Citigroup Inc. 2Q Profits To Likely Wipe Out by $7B Mortgage Settlement

Most major financial institutions have already settled with federal regulators regarding their role in the pervasive mortgage-related security fraud perpetrated by nearly all major banks before the financial crisis, but Citigroup Inc (NYSE:C) is one of the few remaining hold outs.

However, a number have sources have confirmed the recent rumor that Citigroup Inc (NYSE:C) arduous negotiations with federal regulators regarding a settlement for its role in deceptive practices in creating and marketing mortgage-related securities have finally come to fruition. If the rumors are correct, Citigroup has agreed to pay a $7 billion penalty to settle mortgage-related security claims.

Seth Klarman: Investors Can No Longer Rely On Mean Reversion

Volatility"For most of the last century," Seth Klarman noted in his second-quarter letter to Baupost's investors, "a reasonable approach to assessing a company's future prospects was to expect mean reversion." He went on to explain that fluctuations in business performance were largely cyclical, and investors could profit from this buying low and selling high. Also Read More


Citigroup decided to bite the bullet

Analysts say if the deal is finalized it means that Citigroup Inc (NYSE:C) decided that putting the issue to rest and moving on was worth a couple of billion extra dollars. Negotiations between Citigroup execs and regulators had broken down back in June when Citi was holding firm on a $3 billion settlement. The bank set aside that amount in reserves a few months earlier. According to analysts at Trefis, this means we will probably see Citi taking an additional pre-tax charge of $4 billion in the second quarter to reflect the $7 billion settlement.

$7 bil settlement will lead to loss in second quarter

The Trefis analysts also point out that the additional $4 billion charge is likely to push Citigroup Inc (NYSE:C) into the red for the second quarter. The firm announced back in May that second quarter trading revenues will be 20 to 25% below year-ago figures. They argue given the bank reported net income of $4.2 billion in Q2 2013 on revenues of $20.5 billion, and assuming other divisions performed as well as they did the prior year, then the decline in trading income would drop revenues to below $19 billion and net income to below $4 bil. This means the $4 billion additional settlement charge will completely wipe out profits for the quarter.

Of note, megabank JPMorgan Chase & Co. (NYSE:JPM) also posted a quarterly loss in the third quarter of 2013 after paying the feds $13 billion to settle its mortgage-related issues.