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Investments

3 reasons Citi will miss next week

Costly but favorable MBS settlement is just one reason

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Citigroup (C) is facing a gauntlet of troubles, now warning investors it may miss a key profitability target because of the central bank’s rejection of its capital plan in March, anda  $100 million charge in the first quarter of 2014 as part of its $1.125 billion MBS agreement announced Monday.

The reasons?

  1. Federal Reserve rejection of Citi's capital plan
  2. Cost of $1.125 billion RMBS settlement
  3. Failure of Fed's stress test

In late March Citi faced two setbacks from the Federal Reserve – the rejection of its capital plan and the failure of the bank to the Fed’s stress test.

The capital plan rejection means it is unlikely Citigroup will hit its 2015 target to return to tangible common equity.

Citigroup’s investor-relations department has talked with shareholders to lower expectations for the quarter, which reports on April 14. Analysts have consistently revised their estimates down.

The agreement to pay $1.125 billion to investors will settle claims arising from mortgage-backed securities sold before the housing crash.

Citigroup’s settlement on Monday is for pennies on the dollar, as the 68 trusts that had collectively issued residential MBS totaling more than $59.4 billion.

The settlement agreement covers 18 investors represented by Gibbs & Bruns LLP. Trustees have until June 30 to accept or reject the deal, which also must be approved by the Federal Housing Finance Agency.

The 18 investors include BlackRock (BLK), Goldman Sachs (GS) and Pacific Investment Management Co.

“This settlement resolves a significant legacy issue from the financial crisis and we are pleased to put it behind us,” Citi said in a formal statement.

This $1.125 billion settlement doesn’t include residential loans that were sold through private label trusts through Citigroup’s consumer mortgage business, meaning it doesn’t prevent investors from claiming misrepresentations on offering documents or other potential regulatory actions.

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