Citigroup didn’t have a prayer.
The Department of Justice announced Monday that Citi agreed to pay $7 billion in fines for misleading investors about how toxic its home loans were — a major factor contributing to the global financial crisis six years ago.
The bank knew that its securities weren’t as good as it said they were, said prosecutors, who noted that some of the paper was so bad that one of Citi’s own traders said they “should start praying.”
“I would not be surprised if half these loans went down,” the Citi trader said, according to the government’s statement of facts. “It’s amazing that some of these loans were closed at all.”
The fine is the second largest thus far for failed mortgage bonds that helped crater the world economy.
JPMorgan Chase paid $13 billion to settle claims last year without admitting or denying guilt. Bank of America is reportedly looking at $17 billion in fines.
The size of the fine—more than three times what analysts forecast — is tied, in part, to the bank knowing it was hiding risks from investors, Attorney General Eric Holder said in prepared remarks.
In 2006 and 2007, the bank peddled mortgage bonds that were increasingly made up of loans so bad Citi called them “rejects,” according to a DOJ statement.
The bank had internal rules to make sure that none of the bonds, known as residential mortgage-backed securities, or RMBS, could be made up of more than 15 percent of the rejects, the statement said.
But when there were too many bad loans to sell, Citi just had them reclassified so that it could sell them, even though there could be information missing or the mortgage holder would be more likely to default, the statement said.
At one point, 94 percent of the loans making up one of the securities weren’t up to the top criteria and well below its own standards, according to the statement.
The 2006-07 period, which the lawsuit covers, is when house prices peaked and lending standards deteriorated, leading to greater risk of default, said Erik Oja, a bank analyst at S&P Capital IQ.
Of the $7 billion in fines, about $2.5 billion will go to homeowner relief, with $182 million going to New York, according to Eric Schneiderman, the state’s attorney general.
As early as last month, analysts thought Citi would be able to resolve the DOJ dispute for about $2 billion.
Investors ignored the fine, pushing Citi shares up 3 percent to $48.42 on Monday, in part because it beat second-quarter profit estimates in trading assets like bonds.
While trading for fixed income, which can include bonds and currencies, fell 11 percent, Citi CFO John Gerspach had said in May that the bank could see as much as a 25 percent drop.