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Citigroup Mortgage Accord Includes $2.5 Billion Relief, NYT Says

July 13 (Bloomberg) -- Citigroup Inc.’s $7 billion agreement to end government claims it misled investors in mortgage-backed bonds includes $2.5 billion to assist consumers, the New York Times reported.

The deal, to be announced tomorrow, also includes $500 million to state attorneys general and the Federal Deposit Insurance Corp., the newspaper said, citing unidentified people familiar with the matter. The largest piece of the package is a $4 billion payment to the Justice Department, a person familiar with the talks said last week.

Citigroup, the third-biggest U.S. bank, was among lenders including Bank of America Corp. investigated by the Justice Department for allegedly misrepresenting the quality of mortgage-backed bonds sold to investors as housing prices plummeted. JPMorgan Chase & Co., the biggest bank, agreed in November to pay $13 billion to resolve similar federal and state probes. The government has sought about $17 billion from No. 2 Bank of America, a person familiar with the discussions has said.

Mark Costiglio, a spokesman for New York-based Citigroup, declined to comment on the Times story or a possible settlement.

Citigroup and government officials have been discussing a resolution since April, a person familiar with the matter said last month. Discussions broke down June 9 after the bank’s settlement offers failed to satisfy prosecutors, the person said. Government officials had demanded more than $10 billion to resolve the issue, while Citigroup raised its offer to less than $4 billion, the person said.

Libya Arrest

Citigroup’s lawyers had argued that the lender should face a far smaller settlement than JPMorgan since Citigroup sold about half as many mortgage securities, according to the Times. The government rejected that position, citing what it considered Citigroup’s level of culpability based on e-mails and other evidence it uncovered, the newspaper reported.

The Justice Department told Citigroup in mid-June it was planning a news conference to announce a lawsuit against the company after the two sides failed to agree on a resolution, according to the Times. The arrest of a suspect in the attack on the U.S. embassy in Libya prompted government prosecutors to temporarily postpone the announcement, concerned that the news from Benghazi would overshadow the Citigroup case, the newspaper said.

In the following weeks, the two sides reached agreement on a settlement, the Times said.

Tougher Approach

From 2005 through 2008, Citigroup sold about $91 billion of mortgage loans packaged into so-called private-label mortgage debt, which isn’t guaranteed or issued by government agencies, according to the bank’s annual securities filing.

The Justice Department has taken a tougher approach after drawing criticism that it hasn’t done enough to punish large financial firms for their role in the collapse of home prices and the turmoil that began in 2008. Prosecutors have also won multibillion-dollar penalties from banks for wrongdoing including sanctions violations helping clients evade taxes.

On June 19, Charlotte, North Carolina-based Bank of America was ordered by a federal judge to face two government lawsuits in which it’s accused of misleading investors about the quality of loans tied to $850 million in residential mortgage-backed securities.

BofA Negotiations

The Justice Department broke off negotiations last month because it was dissatisfied with Bank of America’s offer to pay more than $12 billion, which included at least $5 billion in consumer relief, the person familiar with the discussions said at the time. The department’s latest settlement request was for about $17 billion, the person said.

Citigroup ranked ninth among non-agency underwriters of mortgage-backed securities in 2008, and wasn’t among the top 10 in the three previous years, according to data from Inside Mortgage Finance, a Bethesda, Maryland-based industry publication.

Citigroup is scheduled to report second-quarter results tomorrow before U.S. markets open. Net income is expected to fall 19 percent to $3.37 billion from a year earlier, according to the average estimate of 11 analysts surveyed by Bloomberg.

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