By Devlin Barrett, Dan Fitzpatrick and Christina Rexrode
WASHINGTON--The Justice Department and Citigroup Inc. plan to
meet next month in the opening salvo of multibillion-dollar
settlement talks aimed at ending probes into how the bank handled
shoddy mortgage-backed securities, according to people familiar
with the matter.
The scheduled meeting will be the first chance for each side to
put a number on a potential settlement, but in the past such
numbers have been far apart, representing little more than starting
negotiating positions.
The Justice Department hasn't yet floated a number with the
bank--which has already settled several other mortgage-related
lawsuits--but an agreement could tally in the billions of
dollars.
The discussions, which center on the bank's sale of residential
mortgage-backed securities, are part of a continuing push by the
Justice Department to bring big banks to heel for activities that
regulators and law enforcement believe contributed to the 2008
financial crisis.
The Wall Street Journal reported earlier this month that the
Justice Department and Bank of America Corp. are also in
multibillion-dollar settlement discussions over that firm's role in
securitizing mortgages. According to people familiar with those
talks, government negotiators suggested a roughly $20 billion
figure at a meeting in March--a figure described by some of those
involved as an opening marker, not a serious offer.
Discussions between the banks and the Justice Department are
following a familiar pattern, with government officials floating a
fairly high price tag at the start as a way to push banks into
resolving the probes quickly and without requiring drawn-out
deliberations.
Last year, the Justice Department initially suggested a $20
billion price tag with lawyers for J.P. Morgan Chase & Co.
before they eventually settled for $13 billion.
The Citigroup and Bank of America talks are being handled
separately, but in each case, a settlement is far from guaranteed.
If the government cannot agree to terms, it then would have to
decide whether to file a lawsuit over the conduct.
Bank of America and Citigroup have already settled many of the
lawsuits that were part of J.P. Morgan's $13 billion settlement,
although Citigroup's payments have been significantly less.
The Justice Department's mortgage-related probe is perhaps the
biggest remaining wild card that Citigroup still needs to settle as
part of a raft of postcrisis mortgage-related litigation. This
month, it agreed to pay $1.13 billion to private investors who
bought mortgage-backed securities the bank packaged and sold. Last
year, it paid $250 million to settle similar allegations from the
Federal Housing Finance Agency, which regulates mortgage giants
Fannie Mae and Freddie Mac. It's also been part of industrywide
settlements over how banks foreclosed on home buyers.
Citigroup is a smaller player in mortgages than J.P. Morgan or
Bank of America, and its mortgage-related settlements have also
tended to be smaller, sometimes significantly. The bank's
litigation costs from 2011 through 2013 were more than $7 billion,
according to Barclays analysts, far less than J.P. Morgan or Bank
of America. But the amount it could still pay above existing
reserves is $5 billion, which is tied for second largest behind
Bank of America.
Analysts at Sanford C. Bernstein & Co. calculate Citigroup
issued $91 billion in private-label, mortgage-backed securities
between 2004 and 2008. They estimate that Bank of America and its
subsidiaries issued $965 billion during that same period, while
J.P. Morgan and subsidiaries issued $450 billion.
A significant portion of Bank of America's mortgage-backed
securities were made by Countrywide Financial Corp., which it
bought in 2008. A significant portion of J.P. Morgan's securities
were issued by Bear Stearns and Washington Mutual. J.P. Morgan
purchased Bear Stearns Cos. and banking operations of Washington
Mutual Inc. in 2008.
Bernstein analyst John McDonald estimated a Citigroup settlement
with the Justice Department could amount to about $3 billion in
cash payments, plus $2 billion or more in consumer relief, for a
headline number of $5 billion or more.
Wall Street's biggest banks are being investigated by a working
group at the Justice Department, which has been slowly building
civil cases related to the securitization of mortgages and looking
to see if bank officials cut corners to meet the demand at the time
for new investment offerings.
Individual investigations have been farmed out to U.S. Attorney
offices around the country, and a number of state attorneys
general, including New York's Eric Schneiderman, are also
participating in the effort.
U.S. Attorney General Eric Holder has pledged to resolve a
number of such cases before he leaves the Justice Department.
Write to Devlin Barrett at devlin.barrett@wsj.com, Dan
Fitzpatrick at dan.fitzpatrick@wsj.com and Christina Rexrode at
christina.rexrode@wsj.com
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