Citigroup Inc and Bank of America Corp (BofA) are facing the prospect of being sued by the US Department of Justice 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 on Monday because they are 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 US$10 billion from New York-based Citigroup and US$17 billion from Bank of America, though prosecutors are willing to consider proposals below those amounts, the person said.
Bank of America has offered about US$12 billion while Citigroup has put forward less than US$4 billion, 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 had not 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 US$10 billion from BNP Paribas SA 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 US$2.6 billion payment.
The settlement demands of Citigroup and Bank of America, which is based in Charlotte, North Carolina, show that the US is not 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 US$13 billion in November last year to resolve similar federal and state investigations.
Citigroup and the Justice Department have been negotiating a resolution since April, the person said.
US Associate Attorney General Tony West, who is overseeing probes of improper mortgage-bond underwriting by banks, told the bank in a phone call on Monday that it was not making acceptable offers, the person said.
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