ROBERT SIEGEL, HOST:
From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel.
AUDIE CORNISH, HOST:
And I'm Audie Cornish. $7 billion - that's how much Citigroup will be paying to the Justice Department for misleading investors during the housing boom. The settlement was announced today after months of tense negotiations. U.S. officials say the bank sold mortgage-backed securities to investors even though it had been warned the mortgages had big problems. NPR's Jim Zarroli reports.
JIM ZARROLI, BYLINE: Citigroup was never a major player in the subprime mortgage industry, but U.S. Attorney General Eric Holder says the way it did business was especially bad.
U.S. ATTORNEY GENERAL ERIC HOLDER: The bank's misconduct was egregious, and under the terms of this settlement, the bank has admitted to its misdeeds in great detail. The bank's activities shattered lives and livelihoods throughout the country and also around the world.
ZARROLI: Citigroup hired outside due diligence firms to inspect its mortgage-backed securities and it was warned repeatedly that many of the mortgages underlying them were flawed. Either the property wasn't worth what was claimed, or the borrower's credit was poor. But bank employees ordered these outside firms to change the grades on the loans so they'd be acceptable to the markets. And they continued to sell the assets to investors, including pension funds and charities. Meanwhile, Holder says, the bank's share of the subprime market and its profits grew.
HOLDER: Despite the fact that Citigroup learned of serious and widespread defects among increasingly risky loans that they were securitizing, the bank and its employees concealed these defects.
ZARROLI: U.S. officials say there was no question that Citigroup was aware that the mortgages were faulty. They quoted one Citigroup trader who said in an e-mail, I went through the diligence reports and think we should start praying. I would not be surprised if half these loans went down.
For Citigroup, today's settlement represents an opportunity to put the past behind it and try to move forward. The settlement includes a $4 billion civil penalty, which Justice Department officials say is a record. Another half billion will go to the Federal Deposit Insurance Corporation, and the rest will go to various kinds of mortgage relief such as paying back states that bought Citigroup's bonds. The fines are meant to hurt, and they will, says Christopher Whalen of Kroll Bond Ratings.
CHRISTOPHER WHALEN: You know, it's probably 25 - 30 percent of total earnings for the year. That's a lot of money.
ZARROLI: In fact, Citigroup said today that the settlement, which is partially tax-deductible, will wipe out almost all of its profit for the last quarter. But Whalen says the settlement, just like the others negotiated by the Justice Department, sends the wrong message. He says there is plenty of evidence of fraud by individuals at the banks, but U.S. officials have chosen not to pursue them. Instead, the fees get paid by the banks themselves and end up coming out of the pockets of shareholders.
WHALEN: Essentially, we're punishing the institutions and the shareholders, but we're not prosecuting the officers and directors for what seem to be pretty clear-cut acts of securities fraud.
ZARROLI: U.S. officials responded that the settlement doen't absolve the bank or its employees of criminal liability. They also say other settlements could be announced very soon. Holder's office is known to be in talks with Bank of America, and those negotiations are expected to resume now that today's settlement has been made public. Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.