Citigroup sued by investment management group Pimco and others for failed mortgages

The Citigroup (NYC. C) has been slapped with a lawsuit by German investment management firm Pacific Investment Management Co (Pimco) and a few others, seeking unspecified damages over the bank's failure in monitoring toxic securities worth US$13.8 billion (AU$19. 1billion) of mortgage loans that caused US$2.3 billion (AU$3.18 billion) losses to the investors.

The other plaintiffs included TIAA-CREF, an affiliate of Prudential Financial and Transamerica, reports Reuters.

“Citibank knew that the pools of loans backing the trusts were filled with defective mortgage loans that materially breached seller representations and warranties,” said the complaint.

It also mentioned the “abysmal performance” of the trust collateral which had "spiraling defaults, delinquencies and foreclosures,” reports Bloomberg.

Pimco is part of the Allianz SE of Germany and has a history of suing banks on mortgage trusts failures. A Pimco spokesman declined to comment.

The complaint, filed in a New York state court in Manhattan also mentioned the breach of the trustee that affected 25 private-label trusts during the period from 2004 to 2007 for ignoring "pervasive and systemic deficiencies" in the manner the loans were assessed or serviced.

The investors alleged that Citigroup overlooked the "abysmal performance" with self interest, fearing it might "jeopardise its close business relationships" with loan servicers like Wells Fargo & Co and JPMorgan Chase & Co.

Trustees are appointed by bond issuers to ensure prompt payments to investors. Their mandate is to do back-office work and sale of securities. Investors usually turn against trustees when they lose money from badly assessed mortgages and cry foul for evading responsibility in making lenders and bond issuers buying back such loans.

An expected response from Citigroup did not come with spokeswoman Danielle Romero-Apsilos refusing to make any comment.

Pimco predicts growth

Meanwhile, Pimco said its revenue would grow in 2016 with expansion in product offerings, noted Chief Executive Officer Douglas Hodge.

The assets of Pimco under management are estimated to be 1.32 trillion euros (AU$1.94 trillion) at the end of third quarter. This includes 985 billion euros (AU$1446 billion) managed for clients, in which 65 percent is in the Americas, 23 percent in Europe and 12 percent in the Asia-Pacific region, said the Allianz’s website.

The Pimco CEO said higher growth is happening outside the US market, mainly in non-traditional investments. He was speaking at a conference in Munich. Though clients are taking out money from traditional products such as Total Return Fund, they are willing to take more risk by increasing exposure in credit and income products, private debt and alternative assets, Hodge said, reported Bloomberg.

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