Citibank pays $7bn settlement over sale of high-risk mortgages

Citibank has agreed to pay a $7 billion fine (€5 billion) for knowingly selling dodgy securities comprising packaged-up, high-risk subprime mortgages in the run-up to the 2008 financial crisis.

The settlement includes a record $4 billion in cash to the US department of justice. The bank said that, as part of the settlement, it would pay $2.5 billion in relief to consumers and $500 million in compensation to state attorneys and the regulator, the Federal Deposit Insurance Corporation.

The Citibank settlement, the latest penalty levied on a US bank over the dodgy pre-crisis practices, falls short of the record $13 billion payment agreed by JP Morgan Chase in November 2013.

“Citi is not the first institution to be held accountable by this justice department and it will certainly not be the last,” said US attorney general Eric Holder at a press conference in Washington.

The department said the bank had carried out due diligence on the mortgages before selling them on to investors packaged up as mortgage-backed securities in 2006 and 2007 and lied about the quality of the loans in representations to investors.

US investigators quoted one particular Citibank trader who said in an internal email after viewing a sample of thousands of mortgages bought by the bank in 2007 that “we should start praying”.

“I would not be surprised if half of these loans went down. . .” he said. “It’s amazing that some of these loans were closed at all.”

Despite the trader’s concerns about quality where the combined loan-to-value was in excess of 100 per cent, the department said Citibank sold these loans on as securities.

‘Devastated our economy’

Mr Holder said the settlement does not absolve

Citigroup

or its individual employees from facing future criminal charges. “The bank’s activities shattered lives and livelihoods throughout the country and also around the world,” he said. “They contributed mightily to the financial crisis that devastated our economy in 2008.”

The settlement has resulted in the US banking giant taking a charge of about $3.8 billion in its accounts for the second quarter of the year, leading to the bank reporting a 96 per cent decline in earnings.

Shares in the bank rose, however, as the penalty had been well-flagged and earnings for the three-month period had been better than expected. The Financial Times estimated financial institutions have paid out more than $100 million in US legal settlements since the crisis.