Citigroup agrees to pay $7bn to settle investigation into mis-selling of loans

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Citigroup said it agreed to pay $7bn (£4.10bn) to settle a US government investigation into mortgage-backed securities the bank sold in the run-up to the 2008 financial crisis.

The settlement figure was more than twice what many analysts expected earlier this year but less than the $12bn the government had sought in negotiations with the bank.

Citigroup said it took a related pre-tax charge of about $3.8bn in the second quarter. Taking the charge into account, the bank reported a 96 per cent drop in earnings.

Citigroup’s shares were up 3.9 per cent at $48.82 in pre-market trading yesterday. The stock gained 1.4 per cent after the settlement was announced.

The settlement, signed over the weekend, caps months of negotiations, during which, sources said, the government even threatened to sue the bank.

“The penalty is appropriate given the strength of the evidence of the wrongdoing committed by Citi,” US Attorney General Eric Holder said yesterday.

“Despite the fact that Citigroup learned of serious and widespread defects among the increasingly risky loans they were securitising, the bank and its employees concealed these defects,” Holder added. Citigroup is the second major bank to settle with authorities since President Barack Obama ordered the formation of a task force to investigate the sale and packaging of toxic home loans that were at the centre of the 2008 crisis.

JPMorgan Chase & Co, the largest US bank, last year agreed to pay $13bn to settle government probes over the packaging of toxic mortgages.

Bank of America has also been negotiating with the Justice Department over similar claims. Citigroup said it would pay $4.5bn in cash and provide $2.5bn in consumer relief.

The cash portion consists of a $4bn civil payment to the Justice Department and $500m in compensatory payments to state attorneys general and the Federal Deposit Insurance Corp.

The bank said consumer relief will include financing for the construction of affordable multifamily rental housing and principal reduction and forbearance for residential loans.