Citigroup agrees to $590 million subprime settlement

August 29, 2012

Citigroup on Wednesday agreed to pay $590 million to settle a class-action lawsuit brought by investors alleging that the New York bank failed to disclose its exposure to toxic subprime mortgage debt.

In the run-up to the financial crisis, the bank, like many other big financial institutions, either held or sold securities that were essentially giant pools of shoddy mortgages. When waves of struggling homeowners stopped making their monthly payments, these securities exacerbated the mortgage defaults, caused massive losses at big banks and brought on one of the worst financial crises since the Great Depression.

Shareholders and regulators have had a mixed record in their efforts to get compensation from banks that contributed to the near-collapse of the financial system. Several of the largest ones, including Wachovia and Merrill Lynch, have paid millions to investors and government agencies to settle charges tied to subprime mortgages. But some analysts say these settlements do not serve as enough of a deterrent to banks that contributed to the crisis.

Citigroup’s proposed settlement, which must be approved by the U.S. District Court in Manhattan, covers shareholders who acquired Citigroup stock from Feb. 26, 2007, to April 18, 2008. Lawyers for the plaintiffs said it is unclear how many investors will be affected by the order. A hearing was set for Jan. 15 to finalize the agreement.

In the lawsuit, filed in November 2007, shareholders claimed that the banking giant “concealed [its] failure to write down securities tied to subprime debt,” known as collateralized debt obligations (CDOs).

Officials at Citigroup said in a statement that the bank denies the allegations but was entering into the agreement to avoid protracted litigation.

“Citi is fundamentally a different company today than at the beginning of the financial crisis,” the company said in a statement. “Citi has overhauled risk management, reduced risk exposures and . . . [is] focused on the basics of banking.”

Citigroup has contended with dozens of lawsuits and investigations regarding toxic subprime debt.

The company this week agreed to pay nearly $25 million to another group of investors who said they were misled about the quality of mortgage-backed securities they purchased just before the housing market crash. And a year ago, Citigroup paid $285 million to the Securities and Exchange Commission for misleading investors about CDOs tied to the housing market.

“Citi blindsided its investors and shareholders by not disclosing that it had all of this off-balance sheet exposure to this debt,” said Janet Tavakoli, president of Tavakoli Structured Finance. “They were just stuffing junk into these CDOs.”

In the latest lawsuit, shareholders claimed that Citigroup repackaged securities that no one would purchase into new CDOs to hide its exposure to the securities. Tavakoli said that senior management at Citigroup should have been clued to the threat posed by their CDOs once HSBC began writing down billions of its securities in 2007.

Critics say these settlements, while significant in size, fall short of addressing the underlying problem of poor corporate governance.

“There is still many ramifications from the financial crisis that are left unresolved,” said banking analyst Mike Mayo of CLSA, an affiliate of Credit Agricole Securities.

“The governance failures that magnified the financial crisis and caused Citigroup’s poor risk oversight, at least to some degree, remain in place today.”

Mayo said he is not convinced that the root factors that contributed to “overly aggressive behavior with regard to lending, trading, compensation or, in this case, disclosure, are resolved to the extent to prevent similar problems from happening . . . in the future.”

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