NEW YORK (TheStreet) -- Citigroup  (C - Get Report) has a better chance than Bank of America  (BAC - Get Report) of lowering the cost of an expected mortgage settlement with the Department of Justice.

Citigroup and Bank of America have been negotiating with the DoJ to resolve long-running disputes about the mortgage-backed securities the two banks sold leading up to the 2008 subprime financial crisis, according to several news reports and comments from Bank of America executives. The New York Times last week reported that government lawyers are demanding that Bank of America pay $17 billion, while the Charlotte-based bank is arguing that $12 billion is more appropriate.

On Friday, The Wall Street Journal said the Justice Department is seeking more than $10 billion from Citigroup, which has countered with a $4 billion offer to resolve their differences.

JPMorgan Chase  (JPM - Get Report) already settled a similar case for $9 billion (not counting $4 billion in assistance for struggling homeowners). In total, the DoJ is litigating more than 10 other cases centered on mortgage-backed securities, not counting those involved JPMorgan, Citigroup or Bank of America, according to comments by Federal Housing Finance Authority Inspector General Michael Stephens, who along with several state regulators is collaborating with the Justice Department investigations.

But a research report from Wells Fargo analyst Matt Burnell published Monday does something novel. Rather than just licking his finger and sticking it up in the air to test the wind, the Wells Fargo analyst actually considers the dollar value of the mortgage-backed securities sold by each banks leading up to the crisis. Burnell also looks at the performance of those securities.

Considering the $9 billion paid by JPMorgan for sales of mortgage-backed securities worth $450 billion from 2005-2008, Citigroup, which sold $91 billion of similar quality mortgage-backed securities during the same period, should pay $2 billion. Bank of America, which sold closer to $850 billion, should pay $17 billion, Burnell contends. Burnell's logic is similar to a point I made last week after The Wall Street Journal initially reported Bank of America appeared headed for a $12 billion deal. 

But math appears to be only a partial consideration in coming up with a payout for the banks. As a result, Burnell ultimately assumes Citigroup will end up paying $8 billion, of which about $2 billion would not be tax deductible (using the same ratio seen in the JPMorgan agreement). That is essentially what the market forecast when it shaved 1.4% off of Citigroup's $144 billion market cap on Friday following The Wall Street Journal's report.

Mark Costiglio, a spokesman for Citigroup, and Lawrence Grayson, a Bank of America spokesman, declined to comment on the negotiations with the DoJ. A call to Justice Department spokesman Brian Fallon wasn't immediately returned.

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