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Bank of America Corporation (BAC - Analyst Report) and Citigroup Inc. (C - Analyst Report) are most likely to be sued by the Department of Justice (DOJ) as their respective talks to settle investigations for the sale of mortgage-backed securities (MBS) have reached an impasse. The news was first reported by Bloomberg on Friday.

The negotiations to end probes in to the shoddy mortgage practices of the banking giants have been going on for quite some time. However, the discussions hit a deadlock after the DOJ refused the offers made by Citigroup and BofA in order to settle the inquiries. The lawsuits against the banks could be filed very soon.

Notably, Citigroup was ready to pay nearly $4 billion and BofA had offered approximately $12 billion. But the DOJ is demanding around $10 billion from Citigroup, while BofA is being asked to pay over $17 billion.

BofA’s mediation attempts broke apart as it accused the DOJ of claiming much more than the actual penalties for the MBS sold by Merrill Lynch. Further, the company declared that it was compelled by the regulators to acquire Merrill Lynch during the heights of the financial crisis.

Citigroup, while disputing the penalty, stated that as it had issued a lesser number of MBS compared to other banks facing similar claims; it is not required to pay such a huge settlement amount. However, the DOJ countered this argument by asserting that though fewer in number, the MBS issued by Citigroup had significantly more bad loans.

We believe that the DOJ has taken a tough stance. This indicates that the regulators are not dealing the Wall Street biggies leniently for letting the taxpayers suffer due to their wrongdoings. Earlier, in Nov 2013, JPMorgan Chase & Co. (JPM - Analyst Report) had announced a $13 billion settlement with several law enforcement agencies to end all the ongoing and probable civil claims related to the sale of MBS.

One of the primary reasons behind the urgency of the major banks including BofA, Citigroup, JPMorgan, Morgan Stanley (MS - Analyst Report) and Credit Suisse Group AG to settle the probes is to avoid the lengthy court proceedings and continued ambiguity, which could be damaging to the financials. Further, the banks may have to pay more in the future than what the regulators are demanding now.

Nevertheless, despite the talks being stalled presently, it does not denote anything final yet.

In spite of all their efforts to regain their past glory, BofA and Citigroup have been facing tough fundamentals. Also, their ability to manage such big and complex operations is under questions. Further, BofA had to suspend its 2014 capital plan following the discovery of some accounting error, while Citigroup is facing investigations for mismanagement at its Mexican unit.
 
Currently, Citigroup carries a Zacks Rank #3 (Hold) and BofA holds a Zacks Rank #5 (Strong Sell).

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