With Citigroup Inc. agreeing to pay $7 billion for issuing toxic mortgage securities, the Justice Department now turns to settling its case against what analysts call the biggest mortgage miscreant of all: Bank of America Corp.
The government has contended that the Charlotte, N.C., lender bears responsibility not only for its own mortgage bonds, but also for those at two firms it took over during the financial crisis: Countrywide Financial Corp. in Calabasas and Merrill Lynch & Co. in New York.
Analysts said BofA will feel the heat of investigations stemming from the subprime housing boom. Countrywide was once the biggest originator of high-risk home loans, and Merrill was one of Wall Street’s largest producers of bonds back by subprime mortgages.
U.S. Atty. Gen. Eric Holder acknowledged as much Monday during a news conference to announce that Citigroup Inc. would pay a record $4-billion civil fine, $500 million in repayments for losses and $2.5 billion in consumer relief.
“Citi is not the first financial institution to be held accountable by this Justice Department, and it will certainly not be the last,” Holder said.
In the Citi deal, California will be among several states that will share in the settlement. Citi will pay California $102.7 million to offset losses at its public pension funds, primarily the California Public Employees’ Retirement System, according to Atty. Gen. Kamala D. Harris’ office.
California also is guaranteed at least $90 million in consumer relief, the most of any state.
The agreement is the latest in the federal government’s efforts to hold accountable those financial institutions that made high-risk loans during the housing boom and packaged them to create bonds they sold to investors around the world.
Buyers that suffered significant losses included mortgage finance giants Fannie Mae and Freddie Mac, public employee retirement funds and smaller banks and credit unions that failed. JPMorgan Chase & Co.'s $13-billion settlement of mortgage-related claims, announced in November, has been the largest of these settlements.
Saying Citigroup’s sales of “egregious” mortgage investments “shattered lives and livelihoods,” Holder said at a news conference that the bank and its employees have not been absolved of criminal liability. A criminal investigation is pending.
JPMorgan Chase also is the subject of a pending criminal investigation in Sacramento, U.S. Atty. Ben Wagner said.
Bank of America has rung up more than $50 billion in losses and legal expenses stemming from its acquisition of Countrywide in 2008, often described as the worst bank deal in history.
The BofA mortgage expenses include a $9.5-billion settlement with the Federal Housing Finance Agency, a regulator pressing claims for losses at Fannie Mae and Freddie Mac, which fell into government hands as they neared collapse in 2008. BofA also has paid $165 million to settle claims related to losses at credit unions.
But BofA has yet to settle claims by other litigants, including the Federal Deposit Insurance Corp., which has made the bank a defendant in lawsuits over mortgage-backed securities on the books of failed banks and thrifts.
In addition, the bank has held settlement discussions to ward off a lawsuit from the Justice Department. The department often has been criticized as too lenient in pursuing the bankers whose easy-money home loans and shoddy mortgage securities paved the way to the financial crisis.
Those discussions were put on hold as the government dealt with Citi, according to people briefed on the matter who didn’t want to be named because negotiations were private. Talks now are expected to resume, one of these people said.
“The problem for Bank of America is that it’s one of the last big guys standing and Justice isn’t distracted by a lot of other big bank litigation,” said Jaret Seiberg, a senior Washington policy analyst for Guggenheim Partners.
A Bank of America legal spokesman declined to comment.
Seiberg said the Citigroup deal and other previous settlements have had a deterrent effect on Wall Street. The Justice Department, he said, now may “look to criminally indict a domestic bank,” most likely Bank of America, and that “may have adverse unintended consequences for the bank and the financial system.”
“It is very difficult to argue that the banks have been let off easy,” he said. “If you look at the actual numbers, they have paid a big price.”
But Dennis Kelleher, president of Better Markets, a public interest group that supports tougher financial regulations, said the Citibank settlement and others have been sweetheart, back-room deals that failed to penalize the banks proportionately for the financial trauma they caused.
The Justice Department provided no information about how much in profit Citigroup made from its mortgage-backed securities business to put the $7-billion settlement into context, he said.
What the department didn’t mention at its news conference, Kelleher said, was that Citigroup, unlike JPMorgan, also resolved legal claims stemming from its huge business in the mortgage-related securities known as collateralized debt obligations — the “jet fuel” for the financial crisis, Kelleher said.
Kelleher, whose group is suing the agency for more details on the JPMorgan settlement, said the government should have demanded a bigger settlement from Citigroup.
“What DOJ apparently is doing is to work hand in hand with Wall Street’s biggest banks to sweep as much under the rug so the American people know as little as possible, and the deal with Bank of America will probably be the same,” he said.
“They’re pretending to punish Wall Street while effectively letting Wall Street off with less than a slap on the wrist.”