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It's not about the size of the company -- it's about the culpability and level of misconduct during the subprime mortgage bubble that preceded the 2008 financial crisis. That's the message the Department of Justice is sending after today's settlement with Citigroup.
While the company opened negotiations with a $363 million offer, and the DOJ demanded $12 billion, the approximately $7 billion deal struck is this: a $4 billion civil penalty paid to the Justice Department, $500 million paid to the Federal Deposit Insurance Corp. and several states. The bank will also allocate $2.5 billion for "consumer relief," such as modifying mortgages for struggling homeowners and financing affordable multi-family rental housing.
Citigroup had argued for a smaller settlement, emphasizing their small share of the mortgage securities market, but the DOJ emphasized culpability: internal emails and other evidence showed that the bank knew it was pushing defective securities to investors.
According to The Wall Street Journal, one Citigroup trader, in an internal email cited by the government, stated the bank "should start praying" because so many of the loans were likely to go sour. "It's amazing that some of these loans were closed at all," the email stated.
Not Quite the Same as J.P. Morgan's Deal
Last November, we noted that JPMorgan had reached a $13 billion settlement with the DOJ.
That deal, according to the WSJ, covered mortgage securities, but did not cover liability for collateralized debt obligations, or CDOs. This deal, however, covers both, and for the most part, ends the bank's exposure for mortgage-related litigation, at least in a civil context. The deal does not absolve employees from criminal charges, according to Attorney General Eric Holder.
Citigroup is also facing a probe into unrelated Mexican money laundering issues.
Who is Next?
Probably Bank of America. Talks between the DOJ and BOA are already underway. According to The New York Times, the sticking point in those negotiations centers on BOA's acquisition of Merrill Lynch and responsibility for that division's actions in the mortgage crisis. BOA argues that it did not want to go through with its purchase of the troubled Merrill, but was pressured by regulators to acquire it during the recession.