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Investments / Lending

DOJ warns Citi settlement “will certainly not be the last”

AG Holder says cases coming soon against additional banks

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The U.S. Department of Justice isn’t prepared to rest on its laurels after reaching a $7 billion settlement against Citigroup (C) over the bank’s residential mortgage-backed securities’ practices. According to Attorney General Eric Holder, Citi “will certainly not be the last” financial institution that will be “held accountable” by the DOJ.

Holder made the proclamation during a press conference announcing the settlement with Citi. In his prepared remarks, he called Citi’s misconduct egregious. “Under the terms of this settlement, the bank has admitted to its misdeeds in great detail,” Holder said. “The bank’s activities shattered lives and livelihoods throughout the country and around the world.”

Holder also said that despite reaching a settlement with Citi, the agreement does not prevent the DOJ from seeking criminal charges against Citi and its employees in the future. 

“We have not ruled out holding these organizations or individuals criminally responsible,” Holder said. “The agreement does not preclude the ability to bring criminal charges.”

As part of the settlement agreement, Citi acknowledged that it made “serious misrepresentations” to the public about the mortgage loans it securitized an offered to investors.

U.S. Attorney John Walsh for the District of Colorado, who is also co-chair of the DOJ’s RMBS task force, said that, on a number of occasions, Citi employees learned that some of the loans in the securitization were defective and did not disclose that information.

“As the statement of facts explains, on a number of occasions, Citigroup employees learned that significant percentages of the mortgage loans reviewed in due diligence had material defects,” Walsh said. “In one instance, a Citigroup trader stated in an internal email that he ‘went through the Diligence Reports and think[s] [they] should start praying …[he] would not be surprised if half of these loans went down…It’s amazing that some of these loans were closed at all.’”

The loans were reviewed by outside due diligence firms, but Walsh said that on several occasions, Citi employees ordered the due diligence firms to change the grades on defective loans from “rejected” to “acceptable.”

The DOJ noted that the $4 billon civil penalty against Citi is the largest penalty to date under the Financial Institutions Reform, Recovery and Enforcement Act.

The settlement comes on the heels of a nearly $1 billion settlement with SunTrust (STI) over its mortgage servicing and foreclosure abuses.

Also, in recent weeks, negotiations between the DOJ and Bank of America (BAC) over BofA's involvement in mortgage crisis have come to a standstill. The DOJ is reportedly seeking $17 billion from BofA in settlement talks, while the bank has offered $12 billion.

“With today's $7 billion resolution against Citibank - one of the largest banks in the United States - we reaffirm the straightforward principle that no institution is too big or too powerful to escape appropriate enforcement action,” said Associate Attorney General Tony West.

“Now, we know these measures won't cure every ill or solve every problem created by the financial crisis; but they are significant steps toward rectifying the harm caused by what the President called ‘an era of recklessness’ in our financial markets.”

To that end, West said that the DOJ is still investigating other financial institutions that have not yet “taken responsibility” for their pre-crisis RMBS practices.

And the DOJ is most likely using funds from other RMBS settlements to fund its investigations. In June, reports surfaced that the DOJ was using some of the $13 billiion it recovered from JPMorgan Chase to settle claims of mortgage-backed securities fraud to pursue other banks, including Citi.

 

“In the meantime, we're not letting up and we're not going away; we will continue to pursue these cases and follow the facts wherever they lead and enforce the law fairly but aggressively should we uncover evidence of unlawful conduct,” West said. “And as the Attorney General indicated a moment ago, the American people should expect to hear more from the RMBS Working Group in the very near future.”

Holder, when asked if there could be additional charges brought against some of the banks that have already settled, said that he “would think that the settlements would work as a deterrent,” but that if the were to engage in fraudulent RMBS practices again, “we will hold people accountable yet again.”

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