Government Tells Citi to Raise Mortgage Settlement Offer - Update

By Dow Jones Business News, 
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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

Subscribe to WSJ: http://online.wsj.com?mod=djnwires


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