Citigroup is among at least eight banks under investigation by the US Justice Department for misleading investors about the quality of bonds backed by mortgages as housing prices plummeted

Bloomberg

Washington

Citigroup and Bank of America Corp are facing the prospect of being sued by the Justice Department after officials broke off talks aimed at settling probes into the banks’ sales of mortgage-backed bonds.

Justice Department officials suspended negotiations with the banks June 9 because they’re unsatisfied with the offers, said a person familiar with the discussions who asked not to be named because they are confidential. A civil lawsuit against Citigroup could be filed as early as next week, the person said.

The department has asked for more than $10bn from New York-based Citigroup and $17 from Bank of America, though prosecutors are willing to consider proposals below those amounts, the person said. Bank of America has offered about $12bn while Citigroup has put forward less than $4bn, the person said.

“Even though talks have broken off, it doesn’t mean they can’t be restarted,” after lawsuits are filed, said Matthew Axelrod, a former senior Justice Department official whose firm is handling lawsuits against banks, including Bank of America and Citigroup, over mortgage-backed securities.

The Justice Department is taking a tougher approach following criticism that it hadn’t done enough to punish large institutions for their role in the collapse of home prices and ensuing financial market turmoil. Prosecutors are demanding multibillion-dollar penalties from banks for wrongdoing including tax evasion and sanctions violations and have used the threat of lawsuits to reach settlements.

US officials are seeking more than $10bn from BNP Paribas to resolve a probe into transactions involving sanctioned countries, people familiar with the matter have said. The US secured the largest criminal penalty in a tax evasion case last month with Credit Suisse Group AG’s $2.6bn payment. The settlement demands of Citigroup and Bank of America, which is based in Charlotte, North Carolina, show that the US isn’t only seeking high-dollar resolutions from banks outside the country, according to Erik Gordon, a professor at the University of Michigan.

“The effect is to take some of the wind out of the argument that these numbers are unfairly punitive and outrageous,” Gordon said in an interview.

Citigroup is among at least eight banks under investigation by the Justice Department for misleading investors about the quality of bonds backed by mortgages as housing prices plummeted. Other banks that have faced scrutiny include Credit Suisse and Wells Fargo & Co JPMorgan Chase & Co agreed to pay $13bn in November to resolve similar federal and state investigations.

Citigroup and the Justice Department have been negotiating a resolution since April, the person said. Associate Attorney General Tony West, who is overseeing probes of improper mortgage-bond underwriting by banks, told the bank in a phone call on June 9 that it wasn’t making acceptable offers, the person said. The Justice Department would consider a proposal below what it has requested, according to the person.

Mark Costiglio, a bank spokesman, and the Justice Department’s Brian Fallon declined to comment on the talks.

Citigroup sold about $91bn of mortgage loans packaged into so-called private-label mortgage debt, which isn’t guaranteed or issued by government agencies, from 2005 through 2008, according to the bank’s annual securities filing.

Citigroup issued far fewer mortgage bonds than its largest competitors. Bank of America and firms it acquired issued about $965bn between 2004 and 2008, while JPMorgan and firms it bought issued $450bn, according to analysts at Sanford C Bernstein & Co.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.