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Citigroup Settlement, Day 2: Citigroup has agreed to pay $7 billion to settle Justice Department charges it sold mortgage-backed securities stuffed with subprime mortgages to unsuspecting investors in the years leading up to the 2008 financial crisis. About $4 billion of the penalty will go into the U.S. Treasury's general fund. The rest will be divided among other federal agencies, with about $2.5 billion directed toward homeowner relief. The deal shields the bank from any future Justice action related to collateralized debt obligations made during that same time period, many of which were also filled with subprime mortgage loans yet marketed as AAA securities. While Citi was a relatively small player in the mortgage securities market, it was a leader on Wall Street in CDOs, according to the New York Times. Citigroup and its employees could still face criminal charges, Attorney General Eric H. Holder Jr. said Monday. "The bank's misconduct was egregious," he said. "As a result of their assurances that toxic financial products were sound, Citigroup was able to expand its market share and increase profits." The Justice Department said Citigroup routinely ignored warnings that many of the mortgages it was packaging and selling to investors in 2006 and 2007 had underwriting defects. In one internal email cited by prosecutors, a Citigroup trader wrote "went thru Diligence Reports and think that we should start praying … I would not be surprised if half of these loans went down." But the bank securitized the loans anyway. The Wall Street Journal reported that when a third-party due diligence vendor found low-grade mortgages, the bank reclassified the loans as better-performing and then misrepresented their quality to investors. "Citigroup employees often personally ordered the due diligence firms to change the loan grades…from reject to accepted," said U.S. Attorney John Walsh of Colorado, whose office helped lead the investigation, the paper reports. The Financial Times focused on the fact that Citigroup's second-quarter results were not as bad as they could have been, despite the settlement. The bank's shares were up just over 3% at close of trading Monday, the day the deal was announced. Quarterly revenues fell 6% to $19.3 billion, on lower trading revenues and lower U.S. mortgage refinancing activity.

Wall Street Journal

Strong earnings reports from banks helped push the Dow Jones Industrial Average index up 111.61 points Monday, the Journal reports. Citigroup's earnings, for instance, were better than expected, despite its $7 billion settlement with the Justice Department. The bank reported a profit for the quarter of $181 million, or three cents a share.

Financial Times

International regulators have proposed a foreign exchange overhaul, according to the FT. The Financial Stability Board, an international body of regulators based in Basel, has published a paper that aims to reduce problems with FX market structure, amid regulatory investigations into possible manipulation by traders. Today, dealers can influence the exchange rate "by collusion or otherwise by inappropriate sharing of information," the paper writes. The board's recommendations include creating a central utility for order matching.

New York Times

Goldman Sachs earnings are up, JP Morgan Chase's are down for the quarter, the Times reports. JPMorgan Chase's 8% slide in second-quarter earnings, to $1.46 per share, is due to "lackluster revenue from trading and a slowdown in mortgage lending," the paper says. All the big banks are affected by declines in trading activity, low interest rates and "a raft of regulations passed in the aftermath of the financial crisis," the paper notes. Goldman's fortunes rose partly due to the strong performance in its investment banking division, which reported net revenue of $1.78 billion, 15% higher than a year earlier.

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