In mid-July 2014, Citigroup settled the Department of Justice investigation of Citigroup’s part in issuing residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO) in 2006 and 2007. The DOJ RMBS working group was investigating allegations that Citigroup packaged and sold mortgage-backed securities to investors based on supposed quality standards of the mortgages backing those securities, though Citigroup knew the mortgages were subpar. In addition, Citigroup was investigated for collateralized debt obligations based at least in part on those subpar mortgages and sold to investors.
The agreement, in contractual form that does not require judicial approval, requires Citigroup to pay $7 Billion, one of the highest penalties settling a federal investigation into a bank’s suspected mortgage fraud. The penalty is allotted as follows: $4 Billion civil penalty paid to the Department of Justice; $500 Million to the FDIC and state attorneys general; $2.5 Billion in mortgage modifications for homeowners; $0 to defrauded investors.
The DOJ proudly announced the settlement as proof that the government is getting tough on major players in the risky business leading to the 2008 financial collapse, the most disastrous economic crash and Depression since the Crash of 1929 and the ensuing Great Depression of the 1930’s. This settlement, along with a $13 billion settlement with JPMorgan Chase & Co. and a $2.2 Billion settlement with Ocwen, are touted as elements of the government’s tough crackdown on the banking industry.
Severe criticism of the Citigroup deal came immediately. Despite the work of 200+ attorneys and the collection of almost 25 million documents through numerous subpoenas: Citigroup admitted no wrongdoing; Citigroup received immunity for its activities in the CDO market, though Citigroup was the largest CDO placement agent in 2007; there was no disclosure of the possibly hundreds of billions of dollars made by Citigroup’s fraudulent activities; no Citigroup employee was identified; merely 1 e-mail was cited in the agreement; defrauded investors received nothing from the deal; defrauded investors with adequate standing to sue will receive little-to-no help from the DOJ’s brief, barely factual statement of facts; the $2.5 Billion earmarked for mortgage modifications can be made under the HAMP program, under which Citigroup has already acted and for which it receives monetary incentives; the Mortgage Forgiveness Debt Relief Act is set to expire, which means the “helped” homeowners will be required to pay thousands of additional dollars for the so-called debt relief by mortgage modifications; and the lack of accountability and transparency reduces the deal to an essentially ineffective publicity ploy by the DOJ. In sum, while the DOJ was bragging, financial experts were livid.
Better Markets, Inc., a non-profit, non-partisan, independent organization advocating genuine, lasting financial reform already sued the DOJ for the J. P. Morgan Chase & Co. settlement. Given its prompt, biting assessment of the Citigroup deal, Better Markets may be ramping up for another suit against the DOJ.
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