Citigroup will pay $7bn to settle an investigation into risky subprime mortgages, the type that helped fuel the financial crisis.
The agreement comes weeks after talks between the sides broke down, prompting the US government to warn that it would sue the New York investment bank. The bank had offered to pay less than four billion dollars, a sum substantially less than the justice department was asking for.
The settlement stems from the sale of securities made up of subprime mortgages, which fuelled 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 them, selling them to mutual funds, investment trusts, pensions, as well as other banks and investors. The securities, which contained so-called residential mortgage-backed securities and collateralised 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.
The bank separately agreed in April to pay $1.13bn to settle claims by investors seeking that the lender buy back billions of dollars in residential mortgage-backed securities.
In the deal announced today, Citigroup will make a $4bn civil monetary payment to the justice department, and another $500m in compensatory payments to state attorneys general and the Federal Deposit Insurance Corporation.
The bank will provide $2.5bn for consumer relief, which will include financing for construction and preservation of affordable housing, as well as principal reduction and forbearance for residential loans.
“The comprehensive settlement announced today with the US department of justice, state attorneys general and the FDIC resolves all pending civil investigations related to our legacy RMBS and CDO underwriting, structuring and issuance activities,” said CEO Michael Corbat. “We also have now resolved substantially all of our legacy RMBS and CDO litigation.”
The bank will take a pre-tax charge of about $3.8bn during its second quarter.
The Citigroup settlement comes months after a similar – but much larger – 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 $13bn after an investigation into toxic mortgage-backed securities.
As part of the deal, which included settlements with New York, California and other states, JPMorgan agreed to provide four billion dollars in relief to homeowners affected by the bad loans. The bank also acknowledged that it misrepresented the quality of its securities to investors.
That deal was seen as a possible template for settlement with Citigroup and Bank of America, which was accused in a government lawsuit last summer of failing to disclose risks and misleading investors in its sale of $850m of mortgage-linked securities. The Securities and Exchange Commission filed a related lawsuit against Bank of America.