Citigroup Inc. (C) is in talks with the Department of Justice (DOJ) to pay more than $7 billion to resolve several litigations and probes related to its pre-crisis mortgage practices. This was first reported by the Wall Street Journal on Tuesday. Notably, the announcement of the deal is expected earlier next week.
The charges were imposed on the bank for allegedly providing mortgages to ineligible customers and sale of mortgage-backed securities (MBS) to investors without disclosing the associated risks.
Notably, approximately $3 billion of the total settlement amount will be used to provide consumer relief in the form of principal reductions along with payments to certain state attorneys-general, among others. The remaining amount will be paid in cash as penalty to the regulatory authorities.
Citigroup is striving hard to bring an end to the litigation issues and move forward. However, close sources stated that the settlement amount could rise to $10 billion, as negotiations are still in a preliminary stage.
Citigroup, while challenging the penalty, stated that as it had issued a lesser number of MBS compared to other banks facing similar claims and it is not required to pay such a huge settlement amount. However, the DOJ countered this argument by asserting that though fewer in number, the MBS issued by Citigroup had significantly more bad loans.
The negotiations to end probes into the shoddy mortgage practices of Citigroup along with Bank of America Corporation (BAC) have been going on for quite some time. However, the discussions hit a deadlock for BofA after the DOJ refused the offer made by the bank in order to settle the inquiries.
We believe that the DOJ has taken a tough stance. This indicates that the regulators are not being lenient with the Wall Street biggies for letting the taxpayers suffer due to their wrongdoings. Earlier, in Nov 2013, JPMorgan Chase & Co. (JPM) had announced a $13 billion settlement with several law enforcement agencies to end all the ongoing and probable civil claims related to the sale of MBS.
One of the primary reasons behind the urgency of the major banks including BofA, Citigroup, JPMorgan, Morgan Stanley (MS) and Credit Suisse Group AG to settle the probes is to avoid the lengthy court proceedings and continued ambiguity, which could be damaging to the financials. Further, the banks may have to pay more in the future than what the regulators are demanding now.
Currently, Citigroup carries a Zacks Rank #3 (Hold).
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