July 18, 2014

DOJ Catch of the Week — Citigroup

Citigroup-logoBy the C|C Whistleblower Lawyer Team

This week’s Department of Justice “catch of the week” goes to Citigroup.  On Monday, the bank agreed to pay $7 billion to resolve government claims related to Citigroup’s packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities (RMBS).  According to Attorney General Eric Holder, it was the bank’s misconduct in this area that “contributed mightily to the financial crisis that devastated our economy in 2008.”  The settlement includes a $4 billion civil penalty — the largest penalty to date under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).  The settlement does not absolve Citigroup or its employees from facing possible criminal charges.  See DOJ press release.

As part of the settlement, Citigroup acknowledged it misled RMBS investors about the quality of the underlying mortgage loans it securitized and sold.  Specifically, Citigroup knew a significant percentage of them had material defects.  As one Citigroup trader stated in an internal email, “I would not be surprised if half of these loans went down. . . .  It’s amazing that some of these loans were closed at all.”  Citigroup nevertheless securitized the loan pools containing defective loans and sold the resulting RMBS to investors for billions of dollars.  The settlement is just the latest triumph for President Obama’s Financial Fraud Enforcement Task Force RMBS Working Group, which has recovered $20 billion to date.

$2.5 billion of the settlement proceeds will go to consumers directly harmed by Citigroup’s misdeeds.  It will take various forms, including loan modifications for underwater homeowners, refinancing for distressed borrowers, down payment and closing cost assistance to homebuyers, donations to organizations assisting communities in redevelopment, and affordable rental housing for low-income families.  Attorney General Holder stated that this kind of direct consumer relief “has become a must-have element in our agreements with banks that contributed to the mortgage crisis.”

Clearly sensitive to prior criticism that the government has not come down hard enough on those responsible for the financial crisis, the Attorney General made a point of hyping both the size and scope of the settlement as going well beyond “what could be considered the mere cost of doing business.”  He also sent a warning shot to those financial institutions still in the government’s cross-hairs or who might go astray in the future: “Citi is not the first financial institution to be held accountable by this Justice Department, and it will certainly not be the last.”

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