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Citigroup to pay $7B to settle subprime mortgage case

- The Washington Times - Monday, July 14, 2014

The Obama administration hailed Monday's $7 billion settlement with Citigroup as a sign that it's pursuing those responsible for the 2008 economic collapse, but analysts said the penalty won't hurt one of the country's largest banks and won't help many who were devastated.

Few bank employees, executives or workers have been convicted of any crimes connected to the risky subprime mortgages that spurred the collapse that led to the Great Recession.

"In the context of the damage done, the damage even described by the attorney general, we're not even in the same ballpark," said Bartlett Naylor, a financial analyst for Public Citizen, a nonprofit that represents consumer interests.

Indeed, Citigroup shares seemed to absorb the settlement without so much as a bump. The financial corporation, whose net worth is estimated to be at least $120 billion, closed with its stocks up 3 percent on the day, after announcing better-than-expected second-quarter profits.

Attorney General Eric H. Holder Jr. said the agreement, which holds Citigroup accountable for its management of subprime mortgages, shows that the administration is working aggressively on behalf of taxpayers.

"Citi is not the first financial institution to be held accountable by this Justice Department, and it will certainly not be the last," Mr. Holder said at a press conference Monday morning.

"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," Citigroup CEO Michael Corbat said in a statement.

Mr. Holder said the agreement, in which Citigroup admits to a pattern of deception, does not preclude the possibility of criminal prosecutions for the bank or its employees.

Of Citigroup's $7 billion settlement, a $4 billion civil penalty will go to the government — the largest of its kind under the Justice Department's economic enforcement. Another $500 million will go to settle claims in different states and to the Federal Deposit Insurance Corp.

The remaining $2.5 billion is to go to consumers to help those who have lost their homes to foreclosures.

Some analysts are worried that the money paid by Citigroup won't come close to fixing the damage to the economy in 2007 and 2008, when millions of people lost their jobs and hundreds of thousands their homes.

Mr. Corbat said the agreement "resolves all pending civil investigations."

The Obama administration was criticized for its handling of the financial crisis, and some called the Justice Department's pursuit of banks anemic.

Leading up to the financial meltdown, Citigroup and several other banks collected "toxic assets" made up of risky investments, bad loans and subprime mortgages — essentially offering easy credit to borrowers who could not repay their debts. The financial institutions then sold those assets to other banks, investors, pension plans and mutual funds, downplaying the risk involved.

The collapse of the housing market caused many to realize the assets they bought were essentially worthless. Investors lost billions of dollars. The unemployment rate rose to 10 percent as the U.S. entered the worst economic period since the Great Depression.

"They misrepresented the facts, including the level of risk," Mr. Holder said Monday. "They sold defective loans to countless investors, including federally insured financial institutions. ... They led investors and the public to believe that these financial products had been originated in compliance with the law and key underwriting guidelines when this was often not the case."

The federal government bailed out several large banks and corporations, using billions of dollars in taxpayer money to absorb the bad assets and try to stabilize the industry.

The argument, in a phrase that has become common, is that the banks were "too big to fail" and would take down even more of the economy if they collapsed.

Mr. Holder said the Justice Department is working to recoup taxpayer money and aid those who were hurt by the banks' actions.

"This action is merely the latest step in our active and ongoing pursuit of those whose activities defrauded the American people and inflicted grave damage on our financial markets," the attorney general said. "These investigations are not only about holding those who violate the public trust to account; they are also intended to deter banks from engaging in this type of conduct in the future."

In November, JPMorgan Chase agreed to a $13 billion settlement, the largest agreement of its kind between the federal government and a corporation. Watchdogs expect similar monetary agreements to be announced as the Justice Department pursues other financial institutions such as Bank of America.

This article is based in part on wire service reports.

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