Citigroup is only the latest target of an emboldened Justice Department, and likely not the last.
On the same day Citi reported second-quarter earnings, the bank and DOJ on Monday separately announced details of their long-awaited settlement of claims related to the sale of faulty mortgage securities.
The deal includes a $4 billion civil penalty directly to DOJ—the largest of its kind—in addition to $2.5 billion that Citi must set aside to help consumers, and $500 million owed to several states and the Federal Deposit Insurance Corp. The payments resolve a whole host of state and federal claims over how the bank packaged and sold mortgage-related assets that soured during the crisis.
"The bank's activities shattered lives and livelihoods throughout the country and around the world. They contributed mightily to the financial crisis that devastated our economy in 2008," Attorney General Eric Holder said in a statement Monday. "While Citigroup was not alone in its willingness to ignore internal warnings and disregard the law in order to defraud consumers and investors, as a result of their assurances that toxic financial products were sound, Citigroup was able to expand its market share and increase profits."
In a statement, Citi chief executive Michael Corbat said the bank hopes now to move on from the mortgage-related probes.
"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," he said.
But the agreement failed to resolve questions over which institutions could be next as DOJ continues to investigate banks, and whether the government will ever bring criminal charges against a U.S. bank.
Below are insights into what the Citi agreement means for future DOJ actions against the banking industry.
With Citigroup’s settlement finalized, attention will only intensify on how DOJ and Bank of America will resolve talks over a similar mortgage-related deal.
Reports have surfaced in recent weeks that negotiations between the B of A and the government are deadlocked over the size of a possible settlement. Justice is said to be seeking roughly $17 billion—significantly larger than Citi’s amount or the $13 billion settlement DOJ inked with JP Morgan Chase—while B of A has been pushing for something closer to $12 billion.
"The challenge for Bank of America is that prosecutors aren’t going to be distracted by other civil settlements. They now have the spotlight to themselves, which is never a good thing," said Jaret Seiberg, an analyst with Guggenheim Partners. "There are a lot more resources that can be let loose now against Bank of America."
Another threat for B of A is whether the government feels compelled to try to outdo previous fines.
"The federal government is intent on securing a settlement from Bank of America that exceeds any of the previous mortgage crisis settlement amounts paid by the banks," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading. "I think that’s their goal because Bank of America and Countrywide had an outsized role in the mortgage crisis, and policymakers are likely focused on ensuring that the headline settlement amount reflects that role."
Still, the recent deal with Citi suggests B of A has room to negotiate. Discussions between Citi and Justice were also said to be at a standstill, with the government nearly filing a lawsuit against the bank and Citi threatening to end talks altogether.
"What we learned from Citi is that it actually pays to walk away from negotiations and be very public about what you feel is an unfair ask by Justice," said Edward Mills, an analyst at FBR Capital Markets. "But the likely price that you’re paying for this is still higher than you want to pay."
While the list of big banks yet to settle with the government is now smaller, observers said the Justice Department—with each announcement of a high-profile accord—appears to be refining use of special civil litigation authority granted during the savings and loan crisis. That, combined with the financial gains the fines bring to the government, means more settlements could be coming.
"With each successive settlement, the likelihood of the Justice Department pursuing claims against other banks increases both because of the success of previous negotiations as well as the increased financial capacity that each of the settlements provides," said Boltansky.
The 1989 Financial Institutions Reform, Recovery and Enforcement Act gave DOJ the power to seek civil penalties against banks, instead of facing the higher burden of proof in criminal action. The law also afforded a much longer statute of limitations—10 years—than typically allowed for such claims.
Justice said Citi's $4 billion civil penalty is the largest ever to be paid in a FIRREA case. The authority was also credited in Justice's landmark settlement against JPMorgan Chase.
"It does show how powerful this weapon this is," said Arthur Wilmarth, a law professor at George Washington University. "Justice had used this authority somewhat" before the 2008 crisis, "but it's been much more significant in this go-around, mainly because I think the regulators were so slow to take any meaningful action right after the financial crisis."
Observers also note that Justice's preference for civil settlements does not preclude the filing of criminal charges someday against a large domestic institution stemming from mortgage-related abuses, the ongoing investigation into banks' alleged fixing of the London Interbank Offered Rate, Bank Secrecy Act violations or other areas.
"The biggest mistake would be to assume that this settlement means that criminal prosecutions are off the table," said Seiberg. "Justice is still looking for evidence on Libor manipulation and other scandals that could result in criminal charges."
Case in point, both DOJ's press release announcing the Citi settlement and Holder's prepared statement make clear that the settlement does not "absolve" the bank from facing future criminal charges.
At least somewhat, Justice has recently combatted criticism about a perceived unwillingness to prosecute big banks after it forced guilty pleas from two foreign banks, Credit Suisse and BNP Paribas. Credit Suisse was accused of helping customers evade taxes and BNP was alleged to have been involved in transactions with countries under U.S. sanctions.
Observers noted that the earlier widespread belief that the government will seek only civil claims against a global bank no longer applies, and it is increasingly difficult to predict the amount of fines and the type of action the government brings.
"Investors look at this as a process where it is, at a minimum, impossible to gauge an accurate outcome. And others look at it and say it’s completely irrational—'I don't know how to brace to myself for this,'" said Mills.
Wilmarth said even if Justice is unwilling to indict a bank for actions related to the mortgage crisis, other recent allegations against big banks may be more suited to criminal prosecution, such as the alleged Libor collusion.
"Those types of behaviors, as alleged, relate to antitrust violations," he said. "In the past, the Justice Department has shown a greater willingness to consider [criminal] action for price-fixing claims, because price-fixing is seen as such a damaging behavior against the markets."