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$7,000 to settle a federal administratio investigation --to pay $7 billion settlement including a record-breaking $4 billion penalty for its role in the 2008 financial crisis. in a press conference at the department of justice attorney general erik holder called the terms appropriate. >> the bank's misconduct was egregious, and the bank has admitted to misdeeds in detail. the bank's ms. deeds contributed to shattered lives around the country and around the world. >> reporter: it comes from tense negotiations between the government and the bank an and it's investigation of toxic

mortgage securities. >> they sold defective loans including federally insured financial institutions. made false statements to investors, marketing materials and even in documents filed with the securities and exchange commission. the investigators and the public were led to believe that these financial products were in compliance with the law, which is often not the case. >> reporter: $4 billion in fines goes to the justice department. $2.5billion will fund consumer aid programs including principle reductions and other relief options for homeowners and communities, and $500,000 goes to five states and the federal don't corporatio insurance corporation. but it does not protect the bank or employees from further criminal charges.

in a statement: >> back in november there was a settlement with jp morgan bank, and now bank of america, the country's second largest bank. holder touch odd than investigation in his press conference. >> the investigation will remain open, we'll continue to move forward guided by the facts and guided by the law to achieve justice for those affected by the financial crisis. these investigations are not only about holding those who violate the public trust to account, but they're also intended to deter banks from participating in this kind of con be duct in the future. >> reporter: the settlement with citigroup represents half of the bank's $13 billion in profits

last year. >> citigroup reportedly wanted to settle the case for $363 million based on what says its share of the mortgage security market was at the time. but the government held out for billions. joining us now to discuss the citigroup settlement and what it means for consumer and wall street reform in stanford, california, professor of economics at stanford. author of "what's wrong with banking and what to do about it." here in studio, mark calebria. and in new york, matt zitlan, business reporter for buzz feed. matt, kick the conversation off for us. how significant is this settlement? >> i think the most significant part is the civil penalty that citigroup has to pay $4 billion of the total $7 billion that's going to the justice department. and that's the largest civil penalty from a bank.

for example, jp morgan paid $2 billion even though they had a much larger security business before the financial crisis. >> so $2.5 billion for aid to struggling consumers, what will it do? >> well, i'm not sure how they're going to administer this, but the question is why they need to go through this length to help consumers to settle debt that presumably some of these consumers quite quite handle. it would an corporate relief to people who are

. >> i don't know how to judge these amounts of money. they're very large amounts of money and small amounts 6 money when considering the size. >> it's not really very much money, i don't think it will go to the heart of the problem. that's the real issue. what exact way does it deter of those who were described by mr. holder. >> mark, does it get to the heart of the problem? does the settlement of this nature deal with it? >> i don't think it really does. you start with the basic principle, the wrongdoer should pay, and the people who were wronged should receive.

people who were paid were the shareholders. as far as i can tell not one single executive , and then the money transferred. this is about investors. that's who the fdic represents. but most of the money is going to consumers. some of it is going to real estate construction. my suspicion most of the money going to consumers who are with citibank already, and it will be recognition of loans that they're not going to recover any how. they're going to do a reduction on a loan that we're not going to get back any how. to me it sounds bigger than it is. the civil money penalty is the big item. of course part of that is actually tax deductible. how much of that will they pay out in cash is an open question. probably closer to $2 billion in cash, but again it bothers me that most of this--there is more

money going to the government than to investors or consumers, which are supposed to be the parties harmed here. >> put it in context for us. how significant of a chunk of change is this for citigroup itself? >> i think it actually is pretty significant. this morning citigroup reported earnings for the second quarter, and they fell off some--their profits fell 96% from second quarter last year. they only earned $131 million. that's money that could be going to shareholders, money that could be going to fund operations in the bank and they are putting forward a sizable chunk of cash . >> how much money they would pay to the government as part of this settlement, they were talking about hundreds of millions of dollars. hey, this wasn't all of our fault. how do they get to that $7 billion, matt? >> it's always a little mistous because these settlements like

with the jp morgan one last year, they're negotiated between the banks' lawyers and the justice department, they reach some mutually agreeable figure. one thing that is strange is that security groups share before the financial crisis in the settlement covered is smaller than jp morgans, but they're paying larger civil penalty. one reason people think that is because of the behavior described does seem egregious. you have employees who are made aware by a third party firm about the deficiencies in these pools of mortgages that they're selling to investors, and then they describe those mortgages more optimistically to the investors than they know what is happening. when you have that type of damning evidence it's easy for the justice department to bring up the tab on one of these settlements because everyone

wants to avoid a long long, drawn-out trial. >> how significant is that to you? we're not talking about the heydays of investing, we're talking about wrongdoing, about banking on things that really weren't true assets. >> oh, it's a slap on the wrist. i agree with mark there, who actually did this? who are these employees? and how are they impacted? and what does it mean for the future? it seems pretty far off to say well, it's the cost of doing business. we're going to make money in all kinds of ways, and you know, times things don't work out, and then we have to pay a penalty. it really doesn't, again, get to the heart of the problem. what were their incentives, why did they do that? you can sort of imagine why it works for them. it worked for

the firm at the time and that's what they could see. now the shareholders, and the shareholders have to deal with it, and those who did it really didn't pay any much consequences. >> maybe if i can reconcile a little bit what they're saying. you can have a large number. i do think it's percent of earnings, and of course they're using numbers that let you leverage, this is based on how many harm the banks dealt. so the $500 million is based on how much money did banks that were insured by the federal department insurance commission lose. so the investor who is being taken advantage of are other banks, really. that's how they contemplated the damaged. and then of course there is possibility there. the point i want to make will can a large number but it can't

be a deterrent if it is not changing the behavior of the individuals. it's a large headline number. again, if you were the executive of a bank, and they told you that option a was to give us very large check of the shareholders money or option b, go to jail. i think they're going to take option a. >> when we come back we'll look at what is next. the possibility of bank of >> on tech know, >> what if there was a miracle? >> grace's stem cells are in this box. >> that could save the live of your child... >> we're gonna do whatever we can >> would yo give it a try? >> cell therapy is gonna be the next big advance in medicine >> tech know, every saturday go where science meets humanity. >> this is some of the best driving i've every done, even though i can't see. >> tech know. >> we're here in the vortex. only on al jazeera america.

you

welcome back to "inside story", i'm libby casey. on this edition of the programme we are talking about the $7 billion settlement between city group and the department of justice. now, the government is in negotiations with bank of america. let's talk about how today's deal may exact the talks. >> bank of america, what are we looking at in terms of what it may be facing? >> it's hard to say. one thing we can be sure of it will be larger than what city

group and jpmorgan paid last year. there's a feeling in the justice department that the jpmorgan settlement was too small. and bank of america had a mass if mortgage-backed security accusation, especially if you count the activities of merrill lynch, a mortgage broker company that it provided and some of the most egregious forms selling bad mortgages on in mortgage-backed securities. you can expect settlement in the mid to high teams. >> mark, what will you watch to come out of this? >> there was app important part of framework, that a third of this will go for consumer application, payments. then, you know, the larger part will be a pay out to d.o.j. i'll be curious with the numbers.

i think b of a have been successful that it bought itself into the argument with country wide. i don't think it will be as high as mat mentioned. it's too early to tell. city and b of a - you have to keep in mind all the bailouts, the assistance provided in 2008 and 2009. everybody else was a minor in the scheme of things. this was about the two banks, the two most significant in terms of moving forward. >> what will the government get out of the settlement with bank of america as we look forward to the next steps. >> i don't have a thought about that. but they are the two most disturbing institution, banks of america, that it continues to be around leeman, where they were probably insolvent multiple

times is itself a problem. i want to bring up a different possibility, and what is in the credit suisse settlement on a different issue, it appears the government wanted to get into, or the attorney-general in new york, wanted to get into what the governance is in the organization, and i wonder whether it makes sense to make sure for the future, sense these recommendations, these corporations bought, or themselves were involved in these deeds, how it will not happen again, how they will put in place control systems that will make sure it doesn't happen. if they can't figure out the governance, maybe the regulators may have to consider that. >> are we seeing the components in that. >> usually the d.o.j. appoints a monitor to oversee the

settlement, especially with the consumer aid. we are not talking about a little more extensive, getting into the nuts and bolts of how the bank is organised. i don't think you see as much willingness do do that like for big banks. >> what does it mean for the banks? >> i think that the bank has a lot of stakeholders, and it seems clear that governance may not be working at the corporations. governance is a problem. it's a particularly severe problem in the biggest of banks, who get to play with a lot of people's money, who have no voice in governance, and, in the end, consumers and everyone is involved in this in one way or another. so i think there is something broken in this system in the fact we see wrong doings, this coming from the financial industry, and not just in the

form. financial crisis, but going on, probably all the time. >> we heard that talk about governance, what does that mean. >> it raises a point, we have seen the repeated behaviour. it's easy to paint a broadbrush, but the reality is how many times do be bail out citibank. every decade or so we bail out them. most do well. ones don't. you aren't seeing the changes. with b&p, the request was that 30-some executives would leave the bank. it was agreed to. we are not seeing any changes. certainly with both citibank and bank of america there has been leadership changes since the crisis. >> let's dig in to what the picture would be when we talk about criminal charges. when the government is not closing the door on bringing

criminal charges at the bank, talking about citigroup. they haven't closed the door bringing in criminal charges. is it too late for that shoe to drop? >> i think if we saw substantial criminal charges against executives of large banks, we would have seep them or gotten an indication that there was a criminal charge coming. we are running out on the statute of limitations. a lot of stuff happened in 2006 and 2006. there's not a clear roadmap. i understand why they are not ruling it out and why they are gig it away in a settlement. it is likely we'll see something like that. >> how different is it bringing a criminal charge compeared to the civil penalties. >> it depends how you look at it. if you bring a criminal charge,

you are insent vicing the individuals that do bad behaviour, not to do it - people in similar situations not to do it in the future. when you read the settlements you see a problem that seem to be systematic. you know, it seemed like everyone involved in the mortgage-backed security process was kind of overstating the qualities of loans they were selling to investors. with the systematic problem, the best way to deal with it is to address it, and impose a fine and discipline on the corporation as a whole. it's not obvious that bringing a cal charge would make things better. in the s&l crisis we put plenty of bankers in gaol. it didn't necessarily solve the problem. we'll take a break. when we come back, we talk about deterrence, how do you deter bad business practices in banking. stay tuned to "inside story".

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>> welcome back to "inside story." i'm libby casey. it's five and a half years since the financial crisis that started the great recession and the government is still investigating the banks. jp morgan and citigroup have stole settled for a total of $20 billion, the housing and economy is slowly coming back, but what has changed since those days before the crash. still with us, professor of finance and economic at stanford. mark, director of financial regulation studies at the kato institute.

and from new york, business reporter for buzz feed. professor, let's start with you. have things significantly changed since before the great recession? in terms of banking practices and what is happening? >> it is disturbing how little has changed really. we're talking about lots of things, but when you look at the bottom line of everything it's really disturbing how much the same everything is. >> mark, do you agree? >> i largely agree. by and large--i would even go as far as saying in some areas things are worse. >> yes. >> things are worse than before the crisis? >> why? >> certainly if you look at markets and what didn't seem like in 2007 saying that these big banks were given that much of an advantage. during the crisis that expanded. it's contracted a little bit,

and all indicators are that it's driven by a perception of being bailed out. and i think quite frankly dodd frank i don't think anybody would let it happen today. >> not just in the economy but in the banks themselves, are people cynical at this point? >> i think people are cynical, and i think mark is completely right. in a lot of ways you can point to specific ways in which this situation is worse. and and a big huge problem and remains so, and it makes these banks particularly reckless. i think there were practices that were often not appropriate, their lending decisions are all distorted. >> how so? >> well, they behavior, they're lending too much and too little at the same

time. they were part of different kinds of lendings. they responded to their own indebtedness a behaving in ways that shows significant overhang of debt, and the fact that they can benefit from the upside and leaving the down side to others and pass their costs to others. the nor they grow, the more that's the case. i think people are not trusting the banks, and i think they're right not to trust the banks . >> as they talk about the justice department's settlement, and they hope that this would deter banks from bad behavior in the future. what is the aim? >> i think the deterrent

question is interesting. citigroup made a settlement in how it's contributed loans to investors and backed securities. there is much less lending to at-risk borrowers that really drove the housing boom. when those loans soured, and then drove the financial crisis. the market reality as well as new regulation the justice department did not have a role did change how the mortgage industry worked. as for deter represents in the future every large bank has more time and money on compliance, more single people would say they're trying to meet the letter of the law and their behavior hasn't really changed. maybe when i talk to bankers, they're talking about what they are not able to do, it sounds

like this has really abated since the financial crisis. >> what does this mean for someone trying to buy a house? >> i think for the meantime time the difference is we'll see again the housing crisis will go up. we're not quite there yet. for the next few years it will be difficult for marginal borrowers to get credit. after that, we have not cured the business cycle or lipping cycle. it's still with us and if anything we made it worse. >> we'll leave it there and that brings us to the end of "inside story." our program has come to an end but the conversation continues. send us your thoughts on facebook page or twitter. and you can reach me directly @libby casey. we'll see you for the next "inside story."

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