Deutsche Bank Is Asked to Pay $14 Billion to Resolve U.S. Probe
September 15 2016 - 6:10PM
Dow Jones News
The U.S. Justice Department proposed that Deutsche Bank AG pay
$14 billion to settle a set of high-profile mortgage-securities
probes stemming from the financial crisis, according to people
familiar with the matter, a number that would rank among the
largest of what other banks have paid to resolve similar claims and
is well above what investors have been expecting.
The figure is described by people close to the negotiations
between Deutsche Bank and the government as preliminary, and they
said it came up in discussions between the bank and government
lawyers in recent days. It hasn't been previously disclosed.
Deutsche Bank is expected to push back strongly against it, the
people said, and it is far from clear what the final outcome will
be.
It is also unclear how much of that amount is proposed to be
paid in cash, and how much could be in consumer relief, as past
deals have been structured.
The Justice Department routinely opens high-stakes civil
settlement talks with a tough posture, posing higher numbers than
it might expect eventually to win, even from banks eager to close
long-running probes, lawyers involved in current and similar
negotiations say.
A Deutsche Bank spokesman responded to questions about a
settlement by pointing to a July filing saying that the bank had
started negotiations with the Justice Department.
Deutsche Bank hasn't said what it has set aside in anticipation
of a settlement. The bank held €5.5 billion ($6.2 billion) in total
litigation reserves as of June 30, and said it expected to set
aside more before the end of the year.
Privately, Deutsche Bank lawyers have suggested that the bank
views between $2 billion and $3 billion as a reasonable cost to
close out the Justice Department's mortgage-related probe quickly,
according to people familiar with internal bank discussions and
signals communicated to investors. One factor in Deutsche Bank
executives' thinking is that the lender already paid $1.9 billion
in 2013 to settle some U.S. claims tied to mortgage-backed
securities, some of the people said.
A hefty settlement would be bad news for a clutch of big
European lenders who also face potential penalties or litigation in
connection with a U.S. crackdown on the selling and packaging of
residential mortgage-backed securities before 2008.
Big U.S. banks have paid multibillion-dollar settlements for
allegedly misleading investors about the quality of such
securities. The largest so far has been $16.65 billion paid by Bank
of America Corp. in 2014. Goldman Sachs Group Inc. agreed in April
to a $5 billion deal that included a $2.4 billion cash penalty plus
a pledge of $1.8 billion to help struggling borrowers and
communities hard hit by the 2008 collapse in home prices.
The banks have been accused of bundling poorly-underwritten home
loans and selling them as safer securities than they knew them to
be, ultimately helping to fuel a bubble in rising home prices and
exacerbating the consequences of the subsequent collapse.
Citigroup Inc., J.P. Morgan Chase & Co. and Morgan Stanley
together paid more than $23 billion in penalties and consumer help
to settle claims.
In all of these settlements, the banks acknowledged improper
behavior.
The European banks that remain under investigation and could
face penalties besides Deutsche Bank, include Barclays PLC, Credit
Suisse Group AG, UBS Group AG and Royal Bank of Scotland Group PLC,
according to bank disclosures and people familiar with the matter.
The banks haven't commented on any potential settlements other than
to say they are cooperating with the investigations. Some have set
aside money for mortgage investigations as part of their broader
legal provisions, without specifying allocations, according to
company filings.
Lawyers working with various banks say they consider Deutsche
Bank a test case in this next round of anticipated settlements,
which come at a sensitive time for European banks already thin on
capital and slogging through job cuts and restructuring. Lawyers
for both Deutsche Bank and Barclays have met or are meeting with
Justice Department officials this month to discuss a potential
pact, according to people familiar with the talks. Some lawyers
involved have expressed a desire to reach a deal by the November
presidential election, the people said.
Barclays CEO Jes Staley and Deutsche Bank CEO John Cryan have
both said they are eager to put big-ticket legal matters behind
them.
The apparent gulf between figures viewed as palatable to the
bank and those posed by Justice Department officials suggests
negotiations could still have a long way to go, and could
ultimately lead to court battles, the people said.
Analysts have estimated Deutsche Bank alone might pay between $2
billion and $5 billion, based on previous settlements with banks
including Goldman Sachs and Morgan Stanley, and Deutsche Bank's
relative size in the precrisis market for packaging and selling
residential-mortgage-backed securities.
In June, Barclays banking analyst Jeremy Sigee estimated
Deutsche Bank might pay $4.5 billion, and Credit Suisse and UBS
might each pay $2 billion. He and other analysts have said
settlements ultimately could push Deutsche Bank and Credit Suisse
toward capital hikes.
Past settlements haven't always been tied directly to the size
of the business targeted. Citigroup, for example, paid a larger
penalty than expected based on its size in the market for
residential-mortgage securities. Officials said at the time it was
commensurate with the strength of evidence against the bank.
Goldman Sachs, Morgan Stanley and Citigroup declined to
comment.
Write to Aruna Viswanatha at Aruna.Viswanatha@wsj.com, Jenny
Strasburg at jenny.strasburg@wsj.com and Eyk Henning at
eyk.henning@wsj.com
(END) Dow Jones Newswires
September 15, 2016 17:55 ET (21:55 GMT)
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