Citigroup, BofA Said to Face U.S. Lawsuits as Talks Stall

Citigroup Inc. and Bank of America Corp. are facing the prospect of being sued by the Justice Department after officials broke off talks aimed at settling probes into the banks’ sales of mortgage-backed bonds.

Justice Department officials suspended negotiations with the banks June 9 because they’re unsatisfied with the offers, said a person familiar with the discussions who asked not to be named because they are confidential. A civil lawsuit against Citigroup could be filed as early as next week, the person said.

The department has asked for more than $10 billion from New York-based Citigroup and $17 from Bank of America, though prosecutors are willing to consider proposals below those amounts, the person said. Bank of America has offered about $12 billion while Citigroup has put forward less than $4 billion, the person said.

“Even though talks have broken off, it doesn’t mean they can’t be restarted,” after lawsuits are filed, said Matthew Axelrod, a former senior Justice Department official whose firm is handling lawsuits against banks, including Bank of America and Citigroup, over mortgage-backed securities.

The Justice Department is taking a tougher approach following criticism that it hadn’t done enough to punish large 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.

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.

The settlement demands of Citigroup and Bank of America, which is based in Charlotte, North Carolina, 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 Justice 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 a proposal below what it has requested, according to the person.

Mortgage Debt

Mark Costiglio, a bank spokesman, and the Justice Department’s Brian Fallon 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 acquired 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 wasn’t 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 Chief Executive Officer Jamie Dimon and Attorney General Eric Holder.

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