Citigroup Agrees $7bn Settlement Over Toxic Sub-Prime Mortgage Products

Citigroup has announced a $7bn settlement with the US Department of Justice to end multiple investigations into the investment bank's toxic mortgage-backed financial products - the type that sparked the financial crisis.

Citi will pay $4.5bn in cash to regulators and government agencies and $2.5bn in compensation to its former customers who were sold the products between 2003 and 2008, at the dawn of the crisis.

All of the civil claims launched, or due to be launched, by the DoJ, the attorney generals of several states, and the Federal Deposit Insurance Corporation (FDIC) have now been settled as a result of the deal.

"The penalty is appropriate given the strength of the evidence of the wrongdoing committed by Citi," said US Attorney General Eric Holder.

"Despite the fact that Citigroup learned of serious and widespread defects among the increasingly risky loans they were securitising, the bank and its employees concealed these defects."

The financial crisis was triggered as so-called residential mortgage-backed securities (RMBS) and Collateralised Debt Obligations (CDOs) suddenly unwound.

Many of the mortgages underpinning RMBS and CDO products, which were issued by institutions across the financial sector, were sub-prime – debt held by high-risk borrowers.

When the US Fed lifted interest rates at the end of 2006, sub-prime mortgage holders began to default because they could not afford the higher debt repayments.

This then had a knock-on effect on the RMBS markets, which relied on mortgage repayments to pay out interest to the products' investors.

Banks were forced to write-down their RMBS holdings, sending a shockwave through the financial system that caused some institutions to go bankrupt – such as Lehman Brothers in 2008 – and others to be bailed out by national governments with taxpayers' money.

Now investors and regulators are raking over what happened before the crisis in order to claw back cash and hold institutions to account for past risky and bad behaviour.

"The comprehensive settlement announced today with the US Department of Justice, state attorneys general, and the FDIC resolves all pending civil investigations related to our legacy RMBS and CDO underwriting, structuring and issuance activities," said Michael Corbat, chief executive of Citi.

"We also have now resolved substantially all of our legacy RMBS and CDO litigation. We believe that this settlement is in the best interests of our shareholders, and allows us to move forward and to focus on the future, not the past."

Citi rival JPMorgan signed a $13bn (£7.6bn, €9.5bn) settlement with the DoJ and other authorities – the largest fine in US history – over RMBS and CDO failings before the financial crisis.