Citigroup to pay $7 billion settlement

Citigroup said it agreed to pay $7 billion to settle a US government investigation into mortgage-backed securities the bank sold in the run-up to the 2008 financial crisis.

The settlement figure was more than twice what many analysts expected earlier this year but less than the $12 billion the government had sought in negotiations with the bank.

Citigroup said it took a related pre-tax charge of about $3.8 billion in the second quarter. Taking the charge into account, the bank reported a 96 per cent drop in earnings.

The bank’s second-quarter adjusted net income, which excludes the settlement charge and some changes to the value of the bank’s debt, was $3.93 billion, or $1.24 per share, compared with $3.89 billion, or $1.25 per share a year earlier.

But total net income under Generally Accepted Accounting Principles, which includes legal expenses, fell to $181 million, or 3 cents per share, from $4.18 billion, or $1.34 per share, a year earlier.

Citigroup’s shares were up 3.9 per cent at $48.82 in premarket trading on Monday. The stock gained 1.4 per cent after the settlement was announced an hour before the results.

The settlement, signed over the weekend, caps months of negotiations, during which, sources said, the government even threatened to sue the bank.

“The penalty is appropriate given the strength of the evidence of the wrongdoing committed by Citi,” US Attorney-General Eric Holder said in a statement on Monday. “Despite the fact that Citigroup learned of serious and widespread defects among the increasingly risky loans they were securitising, the bank and its employees concealed these defects,” Holder added.

Citigroup is the second major bank to settle with authorities since President Barack Obama ordered the formation of a task force to investigate the sale and packaging of toxic home loans that were at the centre of the 2008 financial crisis.

JPMorgan Chase & Co, the largest US bank, last year agreed to pay $13 billion to settle government probes over the packaging of toxic mortgages.

Bank of America Corp has also been negotiating with the Justice Department over similar claims.

Citigroup said it would pay $4.5 billion in cash and provide $2.5 billion in consumer relief.

The cash portion consists of a $4 billion civil payment to the Justice Department and $500 million in compensatory payments to state attorneys general and the Federal Deposit Insurance Corp.

The bank said consumer relief will include financing for the construction of affordable multifamily rental housing and principal reduction and forbearance for residential loans.

Citigroup said it would provide the consumer relief by the end of 2018.