Citigroup agreed Monday to pay $7 billion to settle a federal investigation into its handling of risky subprime mortgages, admitting to a pattern of deception that Attorney General Eric Holder said "shattered lives" and contributed to the worst financial crisis in decades.
Besides a $4 billion civil penalty, the bank will also pay $2.5 billion in consumer relief to help borrowers who lost their homes to foreclosure and settle claims from state attorneys general and the Federal Deposit Insurance Corporation.
The $7 billion settlement, which represents about half of Citigroup's $13.7 billion profit last year, is the latest substantial penalty sought for a bank or mortgage company at the epicenter of the housing crisis. The Justice Department has in the last year reached a $13 billion deal with JPMorgan Chase, the nation's largest bank, and also sued Bank of America for misleading investors in its sale of mortgage-linked securities.
Yet the settlement packages pale in size compared to the losses suffered by the millions of people who lost their homes.
The settlement stems from the sale of toxic securities made up of subprime mortgages, which led to both the housing boom and bust that triggered the Great Recession at the end of 2007. Banks, including Citigroup, minimized the risks of subprime mortgages when packaging and selling them to mutual funds, investment trusts and pensions, as well as other banks and investors.
One Citigroup trader wrote in an internal email that he "would not be surprised if half of these loans went down," and said it was "amazing that some of these loans were closed at all." Meantime, the bank increased its profits.
"They did so at the expense of millions of ordinary Americans and investors of all types — including other financial institutions, universities and pension funds, cities and towns, and even hospitals and religious charities," Holder said Monday.
The $2.5 billion in consumer relief is directed at underwater homeowners and borrowers in areas of the country with high numbers of distressed properties and foreclosures. The sum includes refinancing for homeowners struggling with high interest rates on their mortgages, closing cost help for borrowers who lost homes to foreclosure and financing for construction and affordable rental housing.
Citigroup should have the capital needed to absorb the $7 billion settlement, said Gerard Cassidy, a managing director and analyst at RBC Capital Markets. In fact, investors were relieved that the issue was no longer confronting the bank and pushed up Citigroup's stock price on Monday.