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On Monday, Citigroup Inc. (C - Analyst Report) announced a settlement with 18 institutional investors resolving the representation and warranty repurchase claims relating to certain legacy Securities and Banking private-label securitization. The settlement will liberate Citigroup from buying back billions in residential mortgage-backed securities (RMBS) from investors.

As per the terms of the settlement agreement, Citigroup will offer $1.125 billion to the trustees of 68 Citi-sponsored mortgage securitization trusts along with certain fees and expenses. Notably, these 68 trusts issued mortgage-backed securities worth $59.4 billion between 2005 and 2008. Citigroup’s settlement awaits the approval of trustees and the court.

Following the settlement, Citigroup’s first-quarter 2014 earnings will be impacted by additional charges worth $100 million. However, Citigroup will remain exposed to other claims by investors including misrepresenting the value of securities by providing materially misleading statements related to RMBS and concealment of risks associated with these securities.

Similar actions have been taken against other banking majors, including JPMorgan Chase & Co. (JPM - Analyst Report), Morgan Stanley (MS - Analyst Report) and The Goldman Sachs Group Inc. (GS - Analyst Report). Notably, these banks have also paid huge penalties for settling such issues.

Our Viewpoint
 
Trouble has been brewing for the banks for quite sometime now. A slew of lawsuits have continued for major banks since the financial meltdown. Numerous lawsuits alleging banks of such wrongdoings are expected to tarnish their reputation and financials over time. With the settlement of the lawsuits, banks plan to move forward with their business strategies after attempting to end issues related to the financial crisis.

Moreover, pending lawsuits further trigger financial hassles while blemishing the company’s image. Therefore, it is in the interest of the company to resolve such matters at the earliest. However, investors and other financial institutions bearing the brunt of these faulty practices are expected to be fairly compensated.

The lawsuit settlement by banks stress on their efforts to resolve all mortgage related issues, and thereby reduce costs over the upcoming period. Moreover, such agreements will likely help revive the economy, and bode well for the company.

Citigroup currently carries a Zacks Rank #3 (Hold).

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