Why a $7 Billion Settlement for Citigroup May Be Good News for Bank of America Corp

Wall Street Bull. Source: Flickr / thenails.

Another week is here, and another billion dollar settlement is -- reportedly -- fast approaching for another big bank. But it turns out the $7 billion settlement for Citigroup may be a sign of good news for Bank of America .

The bad news for Citigroup
In the Wall Street Journal's coverage of the settlement in its Heard on the Street section, the articleLegal Cloud Dims Citi Lights began by noting:

It's tough to put up too much of a fight when you're already bruised. Just ask Citigroup. The bank is reportedly homing in on what could be a $7 billion settlement with the Justice Department over alleged mortgage abuses before the financial crisis, The Wall Street Journal reported. That is far higher than the $4 billion the bank was reportedly willing to pay but also less than the $10 billion the government initially sought.

And while this is smaller than the $13 billion paid out by JPMorgan Chase last fall, it is also worthwhile to note it could substantially have a greater impact on Citigroup's bottom line, as it has only placed $8 billion into its litigation reserves since 2010.

The story also notes Citigroup has paid out nearly $5 billion in total settlements stemming from the 2008 crisis, meaning the $7 billion settlement could impact its bottom line as a significant expense and also hinder its ability to receive the benefits available to it from its deferred tax assets.

2014 has been a rough year for Citigroup, and a massive settlement will only add on to its woes.

The good news for Bank of America
You -- very rightfully -- may be asking yourself: How on earth is a $7 billion settlement at Citigroup good for Bank of America? Well it turns out, the last line from the WSJ quote above could be a bit of good news for the other much maligned bank.

The government wanted Citigroup to pony up $10 billion, but the bank only wanted to pay $4 billion. Like most negotiations in real life, or even on shows like Pawn Stars, the two parties simply met in the middle at $7 billion.

In early June, we learned settlement discussions between Bank of America and the Justice Department surrounding its own mortgage issues were "deadlocked," according to Dealbook. The reported reason behind this was the Justice Department demanded Bank of America to settle for a staggering $17 billion, and while the bank willing to raise its offer to $12 billion, the two sides remained far apart.

But knowing the DOJ and Citigroup closed their gap by meeting in the middle, it's not unreasonable to think Bank of America would want the same. After all, there was a $6 billion gap between Citigroup and the Justice Department versus a $5 billion one between the DOJ and Bank of America.

Although Bank of America may be a bigger name, and Eric Holder is clearly taking a hardline stance against the bank, it seems more than reasonable to expect Bank of America to cite the Citigroup example to lower its own settlement costs.

The key takeaway for investors
Whether Bank of America's settlement stands at $12, $14.5, or $17 billion, it will be a massive one. But in May Brian Moynihan suggested this would be the bank's last major one. Although it will be difficult -- and likely justified -- for the bank to pony up such a massive amount, the Citigroup deal may mean less cash going out the door.

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The article Why a $7 Billion Settlement for Citigroup May Be Good News for Bank of America Corp originally appeared on Fool.com.

Patrick Morris owns shares of Bank of America. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America, Citigroup, and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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