Citigroup to pay US$7b in settlement on US subprime mortgage fiasco

PUBLISHED : Tuesday, 15 July, 2014, 1:36am
UPDATED : Tuesday, 15 July, 2014, 4:55am


Citigroup will pay US$7 billion to settle an investigation into risky subprime mortgages, the type that helped fuel the US financial crisis.

The settlement stems from the sale of securities made up of subprime mortgages, which fuelled both the housing boom and the bust that triggered the Great Recession at the end of 2007.

Citigroup and other banks downplayed the risks of subprime mortgages when packaging and selling them to mutual funds, investment trusts, pensions and other banks and investors.

"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," US Attorney General Eric Holder said yesterday.

The securities, which contained so-called residential mortgage-backed securities (RMBS) and collateralised debt obligations (CDOs), plunged in value when the housing market collapsed in 2006 and 2007. Those losses triggered a financial crisis that pushed the US economy into the worst recession since the 1930s.

The bank separately agreed in April to pay US$1.13 billion to settle claims by investors who want the lender to buy back billions of dollars in residential mortgage-backed securities.

Under the deal, Citigroup will make a US$4 billion civil monetary payment to the Justice Department, and dole out another US$500 million in compensatory payments to state attorneys general and the Federal Deposit Insurance Corporation (FDIC).

The bank will provide US$2.5 billion in consumer relief, which will include financing for affordable housing.

"The comprehensive settlement announced today with the US Department of Justice, state attorneys general and the FDIC resolves all pending civil investigations related to our legacy RMBS and CDO underwriting, structuring and issuance activities, CEO Michael Corbat said. "We also have now resolved substantially all of our legacy RMBS and CDO litigation."

Investors shrugged off the settlement, a sign that they expect Citigroup will continue to operate without much disruption. Shares in Citi rose US$1.67, or 3.6 per cent, to US$48.67.

The bank will take a pre-tax charge of about US$3.8 billion during its second quarter because of the settlement.

The Citigroup settlement comes months after a similar - but much larger - deal between the Justice Department and JPMorgan Chase, the biggest US bank.

After months of negotiations, the bank last year agreed to pay US$13 billion after an investigation into toxic mortgage-backed securities.