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Citigroup and the Justice Department are nearing a deal that could cost the bank roughly $7 billion to settle a civil investigation into the sale of mortgage investments, people briefed on the matter said on Tuesday.
The settlement, which is expected to be announced within the next week, caps months of negotiations that grew so tense in June that the Justice Department threatened to sue if the bank did not agree to the government's proposed penalty. The deal, which would be made up of a monetary penalty and relief for homeowners, would remove a huge legal obstacle that has been weighing on the bank's share price and casting a shadow over its future.
At one point in the talks, the government demanded that Citigroup pay $10 billion. While the settlement will fall short of that demand, the bank will still pay more than once expected.
The two sides are still working out some details. Citi is expected to pay roughly $4 billion in cash, according to a person briefed on the matter. The remainder of the $7 billion would include so-called soft dollar penalties, including mortgage modifications and other forms of relief to homeowners, and possibly payments to state attorneys general involved in the case.
The total amount will almost certainly exceed the $2 billion that some Wall Street analysts initially estimated that Citigroup would be liable to pay, though more recent estimates have put the number closer to $6 billion.
In trying to divine a possible settlement amount, bank investors are trying to determine whether Citigroup has adequate legal reserves to cover the cost or whether this penalty could cut into its bottom line.
More broadly, the bank is seeking to put to rest the issues lingering six years after the financial crisis while it grapples with new challenges posed by a costly fraud in its Mexico unit and its failure to pass the Federal Reserve's so-called stress test.
The large settlement shows how the government has been able to ratchet up the amount of money it can demand from banks for their roles in selling securities tied to shoddy mortgages whose values plummeted during the financial crisis.
Citigroup was not nearly as big a player in this business as JPMorgan Chase, which agreed to a $13 billion settlement with the Justice Department last year.
Lawyers for the big banks say privately that federal prosecutors appear to have scrapped the model used in that case and are demanding penalties that are far more punitive than what JPMorgan paid.
The Citigroup deal raises the stakes for Bank of America, which is expected to be the next large bank to settle its mortgage case with the Justice Department. Talks between the bank and federal prosecutors have largely gone dormant in recent weeks as the Justice Department focused on resolving its case with Citigroup, people briefed on the matter said.
Bank of America also faced the threat of a lawsuit by the Justice Department when their settlement talks stalled over how much the bank should pay in penalties for mortgage securities sold by its Merrill Lynch unit. The bank has said that it tried to back out of its acquisition of Merrill in the depths of the financial crisis but felt pressured by regulators to go through with the deal.
Now, with the Citigroup matter almost settled, the talks between the government and Bank of America will most likely heat up, the people said.
The resolution of the Citigroup case comes as the bank prepares to release its second-quarter earnings on Monday. Analysts say the bank is benefiting from an improving economy in the United States but remains hamstrung by its legal issues.
"We would be more constructive on shares of Citigroup if the company could put outstanding litigation issues behind it in the near term," analysts at Keefe, Bruyette & Woods wrote in a research report on Monday.
The Wall Street Journal earlier reported the possibility of a $4-billion settlement.
©2014 The New York Times News Service
