Citigroup Pays £373m to Settle Debt Claims

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Citigroup has agreed to pay $590m (£373m) to investors who allege they were misled about the scale of the bank’s ownership of troubled mortgage debt before the financial crisis.

The class-action suit, which was filed in New York in 2009, accused Citi of employing a “CDO-related quasi-Ponzi scheme” to conceal the growing risks on its balance sheet from the mortgage-backed debt and collateralised debt obligations (CDOs) it owned. Citi told the investors that the CDOs had been sold when, in fact, the bank still remained liable for any losses the products suffered, the lawsuit claimed.

The settlement is one of the largest to emerge from the financial crisis and comes almost four years after Citi turned to the US taxpayer for a $50bn bail-out. Fears about the health of the bank’s balance sheet had sent its shares tumbling following the demise of Lehman Brothers in September 2008, eventually forcing then US Treasury Secretary Hank Paulson to step in.

Citi, which denies the investors’ allegations, said it had settled to avoid a protracted legal fight. “This settlement is a significant step toward resolving our exposure to claims arising from the period of the financial crisis,” the bank said.

The investors who brought the legal action acquired shares in Citi between February 2007 and April 2008, when they tumbled 55pc. The shares eventually sank below $2 before the US government engineered a rescue.

The packaging of US mortgage loans into fresh financial products, such as CDOs, created a bonanza for Wall Street banks until American house prices began to falter in 2007. Until then, investors from around the world were quick to snap up such products because of the higher yield they offered at a time when interest rates were still relatively low. Charles ‘Chuck’ Prince, the former chief executive of Citi, famously said in the summer of 2007, that “as long as the music is playing, you’ve got to get up and dance. We’re still dancing”.

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