On July 14th, 2014, the Department of Justice and the Attorney Generals of New York, Delaware, Illinois and Massachusetts arrived at a $7 billion settlement with Citigroup—the same bank that received almost half a trillion dollars in government assistance in the wake of the crisis.
The settlement ends investigations into whether or not Citigroup violated federal laws in the way they packaged, sold, structured and issued mortgage securities. In layman’s terms, Citigroup allegedly lied about the quality of crappy products they sold to clients—products Citigroup themselves knew were crappy.
As Politico reported, the investigation unearthed one email from a Citigroup trader that shows how crappy Citigroup knew these products to be:
“One trader said in an email obtained by investigators that he ‘went thru the Diligence Reports and think that we should start praying…I would not be surprised if half of these loans went down.’”
Perhaps the nickname Citigroup enjoys across Wall Street (“Shitigroup”) is deserved after all.
25 Million Documents, But No Criminal Case
The investigation included 50 subpoenas to Citigroup and “nearly 25 million documents relating to every residential mortgage backed security issued or underwritten by Citigroup in 2006 and 2007,” according to U.S. Attorney of the Eastern District of New York Loretta Lynch. But with so much material, one must ask, where are the prosecutions? Where is the court case, so that the general public can see the wrong-doing of Citigroup first-hand, in a public courtroom?
The DOJ Didn’t Sue Citigroup…Because Benghazi?
The Department of Justice has a particularly twisted explanation for why this case did not go to court: in short, “because Benghzai.” According to the NYTimes, the Justice Department was just about to sue Citigroup, but then a suspect in the attack on the U.S. mission in Benghazi, Libya was captured, and they feared “those headlines would overshadow the Citigroup case.” So they delayed it, and somehow, magically, that extra time allowed them to arrive at a settlement. This is convoluted P.R. posturing at best, and outright deception at worst.
“A Sweetheart Immunity Deal”
The settlement grants Citigroup substantial immunity: it releases the company and its subsidiaries from future charges under FIRREA, the False Claims Act, and the Racketeer Influenced and Corrupt Organizations Act (RICO), among others. (See page 6 of the settlement, “Releases”). Dennis Kelleher of the reform group Better Markets called the settlement “a sweetheart immunity deal.”
What’s In the Settlement?
This is the second headline-grabbing settlement number the Department of Justice has secured against a single institution. But what’s in the $7 billion settlement?
• $4 billion cash penalty to the Justice Department.
• $500 million to state attorneys general and the Federal Deposit Insurance Corporation (FDIC).
• $2.5 billion in so-called “soft dollars” for struggling homeowners and consumers.
The $2.5 billion to assist struggling homeowners has some conditions on how it is to be spent, which are outlined in the Settlement’s Annex 2.
Citigroup Gets Credit For Things It Is Required To Do Anyway
In perhaps one of the most questionable parts of an already questionable settlement: Citigroup can count loan modifications made under the HAMP program towards their $2.5 billion aid to homeowners obligation. From Annex 2:
“Eligible modifications may be made under the Making Home Affordable Program (including the Home Affordable Modification Program (“HAMP”) and the Housing Finance Agency Hardest Hit Fund) and any proprietary or other modification program.”
HAMP is the Obama Administation’s failed program to help homeowners. It failed so badly, that Tim Geithner notes in his book Stress Test that the program was “universally reviled.” Even Geithner admits the program was a joke, when he recounts that he pranked his Treasury colleague Gene Sperling by pretending he told a reporter Sperling was “the secret architect of HAMP.”
But HAMP is still around, even though only $11.6 billion of the $50 billion originally allocated to it has been spent. HAMP is meant to compel banks, via incentive payments, to provide loan modifications to homeowners. But despite the fact that HAMP is its own program that the banks are already supposed to be using, the Department of Justice has decided to let Citigroup fulfill its $2.5 billion in aid to required homeowners by giving homeowners HAMP modifications. It gives Citigroup credit for the very homeowner aid they are already supposed to be doing.
The annex does outline that there are certain categories of aid that Citigroup must, at a minimum, provide. Here are the categories:
• $820 million for mortgage modifications and debt forgiveness that Citi would provide to “qualified” underwater homeowners, many from “hardest hit areas.”
• $299 million in refinancing to homeowners. The refinancing must reduce the homeowner’s interest rates by at least 2%.
• $50 million will be donated to community development funds, legal aid organizations, and housing counselors.
• $180 million will go to “gap” financing for affordable rental housing in cities that have cut funding for such housing due to the recession.
To make sure Citigroup is paying out this money, an independent monitor will serve as a watchdog. The monitor chosen is Thomas Perrelli, who the WSJ reports is “a former Justice Department official who helped broker the 2012 mortgage settlement.” This is somewhat troubling, as the 2012 National Mortgage Settlement is seen by many as a disaster for homeowners, which has given 90% fewer principal reductions than were promised.
What happens if Citigroup doesn’t live up to its agreement? No new charges, just a reallocation of the money. According to the Department of Justice:
“If Citigroup fails to live up to its agreement by the end of 2018, it must pay liquidated damages in the amount of the shortfall to NeighborWorks America, a non-profit organization and leader in providing affordable housing and facilitating community development.”
Underwater homeowners and the victims of foreclosures are the collateral consequences of the financial crisis. They were the victim of predatory loans cranked out in an effort to continue to make more mortgage products that the banks could see and profit off of are so rarely paid attention to. So the $2.5 billion to homeowners sounds great in theory—but if past is prologue, there is reason to be skeptical that this allocated relief will ever truly reach those who need it.
Will Homeowners Actually See Relief This Time?
Last year, the Department of Justice arrived at a similar settlement with JPMorgan Chase over their mortgage securities fraud. In that settlement, as with the Citigroup settlement, was slated relief for homeowners But the advocacy group Home Defenders League recently sent a letter to Attorney General Eric Holder asking where is the relief money from the Chase Settlement? From the Home Defender’s League’s letter:
“[R]elief from the Chase Settlement has yet to arrive. The bank has not announced any new relief programs. Nor has there been a noticeable increase in new modifications. Instead, Chase and their competitors are often transferring servicing rights to newer mortgage companies not covered by recent or future settlements.”
Not only have homeowners not seen relief through the JPMorgan settlement, we haven’t even seen a report on it. Joe Smith was appointed the independent monitor of the earlier JPMorgan Chase settlement (Smith is also the monitor of the National Mortgage Settlement). But the only thing present on the monitor’s website about the JPM Settlement is the promise that “The Monitor’s first report is expected in late spring of 2014 and will include details on the Settlement’s structure and his oversight process.” Well into the Summer of 2014, no report has materialized.
Let’s hope that this Citigroup settlement goes a bit better than the Chase, or the National Mortgage Settlement, has gone. Otherwise, this will be yet another entry in a line of empty P.R. from the Obama Administration.
*Download the settlement documentation here http://www.justice.gov/iso/opa/resources/471201471413656848428.pdf
*Also see http://www.cnbc.com/id/42099554