Forbes Reported: Germany’s largest lender Deutsche Bank and Swiss banking giant Credit Suisse have agreed to pay a collective $12.5 billion to settle litigation stemming from their bundling of risky subprime and Alt-a mortgages during the mid-2000s credit bubble, which resulted in a severe housing collapse, billions of dollars of investor losses and widespread claims of deception.
The agreements, struck just before a new administration takes the White House, adds resolution to the Obama administrations efforts to hold Wall Street’s largest banks accountable for their activities during the bubble and bust of the U.S. housing market. To date large lenders in the United States and Europe have agreed to fork over nearly $50 billion in fines and consumer relief to the U.S. government to settle claims of wrongdoing.
Most cases involve bank’s packaging of mortgages to low-rated home buyers or those carrying risky payment features into securities pitched as safe and sold to investors and government-sponsored housing agencies. When the housing bubble burst many of these mortgage bundles lost significant value, saddling investors with unexpected losses. The U.S. government’s litigation efforts have focused on whether banks knowingly deceived their customers, presenting mortgage securities as safe when they knew them to be loaded with bad debts.
For years, when agreeing to multi-billion dollar mortgage settlements with lenders like Bank of America, JPMorgan and Citigroup, the U.S. government has decided against directly levying criminal charges against banks or their executives. Often these settlements come with no admission by banks, or an agreement to a statement of facts that may help private litigation. However, they often also come with a trove of trader communications emails and Bloomberg instant messages indicating deception.
As President Barack Obama leaves office and President-elect Donald Trump takes the White House, it appears the Department of Justice is settling cases expeditiously. Most government cases have been brought under the 1989 Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which was implemented by the administration of Republican President George H.W. Bush in the wake of the 1980s savings and loan crisis.
On Wednesday evening, Deutsche Bank agreed to pay a $3.1 billion civil penalty and provide $4.1 billion in relief to consumers to resolve its mortgage-related litigation with the government. The agreement is far below the $14 billion figure that the DoJ originally sought and will force Deutsche Bank to record a $1.2 billion this quarter. As of the third quarter, the German lender had provisioned $6.2 billion for legal losses.
Deutsche Bank’s settlement, while punitive, may prove a relief for the firm and banking system writ large. When the DoJ’s $14 billion pricetag surfaced this summer, it created a tailspin for Deutsche Bank as investors worried the fine amount would erode the bank’s capital position. With a stock at near decade lows, Deutsche Bank had a limited ability to raise new capital, creating fears of a bank collapse and spillover crisis.
A $7.2 billion fine will lead to yet more staggering losses for Deutsche Bank, which is in the midst of a restructuring under CEO John Cryan, but it may also put a floor on some investor concerns. Rising interest rates and signs of an economic recovery in the developed world may also help stabilize the earnings of banks like Deutsche Banks, which entered the second half of 2016 with conundrum of trying to make money as interest rates turned negative.
Deutsche Bank shares were rising 1% to $18.72 in pre-market trading. The bank’s stock has gained nearly 50% off 2016 lows as the DoJ’s litigation emerged.
Credit Suisse, known more for its sprawling wealth management operations, will pay a smaller figure than Deutsche Bank. It has agreed to pay a $2.48 billion civil penalty and a further $2.8 billion in consumer relief. The settlement will cause Credit Suisse to take a $2 billion pre-tax charge this quarter and will be paid out over five years.
Not all banks are settling with the U.S. government.
On Tuesday, the DoJ levied civil fraud charges against British lender Barclays for its bundling of tens of billions of dollars in subprime and Alt-a mortgages between 2005 and 2007. It further charged two individuals, Paul Menefee, former head of Barclays’s subprime RMBS securitizations, John Carroll, the operation’s head trader, in the civil fraud suit.
The government’s FIRREA charges against Barclays included a 200-page suit where emails and trader instant messages show employees claiming bundles contained “craptacular” mortgage loans and carried an “aroma of default.” Despite these internal concerns, Barclays sold loan securities to investors and assured them unacceptable loans would be excluded from security pools.
“The government’s complaint alleges that Barclays fraudulently sold investors RMBS full of mortgages it knew were likely to fail, all while telling investors that the mortgages backing the securities were sound,” said Bill Baer, Principal Deputy Associate Attorney General, when levying charges. “The widespread fraud that investment banks like Barclays committed in the packaging and sale of residential mortgage-backed securities injured tens of thousands of investors and significantly contributed to the Financial Crisis of 2008,” Baer added.
“Barclays considers that the claims made in the complaint are disconnected from the facts,” the bank said in a statement. “We have an obligation to our shareholders, customers, clients and employees to defend ourselves against unreasonable allegations and demands,” it added.
Barclays shares were little changed in early trading at $11.03. Credit Suisse shares were off by 1% at $14.76.
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