According to the U.S. Justice Department, Citigroup knowingly sold mortgage-backed securities with loans that contained "material defects." Associated Press
Citigroup Inc. C +3.62% will pay $7 billion to settle the U.S. government's accusations that it misled investors about the quality of mortgage securities it sold in the run-up to the financial crisis.
According to the Justice Department, Citigroup knowingly sold mortgage-backed securities with loans that contained "material defects" and concealed that information from investors in what Attorney General Eric Holder described as "egregious" misconduct that helped fuel the 2008 financial crisis.
Citigroup admitted to many of its misdeeds "in great detail" the Justice Department said Monday. A statement of facts released by the government—and agreed to by the bank--detailed a pattern of Citigroup repeatedly ignoring its own red flags about sub-par mortgages and making misrepresentations to investors about the quality of loans being securitized.
Attorney General Eric Holder announces that Citigroup will pay $7 billion in a settlement with the U.S. Justice Department for misdeeds in 2008. Photo: Getty
On several occasions, bank employees learned that significant percentages of mortgage loans reviewed were defective but sold them to investors anyway. One Citigroup trader, in an internal email cited by the government, stated the bank "should start praying" because so many of the loans were likely to go sour. "It's amazing that some of these loans were closed at all," the email stated.
Despite those concerns, Citigroup pooled those loans into residential-mortgage backed securities that were sold to investors.
"The bank's activities contributed mightily to the financial crisis that devastated our economy in 2008," Mr. Holder said. "Taken together, we believe the size and scope of this resolution goes beyond what could be considered the mere cost of doing business."
The settlement doesn't absolve Citigroup or its employees from facing any possible criminal charges, the Justice Department said.
In a call with reporters Monday morning, Citigroup Chief Financial Officer John Gerspach declined to comment on whether the bank had asked for release from any potential criminal charges as part of the settlement.
"We believe that this settlement is in the best interests of our shareholders, and allows us to move forward and to focus on the future, not the past," said Citigroup Chief Executive Officer Michael Corbat in a statement.
In its settlement, Citigroup will pay a $4 billion civil penalty to the Justice Department, plus $500 million to the Federal Deposit Insurance Corp. and several states. Citigroup also agreed to spend $2.5 billion on "consumer relief," where it will get credit for modifying mortgages for struggling homeowners and similar actions.
The pending settlement and other legal problems have been an overhang for the bank. Citigroup's penalty, unlike a similar settlement between the Justice Department and J.P. Morgan ChaseJPM +1.51% & Co. in November, releases it from potential liability for CDOs, or collateralized debt obligations, not just mortgage securities. The settlement covers residential mortgage-backed securities and CDOs issued in the run-up to the financial crisis, from 2003 to 2008.
The bank has "now resolved substantially all of our legacy RMBS and CDO litigation," Mr. Corbat said in his statement.
Citigroup also released its second-quarter earnings Monday, with the bank disclosing its profit dropped 96% in the quarter thanks in part to a pretax charge of about $3.8 billion related to the settlement. Still, the company's earnings came in better than analysts' expectations.
Citigroup's $7 billion agreement comes after a long negotiation. The bank in May had opened with an offer to pay $363 million in cash, plus more for "consumer relief," or money the bank will set aside to help customers in financial trouble. The Justice Department came back with a far higher number: $12 billion, including consumer relief.
The bank had argued that it shouldn't have to pay so much because it was a relatively small player in the mortgage-securities market. But the Justice Department lawyers saw Citigroup's conduct as so egregious that it merited a high penalty.
At one point in mid-June, the government came to within a day of filing a lawsuit against the bank.
Citigroup is the second of the U.S. megabanks to settle with the government over mortgage securities. J.P. Morgan settled similar charges in November for $13 billion. Talks between the government and Bank of America Corp. are under way.
The negotiations were seen as a flash point for both Mr. Corbat, who was given the top job in 2012 with a mandate to improve relations with the government, and for Mr. Holder, who has faced constant criticism that his Justice Department has been too soft on banks.
In May, the Justice Department extracted from Swiss bank Credit Suisse Group AG its first guilty plea from a major financial institution in two decades, and French bank BNP Paribas SA pleaded guilty last week to charges over its dealings with countries sanctioned by the U.S.
It has been a tough year for Citigroup so far. In February it disclosed an alleged accounting fraud against its Mexico unit. In March the Federal Reserve rejected its stress-test request for a higher dividend and share buyback, citing a need for the bank to improve its overall risk managements systems.
The French and now the Germans themselves, those who have the right model, made mistakes lese dollar. To earn money, continental European bankers are willing to do the worst but never the best. Are there only good banks? Bankers do not they belong to the caste of untouchables?
Traders work on the floor of the New York Stock Exchange July 9, 2014.
CREDIT: REUTERS/BRENDAN MCDERMID
(Reuters) - U.S. stocks fell on Thursday after the health of Portugal's top listed bank was questioned, bringing back to markets the specter of a weakened Europe.
With U.S. stocks near record highs, the slide in Europe translated into broad selling on Wall Street. Many market participants have called for a pullback, with the steady S&P 500 yet to see a daily decline of 1 percent or more since April 10.
Espirito Santo Financial Group (ESF.LS), the largest shareholder in Portugal's Banco Espirito Santo (BES.LS), suspended trading in its shares and bonds, citing "material difficulties" at parent company ESI. Shares of the bank fell 17.2 percent. The S&P 500 financial sector .SPSY fell 1.3 percent.
Portugal's benchmark stock index.PSI20fell 3.8 percent and Italy's FTSE MIB.FTMIBfell 2 percent. An index of European bank shares .SX7P was down 1.9 percent.
The Dow Jones industrial average .DJI fell 117.1 points or 0.69 percent, to 16,868.51, the S&P 500 .SPX lost 12.79 points or 0.65 percent, to 1,960.04 and the Nasdaq Composite.IXIC dropped 41.37 points or 0.94 percent, to 4,377.67.
"In a world of global news, you can always find something that is not doing well, whether it is political events in Iraq or banking in Portugal," said Rick Meckler, president of investment firm LibertyView Capital Management in Jersey City, New Jersey.
"The real test will be the earnings and that will either give confidence to people to come back in or make them realize the prices they have been paying are just too high."
Investors in Lumber Liquidators (LL.N) certainly thought they were paying too much. Shares fell 21.5 percent to $55.31 after the hardwood flooring retailer cut its earnings outlook.
Sandwich chain Potbelly Corp (PBPB.O) estimated second-quarter revenue and profit below analysts expectations and its shares slid 24.2 percent to $11.10.
Declining issues outnumbered advancing ones on the NYSE by 2,257 to 604, for a 3.74-to-1 ratio on the downside. On the Nasdaq, 2,167 issues fell and 340 rose for a 6.37-to-1 ratio favoring decliners.
The CBOE Volatility Index .VIX hit its highest since May 20 before paring gains. The VIX last week hit 10.28, its lowest level since early 2007, and was recently up 8.5 percent at 12.64.
Earlier in the session, futures held on to steep losses after data showed filings for new U.S. unemployment benefits claims fell last week to one of the lowest levels since before the 2007-09 recession.
In other data, U.S. wholesale inventories rose in May, reinforcing the view that economic growth should surge in the second quarter following a weak start to the year.
(Reporting by Rodrigo Campos, additional reporting by Chuck Mikolajczak; Editing byBernadette Baum and Nick Zieminski)
But unexpectedly he asks the waiter to take away his cellphones, fearing Snowden-style eavesdropping. And then the scion of America’s most enduring banking family lets it fly: “I feel like citizens are fed up with banksters,” using a term the Occupy Wall Street crowd would surely approve. Politicians receive similar disdain: “We need to live in a more transparent, free democracy. The more secretive America becomes, the more dangerous it is.” The solution, Mellon says, is Bitcoin, and he’s invested $2 million to start an incubator for Bitcoin companies, convinced virtual currency will replace the dollar bill. “The banks are going to be scratching their heads,” he says, a smile encroaching on his high cheekbones.
A bit loony? Clearly. But in an ironic way, Matthew Mellon is exactly what his great-great-great-grandfather Thomas Mellon envisioned when he launched the family on what’s now a nearly two-century run of financial dominance. In scanning FORBES’ first-ever ranking of America’s Richest Families, one thing that stands out is how many of the great fortunes of the mid-19th century have dissipated. The Astors and the Vanderbilts, the Morgans and the Carnegies, none make the cut. Some of that is the result of generous, world-changing philanthropy. Some of it decades upon decades of wastrel heirs. Much stems from both. Amid this peer group, however, the Mellons stand out. Of America’s billion-dollar dynasties, only the Du Ponts are having a longer run, and they have a dominant family company perpetually generating the wealth. Not so with the Mellons, who have flaky heirs like Matthew plowing millions into fashion labels and Bitcoin startups, yet have nonetheless maintained a $12 billion fortune, the 19th-largest family net worth in America, one greater than the Rockefellers and Kennedys, combined.
Thomas Mellon
They’ve done this quietly. Most of the Mellons contacted declined to be interviewed for this story or would speak only on background “We’re happy being under the radar,” says Peter Stephaich, Matthew’s cousin, who owns a barge company in Pittsburgh. But the secret boils down to a family ethos that values one thing over all others: capital preservation. While the pitfalls of inheriting money without purpose have been well documented, Thomas Mellon himself put forward a tacit understanding that while spending was acceptable (Matthew Mellon’s pad at the Pierre is likely worth $7 million, and he likes to fly private), it came with the expectation that each generation push forward a bigger pile than he or she was given. While all the branches operate independently, they’ve almost universally employed smart tricks that minimize taxes, including generation-skipping trusts and making charitable contributions in stock. More critically, Thomas Mellon expected his progeny to be entrepreneurial, with the anticipated corollary that the process would fuel the American economic machine.
Other than that, there have been few covenants or restrictions, with nary a family office or annual meeting. The family mantra as he was growing up, Matthew Mellon recalls: “Intuition is the number one tool in the toolbox.” The result of all that decentralized intuition has been numerous companies, from banking to media to metals to energy, that have altered the face of American business.
The last time the do-it-yourself Mellon clan actually got together, a once-a-decade occurrence that happened four years ago, they went back to the roots of their success: a patch of land in County Tyrone, Ireland. It was here that Thomas Mellon was born to farmers in 1813. The family immigrated to America in 1818, settling into a dilapidated log cabin near relatives who arrived before them in a section of western Pennsylvania that would soon be proven a misnomer, Poverty Point.
His parents soon made their 160-acre lot prosperous. Thomas worked the ground alongside them, but when the plow horses needed a rest, he read Shakespeare in the shade. “The more I read and the more I saw, I was the more convinced that I might do better,” Thomas wrote in his autobiography.
He moved to Pittsburgh, studied law and married Sarah Jane Negley, in 1843–mother to a son, Andrew, and seven other children. He became a judge–forever after known simply as the Judge–and used his income to invest in real estate. He eventually used the returns from foreclosed properties and coal land to start a bank, T. Mellon & Sons. It opened in December 1869 with $10,000 in initial deposits, according to Mellon: An American Life by Princeton professor David Cannadine. Within three years he had $800,000. That little bank has grown into a cornerstone of what today is the $1.6 trillion (assets) BNY Mellon.
Later in life the Judge focused on what would become of his financial efforts. He disliked his contemporary Andrew Carnegie’s massive philanthropic efforts (though his son would give generously, eventually helping establish the National Gallery of Art), and instead split up his estate among his sons with the expectation that they grow the pile.
Just as Thomas had broken from the farming future his parents had in mind, Andrew, the family’s true empire builder, forged his own path: He became a turn-of-the-century venture capitalist. In 1889 Andrew made a $25,000 loan to the Pittsburgh Reduction Co., an aluminum manufacturer, and subsequently purchased equity in the company. Profits rose from $87,000 in 1898 to $322,000 in 1900–then quickly crested the million-dollar mark. The company today is known as Alcoa.
Andrew Mellon
A decade later he put $1 million into creating Union Steel. He sold it four years later to J.P. Morgan’s U.S. Steel, likely making at least $41 million on its sale. (He was later accused by the U.S. government of inflating assets on Union’s balance sheet.)
He also invested in the next generation: Andrew’s nephew William Larimer Mellon was as eager to prove himself as his uncle and grandfather had been. Seeded with $10,000 from the family coffers, he chased the Rockefellers into the oil business. That company wound up being Gulf Oil. Nearly a hundred years later Gulf Oil was sold to Chevron in 1984 for $13.3 billion; the Mellons appear to have held on to their shares after the sale, and their fortune was little changed at an estimated $2.5 billion.
Andrew served as U.S. Treasury Secretary under three presidents from 1921-32–credited for the Roaring ’20s, then blamed for the Great Depression.
When he died in 1937 he had amassed a fortune exceeding $280 million, more than $4 billion in today’s dollars, up from $50 million at the turn of the century–wealth created in ways his father had never considered. Today the idea of the Mellons as a “banking” fortune is, to the family members, an ancient notion. “Those who did own large positions in the bank’s stock have found better things to do with their money,” says Matthew’s uncle, James. “Some of us still benefit from trusts in the bank, but that’s the only relationship that we have to the institution nowadays. Frankly, banking has been a dud business for a long time.”
While the modern Mellons haven’t had grand slams along the lines of Alcoa, Gulf Oil or the eponymous family bank, they’ve followed through on the Judge’s request that they invest and diversify. Thomas Mellon Evans amassed a $290 million fortune and died in 1997 with a menacing epithet: “the Jaws of Business.” He started in the Gulf Oil stats department in 1931 and became one of the earliest takeover artists, buying more than 80 companies with a foolproof formula: He’d never pay more than their breakup value.
Skipping another generation ahead, Timothy Mellon started off creating a computer-programming company in the 1960s, then expanded into industries more typical of the late 19th century, building a New England railroad company, Guilford. Today he’s personally worth almost $1 billion.
Then there was Richard Mellon Scaife*. Scaife bought a small suburban paper in 1970, then grew it into today’s Pittsburgh Tribune-Review. Best known as the man who reportedly funded an ongoing effort to dig up dirt on Bill Clinton during the 1990s, Scaife is perhaps the most important media mogul in western Pennsylvania, with several local weekly newspapers and a stake in Newsmax, the conservative online newsmagazine. He was worth $1.5 billion when he died earlier this month from cancer.
Which brings us to Matthew Mellon, who is carrying on the family tradition of investing in far-flung personal business passions. Matthew’s father, Karl Mellon, was an absent parent for most of his childhood and later committed suicide, a subject he isn’t fond of bringing up. His mother, Anne, and stepfather, J. Reeve Bright, a once powerful GOP attorney and distant relative of Theodore Roosevelt, largely kept him in the dark about the Mellons and what he could expect in terms of inheritance.
Matthew and Nicole Mellon
So it came as a shock at age 21 when he inherited 14 trust funds worth an estimated $25 million. “There’s a saying: more money, more problems,” says Matthew. With little grounding in how to live up to the Mellon name or what to do with the money, he raced around southern California in a little black Ferrari, working ostensibly as a talent agent. He swam the bay at St. Tropez with the crown prince of Greece. (“He’s a really fun guy,” says Prince Pavlos.) He partied, enjoying scotch on the rocks and developing an addiction to cocaine.
Entrepreneurship found him at an Alcoholics Anonymous meeting in 1998, when he met Tamara Yeardye, who was building the shoe line Jimmy Choo. They married, and the Mellon genes soon had him dabbling, first with a Jimmy Choo men’s line, then his own shoe brand, Harrys of London, with shoes cushioned like a sneaker and fancy like a wingtip.
Harrys got some traction, but it proved a decade ahead of its time. “I think if it launched today it would be much bigger and have a more global appetite,” says Michael Atmore, editor of Footwear News . And recurring addiction–one investment was negotiated from a rehab pay phone–stunted sales, which today remain at $7 million. (He lost day-to-day management in 2005, and his marriage to Yeardye ended shortly thereafter.)
Still, the Mellon lessons had seeped in. (“You never touch the principal. And you try to spend 1% of your income that comes in. There are always surprises. Always emergencies. Always charities. Trust me, you end up spending 20% of your income.”) And as he got sober, he began investing: in an online art action house, Paddle8, alongside Alex von Furstenberg and Damien Hirst, and a YouTube channel called StyleHaul, which produces short movies on how to dress well.
And given his fashion chops (besides Jimmy Choo and Harrys, he dated Tory Burch in college), he’s at it again. With his new wife, Nicole Hanley, a former Ralph Lauren designer, he has started Hanley Mellon, with an e-commerce store selling chic women’s clothing, with $3 million invested in the past year or so.
Working from a living room adorned with two Warhols, Nicole is calling the shots on the fashion business, while Matthew focuses on the Bitcoin incubator, CoinApex, which plays into his antiestablishment worldview (he also once contributed to Julian Assange’s bail money).
For now it’s all pie in the sky, though Matthew insists he received a buyout offer in the ballpark of $20 million for the most promising one, Coin.co, a payment processor of Bitcoins the way PayPal handles a transaction between sellers and buyers in dollars. “Matthew is the kind of guy who’s very smart about attracting very talented people to help him figure it out,” says J. Todd Morley, founder of Guggenheim Partners and a longtime friend. “I know he’s been studying Bitcoin and talking to senior people in the industry.”
Already, though, there’s a shift in the way Matthew is perceived as a Mellon. His aunt, Rachel “Bunny” Mellon, died this spring. He went to Virginia for the funeral, one of the few events that can bring the Mellons together. At one point he struck up a conversation with one of Bunny’s advisors. “He said, ‘I can tell you that you’re on to something really huge. You could be the next Andrew Mellon in that space,’ ” Matthew recalls. “ Which I took as a huge compliment.”
Reach Abram Brown at abrown@forbes.com and Alex Morrell at amorrell@forbes.com.
This article and others like it are part of our new subscription. Learn More »
Photo
Jamie Dimon, the chairman and chief executive of JPMorgan Chase, in Detroit in May.Credit Charley Tines/Detroit News, via Associated Press
Jamie Dimon, the chief executive of JPMorgan Chase, was found to have throat cancer and will begin treatment shortly at Memorial Sloan Kettering Cancer Center, he said in an email to the bank’s employees and shareholders late Tuesday.
Doctors discovered the cancer at an early stage, Mr. Dimon said, noting that his condition is “curable.”
After a series of tests, Mr. Dimon, 58, said the doctors confirmed that the cancer had not spread beyond the “original site” and the adjacent lymph nodes on the right side of his neck.
Mr. Dimon assured employees at JPMorgan, the nation’s largest bank, that the prognosis from the doctors was “excellent.”
Mr. Dimon, who has held the dual roles of chief executive and chairman at the bank since 2006, has been atop JPMorgan longer than any other chief has led his rival banks. His tenure, which began when JPMorgan acquired Bank One, has been marked by triumph — the bank emerged from the financial crisis in better shape than its rivals — and by tumult.
The bank has worked to mend its frayed relationships with regulators — a painful reconciliation that cost it roughly $20 billion. In November, JPMorgan reached a record $13 billion settlement with a range of government authorities over its sale of questionable mortgage-backed securities in the lead-up to the financial crisis. The bank also reached a $2 billion settlement of accusations that it failed to sound alarms about Bernard L. Madoff’s Ponzi scheme.
JPMorgan has also been buffeted by the departure of several top executives. In the last two years alone, at least 10 senior executives have left JPMorgan. Most recently, Michael J. Cavanagh, once considered an heir to Mr. Dimon, left the bank in March to join the private equity firm the Carlyle Group.
In his annual letter to shareholders in April, Mr. Dimon stressed that despite the “constant and intense pressure,” he was proud of the bank’s resiliency and its resolve. Last year, JPMorgan earned $17.9 billion in profit despite the legal costs.
Mr. Dimon reiterated his faith in the leadership of the bank on Tuesday. He did not outline any plans to cede the reins of the bank while he undergoes treatment — a process that he said should last about eight weeks.
In his note, Mr. Dimon emphasized that the company “will continue to deliver first-class results for our customers.”
The illness of any chief executive naturally prompts questions about who is prepared to take over, at least for a little while. Mr. Dimon emphasized, throughout his note, though, that his treatment was “curable“ and that he would remain immersed in the day-to-day operations of the bank.
