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Financials in focus: Citigroup rejected, B of A settles and Ally preps for IPO

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The Federal Reserve rejected Citigroup’s (C) plan to raise dividends and increase stock buybacks. The Fed’s decision, part of annual bank stress tests, was based on weaknesses in Citigroup’s plans for how it would handle a future recession. Citi now has 90 days to address the deficiencies identified by the Fed and submit new plans. Twenty-five other banks passed the stress test, including Bank of America (BAC), but B of A had other problems to address this week, including settlements relating to the financial crisis and its acquisition of Merrill Lynch in the midst of the meltdown.

Bank of America agreed to pay $9.5 billion to settle mortgage claims with Fannie Mae and Freddie Mac and the Federal Housing Finance Agency. B of A also agreed to pay $15 million to settle a civil suit alleging the company misled shareholders about Merrill Lynch’s finances before rushing to acquire the company in 2008. Former CEO Ken Lewis also agreed to pay $10 million, which Bank of America will cover, and accept a three-year ban from working for any public company.

Meanwhile, the Treasury Department this morning announced it would launch an initial public offering of Ally Financial as the next step in unwinding its ownership stake in the company. Treasury said it will sell 95 million shares at $25 to $28 each in an initial public offering worth $3.06 billion. Ally, formerly known as GMAC, received a $17 billion government bailout during the financial crisis. The Treasury has since recouped most of that money. After the IPO, the government will still hold about 80 million shares of Ally Financial.