Citigroup's Bad Bank Drives Second-Quarter Profit Despite Mortgage Settlement

NEW YORK (TheStreet) -- Citigroup (C) was able to post a second-quarter profit even after announcing a $7 billion settlement with the U.S. Department of Justice, Federal Deposit Insurance Corp. and states attorneys general surrounding the bank's packaging of residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) written during the housing bubble of 2003 and 2008.

Citigroup's earnings were buoyed by a smaller-than-expected slump in the firm's fixed income currency and commodity trading revenue and a turn to profitability in its run-off portfolio, CitiHoldings.

Chief Financial Officer John Gerspach said on a call with the media that the bank's markets business benefited from a stronger-than-expected close to the quarter as political tensions in Europe dissipated. "Tensions eased regarding Russia and the Ukraine ... You actually saw a relief rally," Gerspach said.

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On Monday, Citigroup reported a second-quarter profit of 3 cents a share on revenue of $19.3 billion. Excluding Citigroup's settlement with state and federal regulators, which consisted of a $4 billion civil monetary payment to the DOJ, $500 million to state AGs and the FDIC, and $2.5 billion in consumer relief, the bank earned $1.24 a share for the quarter.

The bank took a $3.8 billion charge to its CitiHoldings business as a result of the settlement, which the bank said resolves "all pending civil investigations related to our legacy RMBS and CDO underwriting." Only $500 million of the settlement and costs related to the bank's consumer relief is tax deductible. As a result, the firm utilized approximately $1.1 billion of deferred tax assets in the second quarter.

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