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TheStreet Open House

Citigroup Mortgage Settlement Sparks Debate

NEW YORK (TheStreet) -- Citigroup  (C) reached a $1.125 billion legal settlement tied to $59.4 billion in residential mortgage backed securities after the market closed Monday, but analysts can't agree on whether the bank faces substantially more exposure to the issue.

Citigroup shares were flat to slightly higher in the first half of trading Tuesday, in line with the broader market. Shortly after noon, the shares were up 0.24% to $46.66.

Keefe Bruyette & Woods analyst Fred Cannon, who has a market perform rating on Citi, wrote in a report late Monday that "legal costs will remain elevated" for the banking giant. He notes that "the settlement explicitly excluded $24.6 billion in securities issued through Citi's consumer mortgage business, CitiMortgage."

Further, Cannon states that "the agreement does not release investor claims relating to alleged misrepresentations in the offering documents."

In addition to the $24.6 billion figure cited by Cannon, Morgan Stanley analyst Betsy Graseck notes $4 billion in exposure tied to a separate Securities and Banking division of the bank, which has since been reorganized. Still, Graseck, who has an "outperform" rating on Citi, believes future settlements by Citigroup will be at least as cheap as this one, which she points out, cost the bank just 1.9 cents on the dollar. At that rate, future settlements would cost $542 million.

"But we think Citi has largely reserved for that and any risk of incremental reserving is more than covered by our legal reserve build estimate of $3.1b in 2014," Graseck writes.

KBW's Cannon contends the agreement reached by Citigroup with plaintiffs' law firm Gibbs & Bruns is "in line with"ones the same law firm reached with Bank of America (BAC) and JPMorgan Chase (JPM). The Bank of America mortgage settlement is still awaiting final approval from a judge, however, as some investors, most notably AIG (AIG) continue to push for a better deal.

Morgan Stanley's Graseck points out a "noticeable difference" in that Citigroup's settlement does not resolve claims over servicing, as the Bank of America and JPMorgan ones did.

Graseck wonders whether Citi made a "strategic move" to "'fast-track' the settlement given release of servicing claims is stalling [Bank of America's] settlement"


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