The $7 billion that Citigroup agreed to pay on Monday to settle a federal investigation into its irresponsible handling of subprime mortgages sounds like a hefty penalty. But it is not nearly enough to cover the damage created by the reckless behavior of Citigroup and other banks that contributed to the nation's economic meltdown. That is why it is important that the deal does not eliminate the possibility of criminal prosecution of bank executives and that the Obama administration does not back down on increased regulation of the financial industry.
Attorney General Eric Holder bragged that the fine includes a record $4 billion civil penalty, but let's put the numbers into perspective. While Citigroup will pay a total of $7 billion, it received $45 billion in taxpayer bailouts during the 2008 economic collapse. And $7 billion is just more than half of Citigroup's $13 billion profit last year. While Holder expects the fine to serve as a deterrent against risky mortgage lending practices, it is not going to leave a permanent mark. Citigroup's second-quarter earnings announced Monday beat expectations, and its stock price opened nearly 4 percent higher following news of the settlement, which brings some certainty for investors.
At least Citigroup did accept some responsibility and acknowledge wrongdoing. It agreed to a statement that bank employees knew some mortgage loans did not meet guidelines for credit scores for home buyers or were based on inflated appraisals. So Citigroup just made sure grades on some loans were changed and put them into bundles of subprime mortgages, effectively duping investors who had no idea what they were really buying. That was exactly the sort of behavior that helped overheat the housing market and trigger the worst economic collapse since the Great Depression.
Holder agreed Monday that the deception "shattered lives," yet the Citigroup settlement money directed toward helping borrowers is not in proportion to the damage left behind in Florida and in thousands of households. The settlement includes $2.5 billion aimed at helping homeowners, including $820 million toward a program to modify mortgages or forgive some debt so homeowners would no longer owe more than their homes are worth. Smaller amounts will go to help homeowners refinance mortgages and finance affordable rental housing. The Obama administration should ensure that the assistance gets to homeowners as soon as possible and does not get tangled up in red tape as other mortgage relief efforts have in Florida and elsewhere.
This is neither the first nor the last check the Justice Department will collect from the banks that did so much damage to the economy. JPMorgan Chase & Co. settled last year for $13 billion and was able to make a large part of the payment tax-deductible. That was strongly criticized in Congress and elsewhere, and at least Citigroup's $4 billion fine will not be tax-deductible. Meanwhile, the Justice Department is expected to turn toward negotiating a settlement with Bank of America. Those talks reportedly stalled last month, suggesting there is still a significant gap between what the bank is offering and what the Justice Department will accept. That settlement should eclipse the JPMorgan deal.
Holder called Citigroup's behavior "egregious" on Monday and said the settlement is appropriate. But for too many homeowners who lost their homes and too many neighborhoods that have yet to recover from the economic collapse, it is too little, too late.