Why Are Regulators Hitting Citigroup So Hard?

Source: Thinkstock

Source: Thinkstock

Citigroup (NYSE:C) is apparently not going to pay $10 billion to the U.S Department of Justice to settle outstanding investigations into the bank’s role in selling mortgage securities before the financial crisis. According to Bloomberg, the DOJ ended negotiations with Citigroup after the bank refused to offer more than $4 billion.

Prosecutors have been playing hardball with banks for the past few years in an attempt to fix accountability for the late-2000s financial crisis. Regulators have been urged by everyone from the public to policymakers to President Barack Obama to take an aggressive stance against financial institutions accused of misconduct, and the massive fines are designed to ensure that banks receive more than just a slap on the wrist.

“There is a widespread recognition that the banks have not yet been held fully accountable for their origination practices and the harm that did to borrowers, investors, and the American economy in general,” Don Hawthorne, a partner with Axinn, Veltrop & Harkrider in New York who has represented clients in mortgage-backed securities litigation, told Reuters.

Citigroup is not alone in playing hardball with the DOJ. Earlier last week, Bank of America (NYSE:BAC) hit a similar roadblock in its settlement negotiations with regulators. Bank of America appears unwilling to pay more than about $12 billion to enter a settlement in the ongoing investigations against the bank for mis-selling questionable mortgage backed assets. The DOJ would not budge for less than $17 billion to resolve the cases.

According to The New York Times, Bank of America issued mortgage securities worth $637 billion from 2005 to 2008. The bank is willing to pay 2.04 percent of this chunk in fines, but the DOJ wants it to pay almost half a percentage point more.

Last year, JPMorgan Chase (NYSE:JPM) settled with the DOJ for $13 billion, about 2.82 percent of the size of the securities it issued ($460.4 billion) between 2005 and 2008. The matter has been much worse for Citigroup, which sold securities worth $91 billion between 2005 and 2008. Prosecutors have asked the bank to cough up to 11 percent of the mortgage securities it sold. Citigroup is unwilling to pay more than 4.4 percent.

New York-based Citigroup was one of the worst casualties in the credit crisis, with losses breaching $30 billion when borrowers defaulted. It received $45 billion in federal bailout money, one of the government’s biggest rescue operations.

Going by the numbers and the damage caused by banks to the economy, it is not difficult to see why prosecutors are giving banks such a hard time.