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Citigroup mortgage talks, like Bank of America’s, are at an impasse

By Michael Corkery
New York Times

Talks between the Justice Department and Citigroup have deteriorated in recent days, as the two sides are deadlocked on how much money the bank should pay to settle a civil investigation into its sale of shoddy mortgage investments.

The Justice Department has told Citigroup’s lawyers that it plans to sue the bank unless the two sides can reach an agreement before then, people briefed on the matter said. That lawsuit could come as soon as next week, one of the people said.

The standoff sets the stage for Citigroup to be among the first large banks to fight the Justice Department’s findings in court rather than seek a settlement – a development that would carry risks for both sides.

Similar tensions have derailed negotiations between the Justice Department and Charlotte-based Bank of America this week, increasing the likelihood that federal prosecutors will file a lawsuit in that case as well.

In settlement talks that have dragged on since April, Citigroup has argued that it sold only a fraction of the mortgage-backed securities as other Wall Street banks, people briefed on the matter said. Yet, federal prosecutors are demanding penalties that far exceed the losses suffered by investors in the securities.

The government’s proposed penalty of $10 billion dwarfs the $1 billion to $2 billion settlement that many Wall Street analysts have expected Citigroup to pay, people briefed on the matter said. The Wall Street estimate is based on the Justice Department’s $13 billion settlement last year with JPMorgan Chase.

The JPMorgan settlement in November was regarded by banks as a template for settlements with other large banks like Citigroup over investigations to questionable mortgage investments before the housing bust.

But lawyers for some big banks complain privately that federal prosecutors are demanding penalties that are far more punitive than the $13 billion paid by JPMorgan.

Banks have little leverage in negotiations with prosecutors. At the same time, by agreeing to pay massive penalties, the banks risk alienating their shareholders, who will ultimately have to pay much of the costs of any settlement.

But testing the courts could also prove risky. A guilty verdict could mean even stiffer penalties than prosecutors have proposed in settlement talks. And a prolonged trial could drag out potentially damaging documents and testimony from executives, setting back the banks’ progress in regaining the trust of regulators and the public.

For its part, the Justice Department has a mixed track record in proving wrongdoing by banks in the lead up to the financial crisis. Losing a high-profile trial against Citigroup or Bank of America could sully the Justice Department’s reputation for cracking down on mortgage misdeeds that contributed to the financial maelstrom of 2008.

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