Updated Saturday, October 25, 2014 as of 6:55 PM ET

Citigroup to Pay $7 Billion to Settle Mortgage-Bond Probe

(Bloomberg) -- Citigroup agreed to pay $7 billion in fines and consumer relief to resolve government claims that it misled investors about the quality of mortgage-backed bonds sold before the 2008 financial crisis.

The bank took a $3.7 billion charge in the second quarter ended June 30 to cover the cost of the settlement, the New York- based firm said today in a statement. Citigroup climbed 3.6% to $48.71 at 8:33 a.m. in early trading in New York.

Citigroup was among lenders including Bank of America Corp. investigated by the Justice Department for allegedly misrepresenting the quality of mortgage-backed bonds sold to investors before 2008’s credit crisis. JPMorgan Chase & Co., the biggest U.S. bank, agreed in November to pay $13 billion to resolve similar federal and state probes. The government has sought about $17 billion from Bank of America, a person familiar with those talks has said.

“The bank’s misconduct was egregious,” U.S. Attorney General Eric Holder said, according to the text of his prepared remarks. “And under the terms of this settlement, the bank has admitted to its misdeeds in great detail.”

The accord includes a record $4 billion civil penalty to the Justice Department, $500 million to state attorneys general and the Federal Deposit Insurance Corp., and about $2.5 billion in various forms of consumer relief to be provided by the end of 2018, the bank said in a statement today.

'MOVE FORWARD'

The settlement, which caps months of negotiations, covers securities issued, structured and underwritten between 2003 and 2008, according to Citigroup.

“We also have now resolved substantially all of our legacy RMBS and CDO litigation,” Citigroup Chief Executive Officer Michael Corbat said in a statement. “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.”

Citigroup, the third-biggest U.S. bank, has been discussing a resolution with U.S. officials since April, a person familiar with the matter said last month. Discussions temporarily broke down in mid-June after the bank’s settlement offers failed to satisfy prosecutors, the person said. Government officials had demanded more than $10 billion to resolve the issue, while Citigroup raised its offer to less than $4 billion, another person said.

FEWER BONDS

Citigroup’s lawyers had argued during talks that the lender should face a far smaller penalty than JPMorgan because it sold fewer mortgage bonds, the person with knowledge of the deal said yesterday. 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 person said.

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.

BofA TALKS

Citigroup ranked ninth among non-agency underwriters of mortgage-backed securities in 2008, and wasn’t among the top 10 in the three previous years, according to data from Inside Mortgage Finance, a Bethesda, Maryland-based industry publication.

On June 19, Charlotte, North Carolina-based Bank of America was ordered by a federal judge to face two government lawsuits in which it was accused of misleading investors about the quality of loans tied to $850 million in residential mortgage- backed securities.

The Justice Department broke off negotiations last month because it was dissatisfied with Bank of America’s offer to pay more than $12 billion, which included at least $5 billion in consumer relief, the person familiar with the discussions said at the time. The department’s latest settlement request was for about $17 billion, the person said.

Bank of America and firms it purchased issued about $965 billion of mortgage bonds from 2004 to 2008, while New York- based JPMorgan and companies it bought issued $450 billion, according to analysts at Sanford C. Bernstein & Co.

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