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.

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.