Justice Department seeking $10 billion to settle Citigroup mortgage investigation

Tensions are rising between Citigroup and the Justice Department, which is threatening to sue the bank if it fails to increase its nearly $4 billion offer to settle investigations into its sale of troubled mortgage securities, according to people familiar with negotiations.

Lawyers for Citigroup and senior officials at Justice have been trying to broker a deal for weeks. Talks broke down Monday night after both sides reached an impasse on the terms of the settlement.

Justice initially asked for $10 billion to end its investigation into how the bank packaged mortgages into securities in the lead-up to the 2008 financial crisis. But Citigroup has refused to pay that amount, arguing it had a small share of the securities market compared to other big banks, according to people who were not authorized to speak publicly.

One analysis bears out the bank’s argument. Sanford C. Bernstein analyst John McDonald estimates that Citigroup packaged and sold $91 billion worth of the securities in question from 2004 to 2008. By comparison, Bank of America, including its Merrill Lynch unit, traded $965 billion, while JPMorgan Chase, including its Bear Sterns subsidiary, sold $450 billion.

Prosecutors argue that Citigroup issued securities with a higher percentage of bad loans compared to its competitors and must pay for the damage it caused, the people said. If the bank refuses to come back to the table, Justice could file a lawsuit next week.

Justice faced similar push-back in negotiations with JPMorgan last year. The $13 billion settlement nearly fell apart when the bank demanded that it avoid future criminal charges for its sale of toxic mortgage securities. In the end, JPMorgan came back to the table in hopes of putting to rest myriad investigations.

People close to the Citigroup negotiations say the bank does not feel the same sense of urgency to end the Justice probe as JPMorgan did. Unlike JPMorgan, Citigroup is not trying to negotiate a global settlement to resolve multiple investigations. And the bank does not believe its sales activity warrants the kind of fines Justice is considering, according to people familiar with the talks.

Federal prosecutors have reached a similar impasse in their attempts to hammer out a settlement with Bank of America over its role in selling faulty mortgage securities.

The bank offered to pay more than $12 billion to end several ongoing investigations, a figure that rivals the JPMorgan deal, according to people familiar with the talks. But the bank could not come to an agreement on how much money it would set aside to help struggling homeowners.

Justice officials have picked up the pace of mortgage-related investigations over the past year. Mortgage securities, once a brisk business for Wall Street, were at the heart of the crisis. Banks, after issuing loans, would pool the mortgages and market the bundles as investments. When the housing market crashed, the securities were worthless and left investors saddled with massive losses.