Citi to pay $7bn to settle US mortgage securities probe

Customers wait at an ATM at a Citibank branch in New York. Citigroup said it agreed to pay $7bn to settle a US government investigation into mortgage-backed securities the bank sold in the run-up to the 2008 financial crisis.

Reuters/Washington

Citigroup has agreed to pay $7bn to settle a US investigation into shoddy mortgage-backed securities the bank sold in the run-up to the financial crisis, including the largest civil fraud penalty ever levied by the US Justice Department.

The settlement is more than twice what many analysts had expected but less than the $12bn the government sought in negotiations with Citi, the third largest US bank.

Citi said it took a related pretax charge of about $3.8bn in the second quarter, which led the bank to report a 96% drop in earnings yesterday.

Citi shares rose 3.2% at $48.52.

The settlement, signed over the weekend, capped months of negotiations, during which the government threatened to sue the bank, sources said.

“The penalty is appropriate, given the strength of the evidence of the wrongdoing committed by Citi,” US Attorney General Eric Holder said in a statement yesterday.

“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,” Holder added.

Citi said it will pay $4.5bn in cash and provide $2.5bn in aid to low-income tenants and struggling homeowners.

The cash portion consists of a $4bn civil payment to the Justice Department, double a similar penalty levied on rival JPMorgan Chase & Co in November, and $500mn in compensatory payments to state attorneys general and the Federal Deposit Insurance Corp.

In exchange, the Citi deal resolves claims over both mortgage securities and more complicated securities known as collateralized debt obligations that the bank structured or underwrote between 2003 and 2008.

The consumer portion of the deal will include financing for the construction of affordable multifamily rental housing and principal reduction and forbearance for residential loans, the bank said. Citi said it will provide the assistance by the end of 2018.

Citi is the second major bank to settle with authorities since US President Barack Obama ordered the formation of a task force to investigate the sale and packaging of toxic home loans that were at the centre of the 2008 financial crisis.

The No. 1 US bank JPMorgan last year agreed to pay $13bn to settle government probes over the packaging of toxic mortgages, including both Justice Department claims, a $4bn deal with the Federal Housing Finance Agency (FHFA), and other regulators. Last year Citi settled with the FHFA for $250mn. The FHFA, which regulates Fannie Mae and Freddie Mac, had sued the bank over soured mortgage securities sold to the taxpayer-owned entities,

Bank of America Corp has also been negotiating with the Justice Department over similar claims.

Profit helped by better-than-expected fixed-income trading

Citigroup reported a stronger-than expected adjusted quarterly profit as its fixed-income business performed ahead of forecasts, and the bank cleared another hurdle by reaching a $7bn settlement over its sale of flawed mortgage securities.

The settlement with the Justice Department was more than twice what many analysts had expected earlier this year, but it was less than the $12bn sought by the government in negotiations with the bank.

Including a charge of $3.8bn related to the settlement, Citi’s second-quarter earnings fell 96% to $181mn.

But adjusted net income, which excludes the settlement charge and some changes to the value of the bank’s debt, amounted to $3.93bn, or $1.24 per share, compared with $3.89bn, or $1.25 per share a year earlier.

Analysts on average had expected earnings of $1.05 per share, according to Thomson Reuters I/B/E/S.

Citigroup’s stock was up 3.5% at $48.60 in early trading yesterday. The shares rose 1.4% premarket after the settlement was announced an hour before the results.

Adjusted revenue from fixed income markets fell 12% to $2.9bn - a much better outcome than the drop of 20-25% that Chief Financial Officer John Gerspach had braced the market for in May.

Gerspach, in a media call, attributed better-than-expected performance to eased tensions in Russia and Ukraine during the latter part of the quarter.

Citigroup’s fixed-income results are first to be reported by a major US investment bank this quarter and are a pointer to how the others may have fared in that business.

Fixed income trading has slumped amid uncertainty about the global economy.