Citigroup has agreed to a $7 billion settlement with the government over claims the bank misled investors in selling risky mortgage securities before the 2008 financial crisis.
The deal, announced Monday by Attorney General Eric HolderEric H. HolderOvernight Tech: Senate moving to kill FCC's internet privacy rules | Bill Gates pushes for foreign aid | Verizon, AT&T pull Google ads | Q&A with IBM's VP for cyber threat intel Uber leadership sticking by CEO Top Dems prep for future while out of the spotlight MORE, includes a $4 billion civil penalty — the largest ever of its kind.
"This historic penalty is appropriate given the strength of evidence of the wrongdoing committed by Citi," Holder said.
Holder said $2.5 billion of the penalty will be used to help consumers hurt during the 2008 financial crisis, with another $500 million going to state attorneys general and the Federal Deposit Insurance Corp.
The bank admitted to wrongdoing under the settlement, Holder said.
“The bank's conduct was egregious. And under terms of this settlement, the bank has admitted to its misdeeds in great detail.”
The settlement comes months after JPMorgan Chase agreed to a $13 billion settlement — the largest in U.S. history — to resolve allegations of selling bad loans.
Holder said Citi’s involvement in the bad mortgage practices was at the “expense of millions of ordinary Americans and investors of all types, including other financial institutions, universities and pension funds, cities and towns and even hospitals and charities.”
"Ultimately, these investors suffered billions of dollars in losses when Citi's false and fraudulent claims came crashing down.”
The settlement centered on allegations that Citi put together billions of dollars' worth of mortgage-bond deals it knew were defective. The bank then misrepresented the quality of those mortgage-bond deals to investors, Justice said.
Among the evidence that bank officials were well aware of the potential fallout is an internal email from a Citigroup trader who had examined one of the packages and discovered "a lot" of loans based on unreasonable income and other problematic features.
The trader said he "went through the Diligence Reports and think[s] we should start praying."
"I would not be surprised if half of these loans went down," he said.
Ultimately, enough investors realized the quality of the investments was not as advertised by Citi and their value plummeted, leading to losses that helped precipitate the recession.
While no criminal charges were filed, the civil settlement does not preclude further action on that front. Citi and its employees could still face further criminal actions down the road.
In a statement issued Monday, Citigroup CEO Michael Corbat said the deal resolved the civil matter.
“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,” Corbat said.
To date, no criminal charges have been brought in cases connected with the onset of the financial crisis, angering some members of Congress.
The Justice Department touted the efforts of federal prosecutors and regulators who have recovered more than $20 billion in investigations related to residential mortgage-backed securities, however.
Holder and associate Attorney Gen. Tony West said additional settlements were likely to follow. West said “several” banks remain the focus of Justice Department probes, though he declined to specify which or exactly how many.
At the same time, Holder said the penalty leveled against Citi would stand as a deterrent against future bad practices on Wall Street.
"We believe the size and scope of this resolution go beyond what could be considered the mere cost of doing business.”
This story was last updated at 2:59 p.m.