On Monday, July 14, Citibank agreed to pay a $7 billion settlement related to sub-prime mortgage-backed securities sold to investors during the lead up to the financial crisis of 2008. The settlement results from a Justice Department effort to crack down on the complex and risky behaviors that led Wall Street to the brink of collapse in 2008. While the overwhelming majority of Americans want to hold bankers accountable for gambling on peoples’ livelihoods, the recent settlements don’t represent a real victory for the population. If we break down the structure of the most recent settlement, it’s easy to see why.
Citi agreed to pay a total of $7 billion dollars to end a DOJ inquiry into its involvement in the financial crisis. Citi will pay $4.5 billion in cash, and $2.5 billion to provide relief to struggling homeowners and low-income tenants in the form of restructured mortgages. Of the $4.5 billion cash payment, $4 billion will go to the Justice Department as a civil penalty. The other $500 million will be paid as fees to state Attorneys General and to the Federal Deposit Insurance Corporation (FDIC).
There are a few reasons why this settlement looks more like a PR stunt than Citi actually trying to right any wrongdoing. First of all, the majority of the settlement will go to the agencies doing the prosecution, pretty much to spend at their discretion. The prosecuting agencies do not represent the true victims of the housing crisis, the ones who were aggressively sold mortgages that they had no chance of affording a few years down the line. The lion’s share of the settlement, in effect, settles little more than legal fees.
Citigroup can count the loan modifications it will make for sub-prime borrowers under the government Home Affordable Modification Program (HAMP) as part of the settlement. This program awards incentive payments to the bank to modify bad loans. Citi will actually receive payments for abiding by the terms of the settlement they reached with the government. The assistance to homeowners, those most affected by the financial crisis, will therefore be subsidized.
And as if the taxpayer hasn’t already paid enough for the egregious actions of large financial institutions leading up to the financial crisis, any mortgage principal reductions to homeowners from Citi will come in the form of earned income for tax purposes. Any supposed relief homeowners enjoy will be taxed as income, in many cases negating any relief in the first place. This is due to the expiration of the Mortgage Debt Relief Forgiveness Act, which Congress has failed to renew. Without this essential protection, the settlement might actually leave some borrowers worse off.
The settlement reached between Citi and the Department of Justice doesn’t even address the losses incurred by investors who purchased securities backed by sub-prime mortgages in the lead-up to 2008.
At the end of the day, Citi will pay $7 billion to get regulators and investigators off its back. The settlement comes after JP Morgan Chase reached a similar agreement to the tune of $13 billion last year. The DOJ collects more cash than it knows what to do with, the mega-banks continue to gamble with real peoples’ homes (increasingly in the rental market that grew as a result of the crash), and tax-paying citizens are left to foot the bill. Nobody involved with the packaging and sale of toxic mortgages will see the inside of a jail cell, and all parties involved will move forward as if the mess didn’t occur in the first place. If you’re tired of the illusion of justice in our legal and financial systems, Green America urges you to take the time and tell Eric Holder to re-prioritize the prosecution of those involved mortgage fraud. Unless the people stand up and demand justice, there will be nothing to deter mega-banks like Citi from driving the economy to the brink of collapse all over again.