Citigroup Said to Face $10 Billion Request in U.S. Talks

The U.S. Justice Department has asked Citigroup Inc. for more than $10 billion to settle a probe into the lender’s sale of mortgage-backed bonds before the 2008 financial crisis, a person familiar with the negotiations said.

Prosecutors broke off talks with Citigroup on June 9 and are preparing to sue the New York-based bank after it offered less than $4 billion to resolve the matter, said the person, who asked not to be named because the discussions are confidential. The Justice Department could file a lawsuit as early as next week, according to the person, who also said the bank’s offer included about $1 billion in cash and the rest in consumer relief.

Citigroup shares fell 1.8 percent to $47.42 at 3:02 p.m. in New York, the worst performance in the 24-company KBW Bank Index.

The stance against Citigroup reflects a tougher approach by the Justice Department following criticism that it hadn’t done enough to punish large financial institutions for their role in the collapse of home prices and ensuing financial market turmoil. Prosecutors are demanding multibillion-dollar penalties from banks for wrongdoing including tax evasion and sanctions violations and have used the threat of lawsuits to reach settlements.

Similar Approach

The department is taking a similar approach with Bank of America Corp. Prosecutors also halted talks with the bank June 9 after it offered to pay more than $12 billion, short of the department’s $17 billion request, people familiar with the matter have said.

U.S. officials are seeking more than $10 billion from BNP Paribas SA to resolve a probe into transactions involving sanctioned countries, people familiar with the matter have said. The U.S. secured the largest criminal penalty in a tax evasion case last month with Credit Suisse Group AG’s $2.6 billion payment and guilty plea.

The settlement demands of Citigroup and Bank of America show that the U.S. isn’t only seeking high-dollar resolutions from banks outside the country, according to Erik Gordon, a professor at the University of Michigan.

‘Unfairly Punitive’

“The effect is to take some of the wind out of the argument that these numbers are unfairly punitive and outrageous,” Gordon said in an interview.

Citigroup is among at least eight banks under investigation by the Justice Department for misleading investors about the quality of bonds backed by mortgages as housing prices plummeted. Other banks that have faced scrutiny include Credit Suisse and Wells Fargo & Co. JPMorgan Chase & Co. agreed to pay $13 billion in November to resolve similar federal and state investigations.

Citigroup and the department have been negotiating a resolution since April, the person said. Associate Attorney General Tony West, who is overseeing probes of improper mortgage-bond underwriting by banks, told the bank in a phone call on June 9 that it wasn’t making acceptable offers, the person said. The Justice Department would consider an offer below what it has requested, according to the person.

Mortgage Debt

Mark Costiglio, a bank spokesman, and Brian Fallon, a Justice Department spokesman, declined to comment on the talks.

Citigroup sold about $91 billion of mortgage loans packaged into so-called private-label mortgage debt, which isn’t guaranteed or issued by government agencies, from 2005 through 2008, according to the bank’s annual securities filing.

Citigroup issued far fewer mortgage bonds than its largest competitors. Bank of America and firms it purchased issued about $965 billion between 2004 and 2008, while JPMorgan and firms it bought issued $450 billion, according to analysts at Sanford C. Bernstein & Co.

Citigroup ranked ninth among non-agency underwriters of mortgage-backed securities in 2008, and didn’t rank among the top 10 in the three previous years, according to data from Inside Mortgage Finance, a Bethesda, Maryland-based industry publication.

Since the 2012 creation of West’s group, Bank of America was sued in federal court in North Carolina in August, alleging the bank misled investors about the quality of loans tied to $850 million in mortgage-backed securities.

The department was prepared to sue JPMorgan last year after the two sides failed to reach an agreement, which led to a critical meeting -- and eventual deal -- between JPMorgan Chief Executive Officer Jamie Dimon and Attorney General Eric Holder.

(A previous version of the story was corrected to show the possible timing of a U.S. lawsuit.)

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