As long as Eric Holder’s around, banking is going to get a lot more expensive.
Citigroup is reportedly facing up to $10 billion in fines for allegedly misleading investors about securities that contributed to the global financial crisis — making the Wall Street bank the latest to face the hard-knuckle tactics of the Justice Department.
If Citi ends up paying the fine — which is still in negotiations — it would join JPMorgan Chase in doling out 10-figure mea culpas to Uncle Sam for their roles in selling mortgage-backed securities backed by toxic home loans.
Bank of America, which purchased mortgage giant Countrywide Financial in 2008 — and has already shelled out $40 billion tied to the housing collapse — is also reportedly facing around $17 billion in fines.
Wall Street watchers were taken aback by the size of the proposed fine.
“The number doesn’t make sense,” said Glenn Schorr, a bank analyst at International Strategy & Investment Group, speaking of the $10 billion the DOJ is reportedly seeking from Citigroup.
That’s because JPM, which didn’t admit or deny guilt, sold about $34 billion of the securities, or six times what Citi did, according to Schorr.
The reason US prosecutors are slapping Citi with a huge fine is that, even though it sold fewer of them, it had more loans that went bad than the others, according to reports.
Citi was late to the mortgage-backed securities markets, so it originated and packaged mortgages from later years, or vintages, that performed worse, said Ed Groshans, an analyst at Height Analytics.
“As long as the music is playing, you’ve got to get up and dance,” former Citi CEO Chuck Prince said in 2007, referring to the bank’s MBS business. “We’re still dancing.”
Holder’s tough tactics, first reported by Bloomberg, are meant to counter the notion that banks are “too big to jail.”
The wave of fines could influence how much banks have to reserve for big government settlements.
“Banks should run larger reserves for the unpredictability factor,” said Schorr, who was expecting the DoJ’s fine to be around $2 billion.
On Thursday, one analyst report speculated that Citi could face more than $4 billion in fines for rigging currency rates.
The enormous MBS fine being bandied about is around the same amount that’s being discussed between US prosecutors and BNP Paribas, the French bank accused of helping Sudanese and Iranian entities launder money, according to a person familiar with that investigation.
Spokespersons for Citi and the DoJ didn’t return calls seeking comment.
Washington’s mortgage-related suits aren’t likely to end anytime soon.
At least six other banks are being investigated by the DoJ, including Goldman Sachs and Morgan Stanley.
“These are the big numbers,” Schorr said, “and then we can move on with our lives until the next settlement of Libor and FX rigging.”
Citi’s shares dipped noticeably after word that settlement talks between the DoJ and Citi had broken down.
Citi shares closed down 1.4 percent Friday, to $47.59.