The Wall Street Bank has once again been publicly shamed this week after the Justice of Department flew in a lead prosecutor from Colorado. This led to a lawsuit against Citigroup, which collapsed after the financial crisis. The apprehension of a suspect in the attack on Benghazi, Libya, completely changed the plans of the Justice Department. Federal prosecutors decided that this turn of events will completely overshadow the Citigroup lawsuit. It was the prosecutor’s last chance to send out a message: that the government is holding Wall Street responsible for crisis. In conclusion, the lawsuit was put on hold, said Tony West, the government’s lead negotiator.
People briefed on the matter said that the declaration from Tony West was made just hours after he declared that the lawsuit is on its way. This situation led to a totally different outcome for the Justice Department, which is trying to escape a costly legal battle. A settlement of 7 billion dollars was discussed, which will most probably be announced on Monday.
This settlement offer comes after months of heated discussion, where Citigroup offered 363$ million, but the Justice Department demanded 12$ billion. If you are wondering why the financial gap is so huge, it is because the two parties had extremely divergent methods of calculating the cost of the settlement. On one hand, Citigroup considered that the small share of market for mortgage securities justifies the costs, while the Justice of Department considered that Citigroup’s level of culpability is irrefutable.
A different account of the negotiations, which comes from people in the know, who were not authorized to speak publicly, suggests that the government’s bargaining position comes from an intense desire to destroy Wall Street’s argument according to which market share should dictate punishment. In the end Citigroup raised its settlement offer to 7$ dollars (the exact same size as the final settlement), at the moment when the Justice of Department decided to go to court. For the J.o.D. this means that the bank will have to pay a heftier sum than that based on market share.
This is the Wall Street’s last chapter in the six-year financial crisis struggle. Another reason why there was such a huge conflict over the settlement value stems from the obscure federal law which was created after the savings-and-loan crisis from a quarter-century ago. The law says that the Financial Institutions Reform (under the Recovery and Enforcement Act) says that prosecutors can demand exorbitant large penalties (1.1$ million/violation), and the Citigroup has 4$ billion cash penalty to the Justice of Department, and 2.5$ billion in soft dollars earmarked for helping struggling consumers.
The JPMorgan settlement template was used as a template, were 2 billion from the 13 billion were sent in cash penalties from Firrea. Citigroup lawyers argued that their client should have a smaller settlement, because the company sold half as many mortgage securities as JPMorgan. The Department of Justice countered saying that market sharing is only one metric that factors into the final penalty. Later, Citigroup raised its offer to 3.6$ billion in Cash (2.5$ billion in consumer relief and 900$ million to the F.D.I.C.).
The bank declined to raise its offer, and in the end Mr. West met with Eric H. Holden Jr., attorney general to discuss the J.D. options. When the situation in Libya arose, Citigroup called to postpone the lawsuit. A few weeks later, Mr. West agreed to Citigroup’s request and offered to shift 400$ million from the state attorneys general & F.D.IC. to the J.D.
Mr. Wells concluded that if global peace can be obtained, the decision will be easier for them.
