U.S. Attorney General Eric Holder, center, announces Monday Citigroup will pay $7 billion to settle an investigation into risky subprime mortgages. With Holder, are, from left, Tony West, the lead Justice Department negotiator in the Citigroup case; John Walsh, U.S. Attorney for the District of Colorado and Loretta E. Lynch, U.S. Attorney for the Eastern District of New York. (AP/Pablo Martinez Monsivais)
New York will get $182 million out of a $7 billion settlement between Citigroup Inc. and the federal government over the bank’s activity in the subprime mortgage market, which was announced Monday.
The settlement came out of an investigation led by the U.S. Attorneys for the Eastern District of New York and the District of Colorado, as well as the Department of Justice’s Residential Mortgage-Backed Securities (RMBS) Working Group.
Of the total settlement, $4 billion will be paid to the Department of Justice as a civil penalty and $500 million will be paid to state attorneys general and the Federal Deposit Insurance Corporation. The remaining $2.5 billion will provide relief to consumers, which will include relief for underwater homeowners and financing of low-income rental housing.
Of New York’s share, $92 million will be paid in cash and $90 million will go toward consumer relief, according to New York Attorney General Eric Schneiderman, who co-chairs the RMBS Working Group.
“This settlement will build upon our work bringing relief to homeowners around the country and across New York, and is exactly what our working group was created to do,” Schneiderman said in a news release. “Systemic frauds harmed thousands of New York homeowners and investors, and today’s result is a major victory in the fight to hold those who caused the financial crisis accountable.”
The settlement does not release Citigroup officers from potential criminal liability.
Eastern District U.S. Attorney Loretta Lynch, in a statement, said the investigation revealed “that the misconduct in Citigroup’s deals devastated the nation and the world’s economies, touching everyone.”
“The investors in Citigroup RMBS included federally-insured financial institutions, as well as a host of states, cities, public and union pension and benefit funds, universities, religious charities and hospitals, among others,” she continued. “These are our neighbors in Colorado, New York and around the country, hard-working people who saved and put away for retirement, only to see their savings decimated.”
The Eastern District assistant U.S. attorneys involved in the investigation are Richard Hayes, John Vagelatos and Edward Newman.
Citigroup is represented by Brad Karp, Theodore Wells, Bruce Birenboim and Susanna Buergel, partners at Paul, Weiss, Rifkind, Wharton & Garrison, along with associates Kevin O’Keefe, Jesse Crew, Ryan Goldstein and Caitlin Grusauskas.
Citigroup CEO Michael Corbat said in a news release that the settlement ends all pending civil investigations related to its handling of mortgage-backed securities.
“We believe that this settlement is in the best interests of our shareholders, and allows us to move forward and to focus on the future, not the past,” he stated.
The two sides once had been far apart in their negotiations. The Justice Department had warned last month that it would sue after the bank offered to pay less than $4 billion to resolve the matter—substantially less than what the government was seeking.
The settlement stems from the sale of 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.
Citigroup and other banks downplayed the risks of subprime mortgages when packaging and selling them to mutual funds, investment trusts, 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 it was “amazing that some of these loans were closed at all,” noting the bank itself increased its profits and share of the market, the Justice Department said.
“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,” U.S. Attorney General Eric Holder said at a Washington, D.C. news conference announcing the settlement.
The securities, which contained so-called residential mortgage-backed securities and collateralized debt obligations, plunged in value when the housing market collapsed in 2006 and 2007. Those losses triggered a financial crisis that pushed the economy into the worst recession since the 1930s.
Citigroup separately agreed in April to pay $1.13 billion to settle claims by investors seeking that the lender buy back billions of dollars in residential mortgage-backed securities.
The Citigroup settlement comes months after a similar deal between the Justice Department and JPMorgan Chase & Co., the nation’s biggest bank. After months of negotiations, the bank last year agreed to pay $13 billion after an investigation into toxic mortgage-backed securities.
That settlement included about $9 billion in cash, of which about $7 billion was for investors. It also included $4 billion in relief for consumers, including mortgage modifications for homeowners facing foreclosure (NYLJ, Nov. 20, 2013).
About $1 billion of the settlement was earmarked for New York. About $613 million of that was in cash, which Schneiderman pledged to use in part to provide relief to victims of Hurricane Sandy. About $400 million was set aside for direct relief to consumers.
As part of the settlement, JPMorgan admitted that, in the years before the financial crisis, it falsely told investors that its residential mortgage-backed securities complied with underwriting guidelines. That settlement covers conduct by JPMorgan itself and by Washington Mutual and Bear Stearns, which JPMorgan acquired after the financial crisis in 2008.