Citigroup, the third-largest U.S. bank by assets, will pay roughly $7 billion in fines and consumer relief to settle an investigation into risky subprime mortgages and resolve government claims that it misled investors about the quality of mortgage-backed bonds sold before the 2008 financial crisis.
The agreement announced Monday comes weeks after talks between the two sides broke down, prompting the Justice Department to warn that it would sue one of the nations biggest banks.
The settlement stems from the sale of securities made up of subprime mortgages which fueled the boom and bust that triggered the Great Recession in 2007. The deal, signed over the weekend, requires the firm to pay $4 billion - the largest civil penalty - to the Justice Department, an estimated $500 million to state attorneys general and the Federal Deposit Insurance Corp. and to provide $2.5 billion in relief for consumers.
Citigroup, among other banks, downplayed the risks of subprime mortgages when packaging them selling them to mutual funds, investment trusts, pensions, as well as other banks and investors.
J.P. Morgan is the only other major U.S. bank to settle so far, though Bank of America is reportedly in talks to do so. JPMorgan agreed in November to pay $13 billion to resolve similar federal and state probes. The government reportedly is seeking about $17 billion from Bank of America.
Citigroup's lawyers had argued during talks that the lender should face a far smaller penalty than JPMorgan because Citigroup sold fewer mortgage bonds, according to Bloomberg. The government rejected that position, citing what it considered Citigroup's level of culpability based on e-mails, internal bank documents and the rates at which loans backing its bonds soured.
The Justice Department has taken a tougher approach after drawing criticism that it hadn't done enough to punish large financial institutions for their role in the collapse of home prices and the economic turmoil that began in 2008. Prosecutors have also won multibillion-dollar penalties from banks for wrongdoing including sanctions violations and helping clients evade taxes.
Citigroup on Monday said second-quarter profit tumbled 96% on $3.7 billion in costs tied to the settlement. Net income fell to $181 million, or 3 cents a share, from $4.18 billion, or $1.34, a year earlier, the New York-based company reported.