By Devlin Barrett and Christina Rexrode
The Justice Department has warned Citigroup Inc. that it plans
to file a lawsuit as early as next week against the bank if the
firm doesn't significantly raise its offer of less than $4 billion
to settle investigations into how the bank securitized mortgages,
according to people familiar with the talks.
The warning came in a Monday-night phone call between senior
Justice Department officials and lawyers for the bank, according to
one of the people.
The bank has offered less than $4 billion to end the Justice
Department's probe of how it packaged faulty mortgages into
securities for investors in the run-up to the 2008 financial
collapse, while the Justice Department is seeking a figure closer
to $10 billion, the people said.
In the negotiations, the bank has expressed skepticism it should
pay a larger sum because it wasn't heavily involved in the mortgage
business compared with other big banks, these people said. Justice
Department lawyers, however, have told the bank that the securities
Citigroup issued had a substantially higher percentage of bad loans
compared with the other banks, these people said.
The threat comes as the Justice Department is seeking a
record-breaking settlement from Bank of America Corp. for similar
conduct. Bank of America so far h as offered to pay $12 billion to
resolve the probes, according to people familiar with the
situation, but the Justice Department is pressing for billions
more.
A threat to file a lawsuit doesn't mean the negotiations are
over and could bring Citigroup back to the table, as evidenced by
discussions last year between the government and J.P. Morgan Chase
& Co.
At several moments during discussions that led to a record $13
billion settlement, government lawyers notified the bank it planned
to file a suit in hours or days, according to people familiar with
those talks. Each time, that brought the bank back to the
negotiating table, these people said.
It is possible the Citigroup talks play out differently because
the two sides have been far apart not just on numbers but on the
seriousness of the bank's conduct, according to people close to the
negotiations.
A lawsuit would add to the difficulties facing Citigroup this
year. In March, the Federal Reserve rejected the bank's stress-test
request to raise its dividend and buy back shares. And in February,
the bank disclosed what it described as an accounting fraud against
its Banamex unit in Mexico, which has raised questions about the
bank's ability to keep a handle on its sprawling global
operations.
Citigroup CEO Michael Corbat alluded to the Justice Department
negotiations during a May 29 analyst conference.
"The challenge of that is we don't get to pick the timing," he
said. "We've got to wait until the agencies and the enforcement
bureaus and so forth are wanting to engage with us... We'd love to
get this stuff behind us this year."
By size alone, Citigroup packaged and sold far fewer
mortgage-backed securities than its rivals.
Sanford C. Bernstein analysts calculate that Citigroup packaged
and sold $91 billion worth of private-label mortgage-backed
securities from 2004 to 2008, compared with $965 billion by Bank of
America or subsidiaries and $450 billion by J.P. Morgan or
subsidiaries.
Many of Bank of America's and J.P. Morgan's problematic
securities were made by companies they hurriedly bought in the
midst of the crisis: Countrywide Financial Corp. and Merrill Lynch
for Bank of America, and Bear Stearns and Washington Mutual for
J.P. Morgan. Citigroup, which teetered in the financial crisis and
required a double helping of government bailout loans, didn't make
a similar purchase.
And previous settlements with other agencies would suggest Citi
has less at stake than others. J.P. Morgan's $13 billion tab
included a $4 billion settlement with the Federal Housing Finance
Agency and a $1.4 billion tab with the National Credit Union
Administration. Citigroup has settled with those two organizations,
for far less than J.P. Morgan did: $250 million with FHFA and about
$20 million with the NCUA.
The status of the talks was first reported by Bloomberg
News.
Write to Devlin Barrett at devlin.barrett@wsj.com and Christina
Rexrode at christina.rexrode@wsj.com
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