Tuesday, July 15, 2014

Citigroup Settles: Less than it seems

Citigroup Settles: Less than it seems

The attorneys general in California, Illinois, Massachusetts, Delaware, and New York are lauding the $7 billion settlement with Citigroup over the bank’s mortgage practices.  The U.S. Government extracted a $4 billion penalty and negotiated $2.5 billion to help homeowners.  Under the settlement, the states will receive $397.3 million and the F.D.I.C. will get $102.7 million.  In their press releases the AGs took credit for the mortgage relief for consumers as well as the money awarded to their States’ respective pension plans.

I’m not sure why the AGs should be heralding this settlement.  While the U.S. Treasury and F.D.I.C. receive cash payments, the parts of the deal that pertain to the states don’t do much.  First, the consumer relief isn’t a cash payment.  Rather it consists of loan modification for underwater homeowners, refinancing for distressed borrowers, down payment and closing cost assistance to homebuyers, donations to organizations assisting communities in redevelopment, and affordable rental housing for low-income families in high-cost areas.  Most of these items don’t involve cash outlays and are activities that the bank engages in anyway.  In making loan modifications and refinancing homeowners, the bank will be doing what it should have done in the first place.  Moreover, it will probably improve its cash flow, since the new loans will be more affordable to its customers.  Even if the $2.5 billion were real cash outlays, they don’t have to be paid out until the end of 2018.

The pension plans will receive $160.6 million.  While it sounds like a lot of money, it represents 2/100 of 1% of the assets of the five states’ pension plans. In addition, all of the pension plans are owners of Citigroup.  The bank tends to be one of their larger holdings, or at least it was before the financial crisis.  In essence, they are paying themselves as well as incurring settlement with the federal government and F.D.I.C.  In other words, the public pensions incurred the losses brought about by Citigroup’s improper securitization practices.  With this settlement, they are, as owners, incurring the penalty as well.

The AGs seem satisfied with the settlement.  I’m not sure anyone else should be.

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