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Citigroup to pay $7 billion for ‘egregious misconduct’ leading up to financial crisis

July 14, 2014 at 6:07 PM EST
The Justice Department announced a $7 billion settlement with Citigroup over “egregious misconduct” related to mortgage securities in the lead-up to the financial crisis. Judy Woodruff gets details from Tony West, associate attorney general at the Department of Justice and the lead negotiator.
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JUDY WOODRUFF: “We should start praying. I wouldn’t be surprised if half of these loans went down” — that’s what a trader at Citigroup wrote in an e-mail in 2007, after reviewing thousands of mortgages bought and sold by the bank.

Today, the Justice Department cited those very words as it announced a $7 billion settlement with the bank. The government said Citi committed egregious misconduct in the lead-up to the financial crisis. Of the $7 billion, Citigroup will pay $4 billion to the Justice Department. More than $2.5 billion is set aside for what’s described as consumer relief.

Tony West is associate attorney general. And he was the government’s lead negotiator in this case.

And we welcome you to the program.

TONY WEST, Associate Attorney General, Dept. of Justice: Thank you so much.

JUDY WOODRUFF: So lay out for us, what was this egregious conduct and how many people at Citigroup were engaged in it?

TONY WEST: Well, OK.

In a nutshell, what we were talking about is Citibank packaged securities, packaged loans, mortgage loans into these securities, which they sold to investors. What they didn’t tell investors was what the actual quality of those loans were. And so you had these mortgage bond deals that had quality that was far less than what Citi was representing to investors that they were.

JUDY WOODRUFF: And how many people knew about this, and did the knowledge go all the way to the top?

TONY WEST: Well, a number of bankers certainly knew about it. In fact, we know from the evidence that bankers were warned that the quality of the loans that they were packaging into these securities wasn’t what they were telling investors they were, but they ignored those warning signs. They ignored that due diligence.

In terms of how far up that went, I think that certainly enough people in the country knew and enough bankers knew that we felt that we could demand a very high, in fact, an historically high, penalty from Citibank.

JUDY WOODRUFF: So $7 billion. As we were saying, $4 billion of that goes to justice. What does Justice do with that money?

TONY WEST: Well, that money is a civil penalty and it goes to the United States Treasury.

Part of that money will actually go to fund additional cases in which the government is going to try to recover funds that have been lost to fraud and waste and abuse on behalf of the taxpayers. Of course, there’s another $500 million that will go to states around the country, five states in particular, and that will help to replenish some of the losses that pension funds and other state entities suffered because of this.

JUDY WOODRUFF: And then the $2.5 billion we said set aside for consumer relief, how does that — who does that go to?

TONY WEST: Well, that goes to consumers.

I think that one of the lessons that we have learned from the financial crisis is that it just wasn’t investors who were hurt in this debacle. We know that there are homeowners on Main Street who really suffered because of the conduct that Citi and other financial institutions engaged in.

And so, as part of any resolution, we want to make sure that we’re trying to bring some meaningful relief to those individuals.

JUDY WOODRUFF: I’m sure you know there are consumer advocates out there who are saying this is not enough, it’s — quote — “too little too late.”

We spoke — we saw today Public Citizen. I just want to read one comment. They said no individuals are being held to account. They said, the bank is not being charged with any criminal activity. They said the corporation faces no review of its bank charter, business continues in its offices.

What do you say to those comments?

TONY WEST: Well, I think I would say a couple of things.

I would, first, this is a civil resolution. It’s not a criminal resolution. And, in fact, by the very terms of the settlement agreement, we have not written off any ability to pursue criminal charges, should the evidence merit that.

JUDY WOODRUFF: So that could still come?

TONY WEST: That’s always a possibility out there. And it’s something that was specifically carved out of this resolution.

The second thing I would say is that we know, of course, that no one resolution — this resolution won’t solve all the problems that were created by the financial crisis, but it is an important step to rectifying some of the harm.

I think when you talk about the principal reduction that we have, the rate reduction, refinancing features of this consumer relief, when you talk about the affordable housing that’s a part of this consumer relief, I think the potential here is that there will be hundreds of thousands of homeowners and borrowers who will benefit from these provisions.

JUDY WOODRUFF: But they may not be individuals who were affected in the original instance?

TONY WEST: Well, again, I think that one of the things we have seen is there are a number of individuals who have been affected. You didn’t just have to be an investor in order to be hurt by what happened as a result of the conduct on Wall Street.

And so it’s our belief that a lot of these measures will in fact help victims, often faceless victims, nameless victims, but victims nonetheless of the financial crisis.

JUDY WOODRUFF: Let me read to you another — another critic.

This Dennis Kelleher of the Better Markets Group. He said to us — quote — “That amount is” — the $7 billion — “is meaningless without the disclosure of the key information about how many hundreds of billions of dollars Citigroup made, how many tens of billions investors lost, how many billions in bonuses were pocketed, which executives were involved, what positions they now have with the bank.”

TONY WEST: Well, again, I think that it would be a mistake not to think that these are meaningful resolutions. What we’re talking about is an historically high civil penalty, $4 billion.

In fact, it’s twice as much as J.P. Morgan paid. And, in addition, we’re talking about really compensating a number of investors who were lost if they were state agencies or pension funds, charities and the like.

And I think we really can’t overlook the potential power of the consumer relief provisions, the power that that has to help rectify the harm that has occurred. You know, again, it’s not a panacea, but it is an important component to trying to restore some of the damage that has been caused by not only the conduct that we were talking about here in the Citi case, but other financial institutions as well.

JUDY WOODRUFF: And just quickly again on the possibility of criminal charges, is that something Justice is actively looking at?

TONY WEST: Yes.

And I don’t want to speak in connection with any particular financial institution, so let me just say generally, we are looking at all aspects. Understand the, civil resolution is only one tool, but wherever the evidence leads, wherever the facts lead, we will not hesitate, if that is criminal, to bring those charges.

JUDY WOODRUFF: And let me just bring a comment from the other side of the ledger, and that is the banks.

I know there were several reports that quoted top folks at Citi saying, you know, they really had, as they put it, a relatively smaller share of the market, that they shouldn’t be held as accountable as some other large institutions should have been.

What do you say to that?

TONY WEST: Well, I think the fact that there are some people who are saying we were too tough and others saying we were too soft, I think that probably means we were in the right place right in the middle.

But, look, this market share argument that I know a number of people talked about, Citi had advanced, the fact of the matter is, is that resolutions are driven by the facts and the evidence of any given matter in any given case. It’s the individual conduct. It’s the conduct of an institution that will really determine how we resolve these cases.

And, so, I’m not saying that market share isn’t irrelevant, but the fact of the matter is, it cannot trump the actual evidence of misconduct. And, in this case, given the size of the fine, it did not.

JUDY WOODRUFF: Tony West, associate attorney general, we thank you for talking with us.

TONY WEST: Thank you so much, Judy. Good to be with you.