Updated from 9:56 a.m. EDT
News of a potential deal between
and the Federal Trade Commission to settle a year-old predatory lending lawsuit pushed the stock of the nation's largest financial services company higher on Friday.
In midday trading, Citigroup stock rose nearly 4%, or $1.20, to just over $30 a share.
Before the trading day began,
The Wall Street Journal
reported that Citigroup and the FTC were close to agreeing on a deal in which Citi would pay $200 million to settle the lawsuit. Officials for the bank and the FTC both confirmed that negotiations aimed at a settlement are underway, but they declined to comment on the amount of money being discussed or when a deal might get signed.
Citigroup Chief Financial Officer Todd Thomson, speaking at a Merrill Lynch banking conference, said the talks with the FTC were at an advanced stage.
Sanford Weill, Citi's chairman and chief executive, speaking at the same Merrill conference, strongly defended the bank, which has come under fire over questions about conflicts-of-interest at its Salomon Smith Barney investment banking division. Weill said the bank would admit to those things it did wrong, but would not allow its critics to unfairly pillory it.
Meanwhile, a $200 million payment would represent the largest consumer-protection settlement ever negotiated by the FTC.
The negotiations are aimed at settling a lawsuit filed last year by the FTC against Associates First Capital, a so-called subprime lending outfit that Citigroup acquired in November 2000 for $27 billion.
Subprime lenders are financing firms that make money by making loans and issuing credit cards to consumers with poor credit histories
Several analysts say $200 million would have minimal impact on Citi's earnings. At worst, one analyst, who didn't want to be named, said it would amount to a three-cent charge against earnings.
In fact, if the settlement were to be occur before the end of the bank's third quarter on Sept. 30, it could be offset by the proceeds from the sale of Citi's corporate offices at 399 Park Avenue in New York City to
, a real estate investment trust. Citi says it intends to record a pretax gain of $830 million from the sale of the building.
But analysts say what's more important than any charge the bank may face is the elimination of a potential headache for Citi, especially at a time that its practices are coming under scrutiny from government regulators and legislators on Capitol Hill. In recent weeks, Salomon has been criticized for its business dealings with
, along with the bank's practice of doling out shares in hot initial public offerings to corporate executives.
"It takes what could have been a major problem off their watch list," says Sean Egan, of Egan-Jones Ratings, a private credit-rating agency. "Often times the biggest cost to a financial services company is the headline factor. They are fairly anxious to settle anything that could further hurt their public image."
And Egan says Citigroup is generating plenty of cash to not only cover the cost the settling with the FTC. He describes a $200 million settlement as "immaterial," when compared to the $4 billion in net income that Citigroup pumped out in the second quarter.
Earlier in the week, Citigroup's stock got pounded after Mike Mayo, the well-known Prudential Securities bank analyst, slapped a sell rating on the stock. Mayo estimated the bank may have to pay out $10 billion in fines and damages to settle all the regulatory and legal actions arising out of Citi's role in the collapse of
But other analysts say it's difficult, if not impossible, to predict the cost of resolving litigation. And they note that as big as a $200 million payout may be, it's pittance compared to the roughly $50 billion in market cap Citi's stock has lost this year, largely due to the endless spate of negative headlines about its business practices.
Indeed, a settlement with the FTC would to put to rest an issue that has dogged Citi ever since it acquired Associates, now part of Citigroup's consumer finance division, CitiFinancial.
The FTC charges that Associates, prior to its acquisition by Citigroup, engaged in predatory lending, a practice in which finance firms take advantage of cash-strapped consumers.
Specifically, the FTC lawsuit charges that Associates used deceptive marketing practices to induce consumers with poor credit histories to buy optional insurance policies on high-interest loans and bullied some of its borrowers to collect on outstanding debts.
Even before the settlement talks got underway, Citi began taking steps to revamp its consumer lending operation. The bank, for instance, severed its relationship with nearly 4,000 brokers that had referred loans to Associates.