Earlier this week, Citigroup ( C ) became the first among the global banking groups to reach an agreement with the Federal Housing Finance Agency (FHFA) over a series of lawsuits that the latter filed against 18 financial institutions in late 2011 alleging that they had mis-sold mortgage-backed securities worth more than $200 billion in total to Fannie Mae and Freddie Mac in the run-up to the economic downturn of 2008. Citigroup was in the line of fire for securities worth $3.5 billion it sold to the government-backed enterprises. How much Citigroup will have to pay to put this issue behind it wasn't disclosed.
This settlement by the diversified banking group was actually the second among the 18 parties named in the lawsuits with the global conglomerate GE ( GE ) coming to terms with the FHFA over its $549 million lawsuit this January - the smallest figure among all the lawsuits. GE has been looking to do away with its financial services arm, and the settlement was a necessity before initiating any such move.
Citigroup's settlement is a likely precursor to similar settlements by the other banking giants - especially Bank of America ( BAC ), JPMorgan Chase ( JPM ) and RBS ( RBS ) - each of which face lawsuits over securities worth more than $30 billion.
See our full analysis for Bank of America | Citigroup | JPMorgan | RBS
In 2011, the FHFA launched a legal battle against some of the world's biggest financial institutions in a bid to make them pay for the billions in losses they inflicted on mortgage enterprises Fannie Mae and Freddie Mac by downplaying the underlying risks involved in scores of mortgage-backed securities they originated. The lawsuits - 18 in all - sought recourse for missold securities worth more than $200 billion. The breakdown of this figure by financial institution is shown in the chart below.
Value of Securities Missold
Bank of America
First Horizon National
General Electric Company
The Royal Bank of Scotland Group
As can be seen from this table, Citigroup's liability from the FHFA lawsuit ($3.5 billion) was much less than that of the other banking giants. Bank of America faces the greatest pressure with the acquisitions of Countrywide and Merrill Lynch in 2008, making its effective liability under three FHFA lawsuits a total of $57.4 billion. JPMorgan Chase comes in second with a legal overhang on securities worth $33 billion, followed by RBS with $30 billion.
And while Citigroup's settlement amount has not been disclosed, we believe that the figure would most likely be between 10-20% of the value of the securities - a range we arrive at using the 20% ballpark figure quoted by the FHFA in its lawsuit against UBS. This represents settlement costs between $350 million and $700 million for the bank - which will drag down margins for its investment banking operations this quarter (represented in chart below). But what we are really interested in is to find out how quickly and at what cost the other banking groups settle their individual legal grudges with the FHFA to put this nagging legacy issue in the past.
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