Citigroup may become latest bank to face huge fine

Citigroup (C) may be the next big Wall Street firm to pay a multibillion dollar penalty for allegedly misleading investors in selling mortgage-backed securities in the years leading up to the 2008 financial crisis.

The financial giant is discussing a potential settlement over its mortgage practices with the U.S. Justice Department, CBS News has learned. The sides continue to negotiate terms of a deal, with the Justice Department already rejecting an initial offer by Citi to pay $4 billion and pressing for a figure closer to $10 billion.

Citigroup spokesman Mark Costiglio declined to comment for this story.

Although such a large fine would sting in the short term, settling the case would lift a cloud over Citigroup, the nation's third-biggest bank by assets. After the housing crash, the company had to accept $45 billion in cash under a federal bailout and billions more in loan guarantees, the most of any big bank. Like other large financial firms, it became a poster child for Wall Street abuses.

More recently, Citi flunked a Federal Reserve stress test of its financial solvency. The bank is certainly eager to put its troubles behind in order to avoid even more legal costs that prolonged litigation could generate.

"It's hard to say in the absence of an actual trial where all evidence is presented and experts and other 'witnesses' can be cross-examined, but $7 billion probably falls within the range of likely 'reasonable' damages," said Robert Hockett, a professor at Cornell Law School, in an email.

Had settlement talks failed, the DOJ was prepared to file suit under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), which would have allowed the government to present a criminal case against the bank. This is a powerful tool at the government's disposal, and Wall Street knows it. After the government announced that it was prepared to sue JPMorgan (JPM) under the law and even scheduled a lawsuit to announced its decision, CEO Jamie Dimon went back to the negating table and eventually settled the case for $13 billion.

Some critics such as veteran banking analyst Dick Bove have argued that the punishments the government is seeking from the industry aren't justified by their misdeeds. But Wall Street critics say big banks are getting of too easy by escaping criminal prosecution and that financial penalties chiefly hurt shareholders.

-- Paula Reid of CBS News contributed to this report