Citigroup will pay $7 billion to settle an investigation into risky subprime mortgages, the type that helped fuel the financial crisis.
Included in the settlement is $102.7 million that will settle claims by the state of California to replace money lost by pension funds CalPERS and CalSTRS. There is also a guarantee that the state will receive $90 million in consumer relief, state officials said.
The settlement stems from the sale of securities made up of subprime mortgages, which fueled both the housing boom and bust that triggered the Great Recession at the end of 2007.
Even federal officials within the U.S. Attorney General's Office did not know how many consumers will be helped by the settlement.
“It’s impossible to make everyone whole,” said Attorney General Eric Holder.
Holder explained that some of the stipulations - reduction of principal for some, refinancing for others as well as investments in neighborhood stabilization/community development and the facilitation of affordable housing - could reach hundreds of thousands of people.
Citigroup and other banks downplayed the risks of subprime mortgages when packaging and selling them to mutual funds, investment trusts, pensions, as well as other banks and investors.
The securities, which contained so-called residential mortgage-backed securities and collateralized debt obligations, plunged in value when the housing market collapsed in 2006 and 2007.
Those losses triggered a financial crisis that pushed the economy into the worst recession since the 1930s.
In the deal announced Monday, Citigroup will make a $4 billion civil monetary payment to the Justice Department, and another $500 million in compensatory payments to state attorneys general and the Federal Deposit Insurance Corporation.
The bank will provide $2.5 billion in consumer relief, which will include financing for construction and preservation of affordable housing, as well as principal reduction and forbearance for residential loans.
"The comprehensive settlement announced today with the U.S. 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 CEO Michael Corbat. "We also have now resolved substantially all of our legacy RMBS and CDO litigation."
The bank separately agreed in April to pay $1.13 billion to settle claims by investors seeking that the lender buy back billions of dollars in residential mortgage-backed securities.
The settlement announced Monday does not preclude criminal charges against the company or any individuals, Holder said.