Washington - Citigroup would pay $7 billion (R75bn) to settle an investigation into risky subprime mortgages, it was announced yesterday.

The agreement between the US government and the New York investment bank comes weeks after talks between the sides broke down, prompting the Justice Department to warn that it would sue Citigroup. The bank had offered to pay less than $4bn, a sum substantially less than the department was asking for.

The settlement stems from the sale of securities made up of subprime mortgages, which fuelled the housing boom and subsequent bust that triggered the Great Recession in 2007.

The bank agreed separately in April to pay $1.13bn to settle claims by investors wanting the lender to buy back billions of dollars in residential mortgage-backed securities.

In the deal announced yesterday, Citigroup will make a $4bn civil monetary payment to the Justice Department, and another $500 million in compensation to state attorneys-general and the Federal Deposit Insurance Corporation.

The bank will provide $2.5bn for consumer relief, which will include financing for the construction and preservation of affordable housing, as well as reductions in principal capital and forbearance for residential loans.

“The comprehensive settlement… resolves all pending civil investigations related to our legacy residential mortgage-backed security (RMBS) and collateralised debt obligation (CDO) underwriting, structuring and issuance activities,” Citigroup chief executive Michael Corbat said.

“We also have now resolved substantially all of our legacy RMBS and CDO litigation.”

The Citigroup settlement comes months after a similar – but much larger – deal between the Justice Department and JPMorgan Chase, the US’s biggest bank. After months of negotiations, the bank agreed last year to pay out $13bn after an investigation into toxic mortgage-backed securities.

As part of the deal, which included settlements with New York, California and other states, JPMorgan agreed to provide $4bn in relief to homeowners affected by the bad loans. The bank also acknowledged that it had misrepresented the quality of its securities to investors.

That deal was seen as a possible template for settlements with Citigroup and Bank of America, which was accused in a government lawsuit of failing to disclose risks and of misleading investors in its sale of $850m of mortgage-linked securities. - Sapa-AP