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Citigroup Announces Effect of Settlement on Q2 Earnings

Citigroup's second-quarter profits took a major hit as the bank announced a settlement with the government to resolve securities claims.

Citi released its quarterly earnings report Monday morning, posting net profit of $181 million—a decline of 96 percent compared to earnings of $4.2 billion a year ago.

The second quarter's results include a $3.8 billion charge related to a $7.0 billion settlement with the Residential Mortgage-Backed Securities (RMBS) Working Group, also announced early Monday. The announcement comes on the heels of reports last week that Citigroup was poised to settle all RMBS related claims with the Department of Justice (DOJ), several state Attorneys General, and the Federal Deposit Insurance Corporation (FDIC).

Under the terms of the agreement, the bank will pay a total of $4.5 billion in cash, including a $4 billion payment to the Justice Department and $500 million in payments to state attorneys general and FDIC. The remaining $2.5 billion will be provided through consumer relief by the end of 2018.

“This historic penalty is appropriate given the strength of the evidence of the wrongdoing committed by Citi,” said Attorney General Eric Holder.  “The bank's activities contributed mightily to the financial crisis that devastated our economy in 2008.  Taken together, we believe the size and scope of this resolution goes beyond what could be considered the mere cost of doing business.  Citi is not the first financial institution to be held accountable by this Justice Department, and it will certainly not be the last.”

The settlement brings to any real claims and investigations into Citi's RMBS and collateralized debt obligations (CDOs) issued, structured, or underwritten between 2003 and 2008.

In a statement, Citigroup CEO Michael Corbat said that with the agreement, Citi has now resolved "substantially all" of its 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," Corbat said.

Even removing the settlement charge, Citi's Q2 earnings would have come to $3.9 billion, short of last year but in line with Q1’s results.

The bank's North American Global Consumer Banking income came to $1.1 billion, "broadly flat" from last year as lower operating expenses, a decline in net credit losses, and a higher loan loss reserve helped offset lower revenues stemming from waning mortgage refinancing activity.

About Author: Derek Templeton

Derek Templeton is an attorney based in Dallas, Texas. He practices in the areas of real estate, financial services, and general corporate transactional law. His experience includes time as an Attorney Adviser for the U.S. Small Business Administration and as General Counsel for a nonprofit organization in Dallas. A self-avowed "policy junkie," he has a keen interest in the effect that evolving federal policy has on the mortgage, default servicing, and greater housing industries.
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