In a deal expected to close next week, Citigroup may finalize penalties with the Justice Department for a price of nearly $7 billion. The hefty fine comes as an agreement to end a civil investigation as to whether the bank sold faulty mortgage-backed securities which led to the 2008 recession.
Jonathan Berr of CBS News stated the heavy penalty Citigroup faces may “sting in the short-term,” but that the penalty will ultimately clear a lingering cloud. Being the third-largest bank in the nation by assets, Citibank had to accept $45 billion in bailout money from the government, and billions more in “loan guarantees” after the housing crisis which hit the nation in 2008, and was primarily caused by the sale of sub-prime mortgages. According to CBS News, this amount of money was the most a bank had to accept in bailout money.
The Justice Department has already rejected a settlement of $4 billion originally proposed by Citigroup. Not only that, the bank also failed a “stress test” on “financial solvency” which was given by the Federal Reserve System. Given these staggering situations, CBS News reported the bank will most likely agree to the $7 billion penalty rather than get involved in a criminal case with the federal government.
In another report on how Citigroup might finalize penalties with the Justice Department, Troy Kuhn of BidnessEtc.com stated the financial institution had previously sold about $90 billion in mortgage-backed securities which contributed significantly to the 2008 recession. Citigroup had the worst performance of these kinds of securities than any other bank, attorneys of the Justice Department were reported as saying. This is one reason the Justice Department is seeking such a significant penalty as a settlement over the pursuance of criminal charges. Kuhn added Citigroup has about $2-4 billion in “legal reserves,” according to estimates taken from analysts, but that shares have declined by more than 4 percent over the last year. Year-to-date figures also show a loss of around 9 percent.
According to Michael Corkery and Ben Protes of The New York Times, the settlement between Citigroup and the Justice Department is expected to be announced in the coming week. That is, if both sides can agree to the settlement after quarreling over figures back in June. Corkery and Protes stated the financial institution is looking at paying a lump sum of $4 billion in cash, with the remainder of the $7 billion going to “soft dollar penalties.” This means about $3 million would go into “mortgage modification” and “other forms of relief to homeowners,” and possibly to state attorneys involved in the settlement.
In comparison to how the Justice Department settled with other banks, such as J.P. Morgan Chase and Bank of America over the case of sub-prime mortgage deals which contributed to the 2008 recession, the leading financial services firm is lucky to avoid even heavier penalties, such as an originally proposed settlement of $10 billion with the Justice Department, or a lengthy pursuance of criminal charges. Citigroup is about to finalize a deal over penalties with the Justice Department, and hopefully put poor choices behind the bank’s enormous reputation.
By Liz Pimentel