Citigroup Inc (NYSE:C) is trading 4 percent higher in early morning trade after reporting soft earnings but more importantly investors learned its often contentious negotiations with the US Department of Justice are now in the rearview mirror.
Citigroup’s settlement with DoJ
Citigroup Inc (NYSE:C) agreed to pay $7 billion to settle claims it sold mortgage backed securities leading up to the financial crisis that helped cause an estimated $12.8 trillion in economic damage to the US economy. The securities in question were intentionally designed to be opaque in their structure and masked the true toxic nature of the then highly rated investment products.
“The bank’s misconduct was egregious,’’ US Attorney General Eric Holder said in a statement. “As a result of their assurances that toxic financial products were sound, Citigroup was able to expand its market share and increase profits.”
The bank and DoJ had engaged in a high-wire like negotiations where the DoJ appeared not to quiver as the final number was close to its recent demand for a $10 billion settlement, as reported in ValueWalk. Citigroup started the negotiations with an offer of just $363 million, which followed a $12 billion demand from DoJ, according to a report in the New York Times.
Citigroup’s information of a criminal nature would have been revealed in a trial
Citigroup Inc (NYSE:C) was said to base the initial lowball offer on its relatively small share of the overall mortgage derivatives market, but DoJ rejected that thinking instead emphasizing a significant degree of culpability based on e-mails and other evidence it had gathered. DoJ was set to announce a public trial but pulled back as unexpected news of the terrorist attack in Benghazi, Libya would have muted the public impact of the news and the message DoJ wanted to send, the Times is reporting. Separate ValueWalk sources had indicated information of a criminal nature would have been revealed in a trial along with egregious neglect of its executives.
“Despite the fact that Citigroup learned of serious and widespread defects among the increasingly risky loans they were securitizing, the bank and its employees concealed these defects,’’ Holder said in the statement.
Citigroup Inc (NYSE:C) had offered a $7 billion settlement last month, but the DoJ threatened a public trial, the report said.
At the last minute Citigroup agreed to switch the settlement structure so they would not receive a tax break by paying the states attorney general, according to the report. With payment to the DoJ at that point the issue was settled. The evidence, some of it said to be criminal in nature, will not be released to the public as a result.
Citigroup settlement reveals a DoJ strategy to appear to act as the tough enforcer
The Citigroup Inc (NYSE:C) settlement reveals a DoJ strategy to appear to act as the tough enforcer, although no executive involved in likely criminal acts on Wall Street has yet to be individually punished. It also sets up what appears as an increasingly tough stance on the issue with other banks who have yet to begin negotiations with the DoJ, including the next target on the list, Bank of America. Goldman Sachs and Wells Fargo are banks waiting in the wings.
The $7 billion Citigroup Inc (NYSE:C) settlement includes a $4 billion cash penalty to the DoJ, $2.5 billion in so-called “soft dollars” designated to help struggling consumers and $500 million to the states attorney general’s office and the Federal Deposit Insurance Corporation.
“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’s chief executive, Michael Corbat, said in a statement.