RBP
07-14-2014, 03:27 AM
A $7 billion deal between Citigroup C +0.21% and the Justice Department expected to be unveiled Monday nearly fell apart one day last month.
Government officials, frustrated by months of back-and-forth haggling, warned the bank that a lawsuit would be filed the next day. But hours before the deadline expired, the Justice Department put its plans on hold.
News had leaked that afternoon, June 17, that the U.S. had captured Ahmed Abu Khatallah, a key suspect in the attacks on the American consulate in Benghazi in 2012. Justice Department officials didn't want the announcement of the suit against Citigroup—and its accompanying litany of alleged misdeeds related to mortgage-backed securities—to be overshadowed by questions about the Benghazi suspect and U.S. policy on detainees. Citigroup, which didn't want to raise its offer again and had been preparing to be sued, never again heard the threat of a suit.
Instead, the two sides returned to the table. Were it not for that unconnected event, Citigroup and the Justice Department might not have the deal they are expected to announce tomorrow.
This reconstruction of the events leading up to the deal is based on interviews with people close to the talks.
The two sides had been negotiating for months. They had started with numbers that were orders of magnitude apart: Citigroup opened negotiations with an offer of $363 million in cash to settle Justice Department claims, plus more for consumer relief. The Justice Department had opened by demanding a number that was roughly $12 billion, which would include consumer relief. The two sides were narrowing the gap but still were arguing over the merits of the case, and the government had raised the threat of a lawsuit.
A pivotal point came on Tuesday morning, June 17, when Tony West, a top lieutenant of Attorney General Eric Holder, met with his boss and presented him with a choice: return to the negotiating table, or move ahead with plans to file a lawsuit the next day. Mr. Holder chose the lawsuit. Mr. West called Ted Wells, a top outside lawyer for Citigroup, and told him the news.
The Justice Department began to plan for an announcement. Colorado U.S. Attorney John Walsh, whose office was working on the case along with its counterpart in Brooklyn, boarded a flight from Denver to Washington for a news conference. Citigroup by then had raised its offer several times and told the Justice Department that it wasn't willing to do so again. At the time, it was offering $7 billion.
Then, the news of Mr. Khatallah's capture broke. Justice Department officials thought attention would be focused on his interrogation and prosecution, distracting from the announcement of the lawsuit.
So that evening, Mr. West called Mr. Wells to tell him that the lawsuit had been delayed. Mr. West said the department had a lot going on, and that the lawsuit wouldn't be filed that week or the following week, as he and Mr. Holder would both be traveling. Privately, some bank officials wondered if the Justice Department didn't want a lawsuit. Within days, the two sides had returned to the table.
The eventual settlement, and the behind-the-scenes haggling that created it, is being watched closely throughout Washington and Wall Street, where it could help set a precedent for similar talks under way with Bank of America Corp.
The negotiations are stoking banks' fears that the Justice Department is getting increasingly heavy-handed against the industry, while investors are worried that bank penalties will be decided not by a formula but by the subjective measures of the government. The deal also could be seen as a key test for Citigroup CEO Michael Corbat, who was given the top job in 2012 with a mandate to improve the bank's relationship with the government.
Meanwhile, Mr. Holder has faced constant criticism from Congress and elsewhere that his Justice Department has been too soft on financial institutions. Negotiations with Citigroup heated up as the department appeared emboldened: In May, it won a guilty plea from Credit Suisse Group AG, its first such plea by a major financial institution in two decades, and was seeking another from BNP Paribas SA.
Citigroup will pay the U.S. government a civil penalty of about $4 billion—twice that paid by J.P. Morgan Chase JPM +0.43% & Co. But unlike J.P. Morgan, Citigroup's penalty also covers its liability for collateralized debt obligations, not just mortgage securities. The rest of the settlement goes to consumer relief, the Federal Deposit Insurance Corp. and the states of California, Delaware, Illinois, Massachusetts and New York, according to people familiar with the matter.
For months, Citigroup lawyers had argued that the bank should pay far less than J.P. Morgan, noting Citigroup's market share in the residential mortgage-backed securities market in the run-up to the crisis: one-fifth that of J.P. Morgan. Most of J.P. Morgan's mortgage securities had been issued by Bear Stearns and Washington Mutual, which J.P. Morgan didn't buy until 2008.
Justice Department attorneys contended that Citigroup's market share was far less relevant than the sheer number of mortgage-bond deals it put together with loans it knew were defective.
When negotiations began in earnest in early May, Citigroup offered to pay $363 million in cash to settle with the Justice Department only, and to set aside an unspecified amount of money to help customers in financial trouble.
Government lawyers thought Citigroup's offer was laughably low and told them to return with something better, these people said.
The bank doubled its proposed penalty to $700 million. The banks' lawyers pointed out how Citigroup already had settled claims with the Federal Housing Finance Agency and the National Credit Union Administration, which had been two pieces of J.P. Morgan's total figure. Citigroup also noted how it had settled those claims for far less than its rival had.
The Justice Department came back in late May with a much higher number: $12 billion, according to people familiar with the matter.
Privately, Citigroup officers wondered if the Justice Department attorneys now viewed the record $13 billion fine against J.P. Morgan as too small, and were making a political example out of the second big bank to settle.
At one point, Geoffrey Graber, an aide to the Justice Department's Mr. West, told Citigroup's lawyers that if they planned to come to the next meeting and make an argument about their clients' small market share, they shouldn't bother showing up.
The Citigroup lawyers asked if they could meet with Mr. Holder—though they were careful not to ask for a personal meeting between Mr. Holder and the CEO, Mr. Corbat, afraid that request would backfire. The Justice Department said no.
By early June, the two sides were bargaining but still far apart. Citigroup had raised its offer to $3 billion—a $1 billion penalty and $2 billion in consumer relief. The Justice Department was still demanding more than $10 billion.
On the night of Monday, June 9, negotiators got on a conference call close to midnight—a time picked to accommodate Mr. West, who dialed in from Alaska where he was meeting with Native American groups. The Justice Department lawyers said that if they weren't satisfied with Citigroup's offer by that Friday, they would sue. Mr. Wells, who was leading the negotiations for Citigroup, asked for more time. Mr. West said no.
On Friday, June 13, news reports circulated that talks had broken down and the Justice Department planned to file a lawsuit. That evening, Mr. Wells called Mr. West and the two sides agreed to keep talking—if Citigroup agreed to raise its offer.
It was hard for Citigroup lawyers to tell if the government was posturing. The Justice Department had, after all, thrown a $20 billion demand at J.P. Morgan as an attempt to get the bank's attention, according to people familiar with those talks.
Citigroup was also wary of taking on another battle, as it was still dealing with an accounting fraud at its Mexico unit and the Federal Reserve's decision to reject its stress-test request for a higher dividend and share buyback. Executives also worried that going to court against the Justice Department might upset the Fed when the bank submitted its next stress-test request in January. The Fed isn't involved in the settlement talks.
That weekend, Father's Day, Citigroup decided it would offer about $7 billion, including payments to the FDIC and the states. The bank also reiterated that it wouldn't sign any deal that didn't release it from potential liability for collateralized debt obligations.
Citigroup was adamant that it wouldn't raise its offer again, and it prepared for the possibility of a lawsuit. Some of Citigroup's largest investors also called the bank to suggest they risk a lawsuit, though some bank executives privately worried that going to court against the government would be a public-relations nightmare even if the bank ultimately won.
Then the bank received an unexpected reprieve from Mr. Khatallah.
The two sides met in Washington days later. In the following weeks, they hammered out details of what the consumer-relief portion would look like, where the bank would get credit for modifying mortgages for some homeowners, and similar actions. Deals with the state attorneys generals were completed. The Justice Department reduced the amount allocated to five states and the Federal Deposit Insurance Corporation by $400 million, and shifted that amount to the department's cash penalty. The move kept the headline number the same, but meant that Citigroup could no longer write off that $400 million against its taxes.
On Monday, the Justice Department is expected to announce a final deal.
Government officials, frustrated by months of back-and-forth haggling, warned the bank that a lawsuit would be filed the next day. But hours before the deadline expired, the Justice Department put its plans on hold.
News had leaked that afternoon, June 17, that the U.S. had captured Ahmed Abu Khatallah, a key suspect in the attacks on the American consulate in Benghazi in 2012. Justice Department officials didn't want the announcement of the suit against Citigroup—and its accompanying litany of alleged misdeeds related to mortgage-backed securities—to be overshadowed by questions about the Benghazi suspect and U.S. policy on detainees. Citigroup, which didn't want to raise its offer again and had been preparing to be sued, never again heard the threat of a suit.
Instead, the two sides returned to the table. Were it not for that unconnected event, Citigroup and the Justice Department might not have the deal they are expected to announce tomorrow.
This reconstruction of the events leading up to the deal is based on interviews with people close to the talks.
The two sides had been negotiating for months. They had started with numbers that were orders of magnitude apart: Citigroup opened negotiations with an offer of $363 million in cash to settle Justice Department claims, plus more for consumer relief. The Justice Department had opened by demanding a number that was roughly $12 billion, which would include consumer relief. The two sides were narrowing the gap but still were arguing over the merits of the case, and the government had raised the threat of a lawsuit.
A pivotal point came on Tuesday morning, June 17, when Tony West, a top lieutenant of Attorney General Eric Holder, met with his boss and presented him with a choice: return to the negotiating table, or move ahead with plans to file a lawsuit the next day. Mr. Holder chose the lawsuit. Mr. West called Ted Wells, a top outside lawyer for Citigroup, and told him the news.
The Justice Department began to plan for an announcement. Colorado U.S. Attorney John Walsh, whose office was working on the case along with its counterpart in Brooklyn, boarded a flight from Denver to Washington for a news conference. Citigroup by then had raised its offer several times and told the Justice Department that it wasn't willing to do so again. At the time, it was offering $7 billion.
Then, the news of Mr. Khatallah's capture broke. Justice Department officials thought attention would be focused on his interrogation and prosecution, distracting from the announcement of the lawsuit.
So that evening, Mr. West called Mr. Wells to tell him that the lawsuit had been delayed. Mr. West said the department had a lot going on, and that the lawsuit wouldn't be filed that week or the following week, as he and Mr. Holder would both be traveling. Privately, some bank officials wondered if the Justice Department didn't want a lawsuit. Within days, the two sides had returned to the table.
The eventual settlement, and the behind-the-scenes haggling that created it, is being watched closely throughout Washington and Wall Street, where it could help set a precedent for similar talks under way with Bank of America Corp.
The negotiations are stoking banks' fears that the Justice Department is getting increasingly heavy-handed against the industry, while investors are worried that bank penalties will be decided not by a formula but by the subjective measures of the government. The deal also could be seen as a key test for Citigroup CEO Michael Corbat, who was given the top job in 2012 with a mandate to improve the bank's relationship with the government.
Meanwhile, Mr. Holder has faced constant criticism from Congress and elsewhere that his Justice Department has been too soft on financial institutions. Negotiations with Citigroup heated up as the department appeared emboldened: In May, it won a guilty plea from Credit Suisse Group AG, its first such plea by a major financial institution in two decades, and was seeking another from BNP Paribas SA.
Citigroup will pay the U.S. government a civil penalty of about $4 billion—twice that paid by J.P. Morgan Chase JPM +0.43% & Co. But unlike J.P. Morgan, Citigroup's penalty also covers its liability for collateralized debt obligations, not just mortgage securities. The rest of the settlement goes to consumer relief, the Federal Deposit Insurance Corp. and the states of California, Delaware, Illinois, Massachusetts and New York, according to people familiar with the matter.
For months, Citigroup lawyers had argued that the bank should pay far less than J.P. Morgan, noting Citigroup's market share in the residential mortgage-backed securities market in the run-up to the crisis: one-fifth that of J.P. Morgan. Most of J.P. Morgan's mortgage securities had been issued by Bear Stearns and Washington Mutual, which J.P. Morgan didn't buy until 2008.
Justice Department attorneys contended that Citigroup's market share was far less relevant than the sheer number of mortgage-bond deals it put together with loans it knew were defective.
When negotiations began in earnest in early May, Citigroup offered to pay $363 million in cash to settle with the Justice Department only, and to set aside an unspecified amount of money to help customers in financial trouble.
Government lawyers thought Citigroup's offer was laughably low and told them to return with something better, these people said.
The bank doubled its proposed penalty to $700 million. The banks' lawyers pointed out how Citigroup already had settled claims with the Federal Housing Finance Agency and the National Credit Union Administration, which had been two pieces of J.P. Morgan's total figure. Citigroup also noted how it had settled those claims for far less than its rival had.
The Justice Department came back in late May with a much higher number: $12 billion, according to people familiar with the matter.
Privately, Citigroup officers wondered if the Justice Department attorneys now viewed the record $13 billion fine against J.P. Morgan as too small, and were making a political example out of the second big bank to settle.
At one point, Geoffrey Graber, an aide to the Justice Department's Mr. West, told Citigroup's lawyers that if they planned to come to the next meeting and make an argument about their clients' small market share, they shouldn't bother showing up.
The Citigroup lawyers asked if they could meet with Mr. Holder—though they were careful not to ask for a personal meeting between Mr. Holder and the CEO, Mr. Corbat, afraid that request would backfire. The Justice Department said no.
By early June, the two sides were bargaining but still far apart. Citigroup had raised its offer to $3 billion—a $1 billion penalty and $2 billion in consumer relief. The Justice Department was still demanding more than $10 billion.
On the night of Monday, June 9, negotiators got on a conference call close to midnight—a time picked to accommodate Mr. West, who dialed in from Alaska where he was meeting with Native American groups. The Justice Department lawyers said that if they weren't satisfied with Citigroup's offer by that Friday, they would sue. Mr. Wells, who was leading the negotiations for Citigroup, asked for more time. Mr. West said no.
On Friday, June 13, news reports circulated that talks had broken down and the Justice Department planned to file a lawsuit. That evening, Mr. Wells called Mr. West and the two sides agreed to keep talking—if Citigroup agreed to raise its offer.
It was hard for Citigroup lawyers to tell if the government was posturing. The Justice Department had, after all, thrown a $20 billion demand at J.P. Morgan as an attempt to get the bank's attention, according to people familiar with those talks.
Citigroup was also wary of taking on another battle, as it was still dealing with an accounting fraud at its Mexico unit and the Federal Reserve's decision to reject its stress-test request for a higher dividend and share buyback. Executives also worried that going to court against the Justice Department might upset the Fed when the bank submitted its next stress-test request in January. The Fed isn't involved in the settlement talks.
That weekend, Father's Day, Citigroup decided it would offer about $7 billion, including payments to the FDIC and the states. The bank also reiterated that it wouldn't sign any deal that didn't release it from potential liability for collateralized debt obligations.
Citigroup was adamant that it wouldn't raise its offer again, and it prepared for the possibility of a lawsuit. Some of Citigroup's largest investors also called the bank to suggest they risk a lawsuit, though some bank executives privately worried that going to court against the government would be a public-relations nightmare even if the bank ultimately won.
Then the bank received an unexpected reprieve from Mr. Khatallah.
The two sides met in Washington days later. In the following weeks, they hammered out details of what the consumer-relief portion would look like, where the bank would get credit for modifying mortgages for some homeowners, and similar actions. Deals with the state attorneys generals were completed. The Justice Department reduced the amount allocated to five states and the Federal Deposit Insurance Corporation by $400 million, and shifted that amount to the department's cash penalty. The move kept the headline number the same, but meant that Citigroup could no longer write off that $400 million against its taxes.
On Monday, the Justice Department is expected to announce a final deal.