Citigroup Said Poised to End Mortgage-Bond Probe for $7 Billion

Citigroup Inc. and U.S. authorities will announce a $7 billion agreement as early as tomorrow to end probes of the bank’s sales of mortgage-backed bonds, according to a person with direct knowledge of the matter.

The deal, signed over the weekend, requires the firm to pay $4 billion to the Justice Department, about $300 million to state attorneys general and about $200 million to the Federal Deposit Insurance Corp., and to provide $2.5 billion in relief for consumers, the person said, asking not to be named because the talks are private. The settlement includes a statement of facts, outlining the allegations, the person said.

Citigroup, the third-biggest U.S. bank, was among lenders including Bank of America Corp. investigated by the Justice Department for allegedly misrepresenting the quality of mortgage-backed bonds sold to investors as housing prices plummeted. JPMorgan Chase & Co., the biggest bank, agreed in November to pay $13 billion to resolve similar federal and state probes. The government has sought about $17 billion from No. 2 Bank of America, a person familiar with those talks has said.

Mark Costiglio, a spokesman for New York-based Citigroup, declined to comment on the settlement.

Citigroup and government officials have been discussing a resolution since April, a person familiar with the matter said last month. Discussions broke down June 9 after the bank’s settlement offers failed to satisfy prosecutors, the person said. Government officials had demanded more than $10 billion to resolve the issue, while Citigroup raised its offer to less than $4 billion, the person said.

Libya Arrest

Citigroup’s lawyers had argued that the lender should face a far smaller penalty than JPMorgan because Citigroup sold fewer mortgage bonds, the person with knowledge of the deal said.

The government rejected that position, citing what it considered Citigroup’s level of culpability based on e-mails, internal bank documents and the rates at which loans backing its bonds soured, the person said. Investigators also focused on how Citigroup employees “waived” loans that were supposed to be subject to certain criteria for inclusion in the securities, the person said.

As talks stalled in mid-June, the Justice Department told Citigroup it was planning a news conference to announce a lawsuit against the company, the person said. The arrest of a suspect in the attack on the U.S. embassy in Libya prompted government prosecutors to temporarily postpone the announcement, concerned that the news from Benghazi would overshadow the Citigroup case, the person said. The bank and investigators reached a deal in the weeks that followed.

Tougher Approach

The New York Times reported earlier today on how the settlement would be divided, and the negotiators’ positions during the talks.

From 2005 through 2008, 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, according to the bank’s annual securities filing.

The Justice Department has taken a tougher approach after drawing criticism that it hasn’t done enough to punish large financial firms for their role in the collapse of home prices and the turmoil that began in 2008. Prosecutors have also won multibillion-dollar penalties from banks for wrongdoing including sanctions violations and helping clients evade taxes.

On June 19, Charlotte, North Carolina-based Bank of America was ordered by a federal judge to face two government lawsuits in which it’s accused of misleading investors about the quality of loans tied to $850 million in residential mortgage-backed securities.

BofA Negotiations

The Justice Department broke off negotiations last month because it was dissatisfied with Bank of America’s offer to pay more than $12 billion, which included at least $5 billion in consumer relief, the person familiar with the discussions said at the time. The department’s latest settlement request was for about $17 billion, the person said.

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.

Citigroup is scheduled to report second-quarter results tomorrow before U.S. markets open. Net income is expected to fall 19 percent to $3.37 billion from a year earlier, according to the average estimate of 11 analysts surveyed by Bloomberg.

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