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 firstname.lastname@example.org, Dan Fitzpatrick at email@example.com and Christina Rexrode at firstname.lastname@example.org