that.
