Citi Agrees to Shell Out $7 Billion for Bad RMBS
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Citi Agrees to Shell Out $7 Billion for Bad RMBS

July 14, 2014

Citigroup has announced that they’ve agreed to pay around $7 billion to the U.S. government regarding bad mortgage-backed securities (MBS), with $4.5 billion to be paid in cash with an additional $2.5 billion paid in “consumer relief.” Even with Citigroup’s shares rising 3.6 percent in the second quarter, this news is still devastating to Citi's Q2 bottom line.
The agreement also requires Citigroup to provide relief to underwater homeowners, distressed borrowers and affected communities through a variety of means including financing affordable rental housing developments for low-income families in high-cost areas. The settlement does not absolve Citigroup or its employees from facing any possible criminal charges.
“This historic penalty is appropriate given the strength of the evidence of the wrongdoing committed by Citi,” said U.S. Attorney General Eric Holder. “The bank's activities contributed mightily to the financial crisis that devastated our economy in 2008. Taken together, we believe the size and scope of this resolution goes beyond what could be considered the mere cost of doing business. Citi is not the first financial institution to be held accountable by this Justice Department, and it will certainly not be the last.”
The settlement includes an agreed upon statement of facts that describes how Citigroup made representations to RMBS investors about the quality of the mortgage loans it securitized and sold to investors. Contrary to those representations, Citigroup securitized and sold RMBS with underlying mortgage loans that it knew had material defects. As the statement of facts explains, on a number of occasions, Citigroup employees learned that significant percentages of the mortgage loans reviewed in due diligence had material defects.
In one instance, a Citigroup trader stated in an internal e-mail that he “went through the Diligence Reports and think[s] [they] should start praying ... [he] would not be surprised if half of these loans went down ... It’s amazing that some of these loans were closed at all.” Citigroup nevertheless securitized the loan pools containing defective loans and sold the resulting residential mortgage-backed securities (RMBS) to investors for billions of dollars. This conduct, along with similar conduct by other banks that bundled defective and toxic loans into securities and misled investors who purchased those securities, is said to have contributed to the financial crisis. Citigroup is often among the usual suspects accused of misrepresenting the quality of mortgages in the days before the 2008 crisis.
“We also have now resolved substantially all of our legacy RMBS and CDO litigation,” Citigroup Chief Executive Officer Michael Corbat said in a statement to Bloomberg. “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.”
Of the $7 billion resolution, $4.5 billion will be paid to settle federal and state civil claims by various entities related to RMBS: Citigroup will pay $4 billion as a civil penalty to settle the Justice Department claims under FIRREA, $208.25 million to settle federal and state securities claims by the Federal Deposit Insurance Corporation (FDIC), $102.7 million to settle claims by the state of California, $92 million to settle claims by the state of New York, $44 million to settle claims by the state of Illinois, $45.7 million to settle claims by the Commonwealth of Massachusetts, and $7.35 to settle claims by the state of Delaware.
“Citigroup misled consumers and profited by providing California’s pension funds with incomplete information about mortgage investments,” California Attorney General Kamala Harris said. “This settlement holds Citi accountable and compensates the state’s pension funds that protect the retirement savings of hardworking Californians.”
Citigroup will pay out the remaining $2.5 billion in the form of relief to aid consumers harmed by the unlawful conduct of Citigroup. That relief will take various forms, including loan modification for underwater homeowners, refinancing for distressed borrowers, downpayment and closing cost assistance to homebuyers, donations to organizations assisting communities in redevelopment and affordable rental housing for low-income families in high-cost areas. An independent monitor will be appointed to determine whether Citigroup is satisfying its obligations. If Citigroup fails to live up to its agreement by the end of 2018, it must pay liquidated damages in the amount of the shortfall to NeighborWorks America, a non-profit organization and leader in providing affordable housing and facilitating community development. 
Reportedly, Citigroup’s lawyers argued that they shouldn’t face the level of fines that lenders like JPMorgan have faced because they didn’t issue nearly the same amount, in terms of bonds.

Secondary, Settlement