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article imageCitigroup to pay $7 billion to settle U.S. financial claims

By Nathan Salant     Jul 15, 2014 in Business
Washington D.c. - U.S. banking giant Citigroup Inc. agreed Monday to pay $7 billion to settle government claims that it lied to investors when it sold them some $30 billion in financial products backed by subprime mortgages, precipitating the 2007-2009 financial crisis.
The settlement, which was signed over the weekend, is more than double what most analysts expected but still far below the government's $12 billion demand at the start of negotiations, according to the Reuters news service.
"The penalty is appropriate, given the strength of the evidence of the wrongdoing committed by Citi," US Attorney General Eric Holder said in announcing the deal on Monday.
"Despite the fact that Citigroup learned of serious and widespread defects among the increasingly risky loans they were securitizing, the bank and its employees concealed these defects," he said.
The $7 billion pricetag includes $4.5 billion in cash -- $4 billion in fines and $500 million for claims filed by five state attorneys general and the Federal Deposit Insurance Corp. -- and $2.5 billion to aid struggling low-income tenants and struggling homeowners, Reuters said.
The $4 billion in penalties is the largest civil fraud payment ever to the Justice Department, and more than twice the penalty paid by JPMorgan Chase & Co. in November.
The settlement, which came after months of negotiations, wipes out most of Citigroup's profits for the second quarter.
Citigroup took a $3.8 billion charge against second-quarter earnings, Reuters said, which led to a 96 percent drop in profits.
Another major rival, Bank of America Corp., also has been negotiating with the Justice Department for months over similar claims but those talks have reportedly stalled over the amount of the penalty.
"We're not letting up, and we're not going away," said Tony West, the Justice Department's No. 3 official, in announcing the Citigroup deal.
"We will continue to pursue these cases," he said, and added that more announcements more expected "in the very near future," Reuters said.
Citigroup admitted that it was aware that "significant percentages" of loans it pooled into securities did not comply with underwriting guidelines.
In one document in evidence from 2007, a Citigroup trader advised colleagues to "start praying" after he reviewed reports on the quality of many of the loans, Reuters said.
The trader said he "would not be surprised if half of these loans went down," the document said, but they still were processed into securities, Reuters said.
The penalty resolves claims arising from mortgage securities and collateralized debt obligations that the bank structured or underwrote frmo 2003-2008, Reuters said.
Citigroup becomes the second major bank, after JP Morgan Chase, to settle since US President Barack Obama [Unlink] ordered the formation of a task force to investigate alleged misconduct in the mortgage securities market in 2012, Reuters said.
Authorities told Reuters that the U.S. Attorney's offices in Brooklyn and Colorado and the Federal Housing Finance Agency subpoenaed 25 million documents as evidence in the Citigroup investigation.
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