Citigroup Inc., the famous banking institution, announced Monday that it had agreed to pay $7 billion in fines to the U.S. Justice Department (DoJ) after it was found guilty of selling faulty mortgage securities to investors that eventually led to the financial crisis in 2008.
The bank agreed to pay $4.5 billion in cash, of which $4 billion will go to the DoJ and $500 million will go towards compensating the State Attorney Generals and the Federal Deposit Insurance Corps. The remaining $2.5 billion will be dedicated towards consumer relief.
In addition to the fines, Citigroup also plead guilty in a statement of facts that it had ignored all warnings, which notified the bank of the faulty mortgages and forbade it from hiding the facts from investors, reports The Wall Street Journal.
"The bank's activities contributed mightily to the financial crisis that devastated our economy in 2008. Taken together, we believe the size and scope of this resolution goes beyond what could be considered the mere cost of doing business," Eric Holder, U.S. Attorney General, was quoted by Bloomberg.
When Citigroup first started packaging the loans into securities, it hired a "Due Diligence Vendor" to certify the quality of the loans. When the vendor turned up with poor quality loans, the bank ordered it to reclassify them as best-performing ones and sold them to investors who were ignorant about the quality.
The DoJ found the bank guilty of 45 such deals and called the bank's behavior "egregious."
In May, Citigroup agreed to pay just $363 million in fines arguing that the number of mortgages it sold were too small when compared to other banks. It upped the amount to $700 million, but the DoJ threatened to sue unless they increased their penalty amount, according to Reuters.
Citigroup believes in putting the probe in the past now that it is completed.
"The comprehensive settlement announced today with the U.S. Department of Justice, state attorneys general, and the FDIC resolves all pending civil investigations related to our legacy RMBS and CDO underwriting, structuring and issuance activities. We also have now resolved substantially all of our legacy RMBS and CDO litigation. 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," Michael Corbat, CEO of Citigroup, said in an official statement.
Soon after Citigroup announced the settlement, it announced better-than-expected second-quarter earnings. The bank reported an adjusted net income of $3.93 billion or $1.24 per share, which is well above the $1.05 per share experts predicted.
Its shares also opened 3.7 percent higher Monday and closed up 3.02 percent. Its shares were up 0.06 percent in after-hours trade.
The DoJ will now get on with investigations into other banks. The Bank of America is next in line and the financial institution could end up paying about $12 billion in fines. Several other banks like BNP Paribas and J.P Morgan Chase have already been fined and apparently, the department has been using the money to fund its investigations.
