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Investments

It's official: Citi reaches $7B RMBS settlement

Drastically dents 2Q profits

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Citigroup (C) officially announced a $7 billion dollar settlement with the U.S. Department of Justice, several state attorneys general, and the Federal Deposit Insurance Corporation to settle residential mortgage-backed securities and collateralized debt obligations after industry whispers that the bank was nearing a resolution.

Under the settlement, Citigroup will pay a total of $4.5 billion in cash and provide $2.5 billion in consumer relief.

From that amount, the cash portion consists of a $4 billion civil monetary payment to the DOJ and $500 million in compensatory payments to the State AGs and the FDIC.

The consumer relief will go toward financing for the construction and preservation of affordable multifamily rental housing, principal reduction and forbearance for residential loans, as well as other direct consumer benefits from various relief programs.

The consumer relief will be provided by the end of 2018.

In addition, the bank will take a charge of approximately $3.8 billion in pre-tax in the second quarter of 2014

“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,” Michael Corbat, CEO of Citigroup, said.  

“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,” he added.

However, to some analysts this may to be too high of an amount.

Analysts at Morgan Stanley (MS) are reportedly backing up the Citi gripe according to a blog by Ben Levisohn of Barron's.

According to MS analysts Betsy Graseck and Manan Gosalia, even a $7 billion settlement may be too dire, when compared to the recent JPMorgan settlement:

Citigroup only issued $91B in PLS between 2005-08, or 20%/14% of what JPMorgan Chase/Bank of America issued.  Reported $7B DoJ ask is 7.7% of Citigroup’s pre-crisis PLS issuance, higher than JPMorgan’s 2% settlement, despite the fact that losses in Citigroup’s PLS book were in-line with peer group.

Last year, mega bank JPMorgan Chase (JPM) reached a $4.5 billion agreement with 21 major institutional investors to resolve legacy mortgage-backed securities issues.

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