Citi Settles Mortgage Securities Inquiry for $7 Billion
Updated, 8:29 p.m. | The $7 billion deal that Citigroup
agreed to strike with the Justice Department involves one of the
largest cash penalties ever paid to settle a federal inquiry into a bank
suspected of mortgage misdeeds.
But another major
component of the settlement has little to do with troubled mortgages. As
part of the deal, Citigroup has also agreed to provide $180 million in
financing to build affordable rental housing.
The unusual
arrangement, which was outlined in the deal on Monday, underscores how
difficult it remains for Citigroup to shed its rocky past and how
federal prosecutors are getting creative in holding the nation’s big banks accountable for losses that crippled the global financial system in 2008.
Like other settlements
the federal government has signed with Wall Street, Citigroup’s deal
also requires the bank to modify mortgages of struggling homeowners. But
Citigroup’s mortgage business has shrunk appreciably since the
financial crisis, and the bank doesn’t service enough troubled mortgages
to satisfy the monetary settlement terms for homeowner relief. So the
bank agreed to finance affordable rental housing in unspecified “high
cost of living areas.”
Wall Street watchdog
groups and housing advocates said the terms of the $7 billion settlement
highlight how the federal government has fallen short in its effort to
hold banks accountable, noting that neither Citigroup nor any of its
executives have been criminally charged for the bank’s mortgage
problems.
In announcing the deal on Monday, Attorney General Eric H. Holder Jr.
said the hard-fought settlement did not absolve the bank or its
employees from facing criminal charges. “The bank’s misconduct was
egregious,” he said. “As a result of their assurances that toxic
financial products were sound, Citigroup was able to expand its market
share and increase profits.”
The Justice Department
said Citigroup routinely ignored warnings that a significant portion of
the mortgages it was packaging and selling to investors in 2006 and
2007 had underwriting defects. In one internal email cited by prosecutors,
a Citigroup trader wrote “went thru Diligence Reports and think that we
should start praying … I would not be surprised if half of these loans
went down.” But the bank securitized the loans anyway.
The Justice Department
said it was this type of evidence that enabled prosecutors to extract a
$4 billion cash penalty from Citigroup — the largest payment of its
kind. That money will go into the United States Treasury’s general fund and is not earmarked for any particular use.
The deal also includes
$2.5 billion in so-called soft dollars designated for the financing of
rental housing, mortgage modifications, down payment assistance and
donations to legal aid groups, among other measures intended to provide
relief to consumers.
The Federal Deposit Insurance Corporation’s
portion of the settlement — about $208 million — will reimburse
creditors in three failed banks that owned large mortgage security
portfolios — Citizens National Bank in Illinois, Strategic Capital Bank
in Illinois and Colonial Bank in Alabama.
State attorneys
general in California, Illinois, Massachusetts, New York and Delaware
will receive a total of $291 million. California, for example, will
reimburse its two largest public pension funds for mortgage-related
losses they suffered during the financial crisis.
The payments to the states are tax-deductible, but the federal penalty is not.
In a boon for Citigroup, the deal with the Justice Department forgoes any potential cases against the bank related to collateralized debt obligations,
or C.D.O.s, which were often tied to mortgages. While Citi was a
relatively small player in the mortgage securities market, it was a
leader on Wall Street in C.D.O.s.
As part of its rental
housing commitment, Citigroup will provide financing to projects that
may result in a loss to the bank. The Justice Department said the bank’s
involvement would help fill a gap left by cities and states that cut
funding for affordable housing because of the recession.
“We hope this measure
will bring relief to families who were pushed into the rental market
after losing their homes in the wake of the financial crisis,” said Tony
West, the Justice Department’s lead negotiator with the bank. But for
many borrowers who have already gone through foreclosures, the
settlement comes too late, consumer advocates say.
“Seven billion sounds
like a lot. But compared to the number of families that lost their
homes, it is not very much at all,” said Isaac Simon Hodes, a community
organizer with Lynn United for Change, a group that advocates on behalf
of Boston-area residents facing foreclosure.
The bank must complete the consumer relief measures by the end of 2018.
In a call with
reporters on Monday, Citigroup’s chief financial officer, John C.
Gerspach, declined to say how much it would cost the bank to satisfy the
consumer relief portions of the settlement. “These are hard-dollar
costs,” Mr. Gerspach said.
Legal costs associated
with the settlement dealt an immediate hit to Citigroup’s financial
results. The bank took a $3.8 billion charge in the second quarter,
leading profits to tumble 96 percent from a year ago.
Including the charge
and one-time items, Citigroup earned $181 million, or 3 cents a share,
compared with $4.18 billion, or $1.34 a share, in the second quarter of
2013.
Still, investors drove
Citigroup’s shares up 3 percent on Monday, relieved that a settlement
had been completed and heartened that the bank’s latest results were
better than expected.
Excluding the mortgage
settlement charge, Citigroup beat Wall Street’s analysts’ profit
expectations, as its slumping trading revenue recovered slightly.
But much of that good
news was overshadowed by the mortgage deal, which came after months of
wrangling between prosecutors and the bank’s lawyers.
At the outset, the
bank had expected to pay a fraction of that $7 billion. Citigroup’s
first offer to settle the case was $363 million in April, revealing a
wide disparity between what prosecutors and bank officials thought was
an appropriate penalty.
That disparity stemmed
largely from a disagreement over how to calculate the suspected harm
that Citigroup’s mortgage securities caused investors. Citigroup linked
its initial offer to the bank’s relatively small share of the market for
mortgage securities, people briefed on the talks said. The Justice
Department, however, rejected that argument, emphasizing instead what it
saw as Citigroup’s level of culpability based on emails and other
evidence it had uncovered.
The jockeying seemed
to continue to the very end. In announcing the settlement, the Justice
Department held a news conference in Washington at exactly the same time
as bank executives discussed second-quarter results with Wall Street
analysts.
end quote from:
No comments:
Post a Comment