CS Credit Suisse Group

By Aruna Viswanatha, Max Colchester and Jenny Strasburg 

In a 12-hour flurry just before Christmas, two big European banks settled mortgage-securities probes with the U.S. Justice Department, agreeing to pay $12.5 billion. Another didn't, and it got sued.

The divergent paths represent the distinct fortunes of Deutsche Bank AG, Credit Suisse Group AG and Barclays PLC, and the unique pressures to resolve a cluster of long-running investigations before the arrival of a new and unpredictable presidential administration.

The chief executive of Barclays, which resisted a settlement and was sued, had made plain in private talks for months he'd risk a fight. Deutsche Bank, the weakest of the three, was keen to settle but couldn't afford a big bill. Credit Suisse also wanted to put an end to its investigation.

Many major investment banks, in both Europe and the U.S., had been caught up in fraud allegations over the selling of precrisis-era mortgage-backed securities. U.S. banks have been reaching settlements, coughing up billions, over the past few years. This summer, the Justice Department turned up the heat on European banks. Yearslong investigations unearthing potentially damaging recordings and emails were nearing an end.

Barclays was pushing back. In October, during the International Monetary Fund meetings in Washington, Barclays chief Jes Staley told colleagues and investors that the British bank was willing to go to court if the Justice Department kept pushing for a number he considered too high, according to a person familiar with the matter.

Mr. Staley, an American investment banker who took over Barclays late last year, suggested he felt Barclays had options, something investors might not allow for Deutsche Bank. The German lender is more acutely cash-strapped -- its cost-cutting efforts and turnaround strategy have remained less convincing to investors than Barclays's have. The German bank still has other major pending legal negotiations to hammer out in the U.S., crimping its ability to hardball authorities, investors and analysts say.

Early this week, a flurry of activity came to a head. Credit Suisse reached a tentative agreement to settle, but held off on disclosing it while negotiators worked out details, according to people close to the talks.

But Barclays executives were digging in their heels. They thought the Justice Department wasn't offering a settlement proportionate to the British bank's involvement in the mortgage-backed securities market, officials say.

Analysts were estimating that a settlement of $1 billion to $2 billion would be a palatable outcome for Barclays, but the Justice Department said $5 billion was in the range of possibilities, according to people familiar with the matter. Justice Department officials argued that a big penalty was appropriate because the bank allegedly knew that billions of dollars of mortgages it had included in the securities didn't meet standards.

The Christmas break loomed. Inside the Justice Department, a view had been growing that officials needed to actually sue a bank, rather than merely threaten, or else bankers would simply continue to stall and resist a settlement, people familiar with the discussions said.

On Thursday, Barclays's Mr. Staley and the bank's general counsel spoke to the Justice Department's No. 3 official, Bill Baer, to discuss if there was a path to a deal. The call ended with Mr. Baer alerting them a lawsuit would be filed later in the day, according to a person familiar with the matter.

Meanwhile, Deutsche Bank and the government were racing to a deal. In the afternoon, they reached a tentative accord. Twenty minutes later, the Barclays lawsuit landed in a Brooklyn federal court. It accused Barclays of fraud in issuing securities backed by more than $30 billion in mortgages from 2005 to 2007.

The lawsuit alleges that the bank ignored warnings from companies hired to conduct due-diligence checks on the mortgages. "These vendors described some of these securitized loans as 'craptacular,' others as 'scariest collateral,' and others as having the 'distinct aroma of default,'" the suit says.

Within several hours, Deutsche Bank publicly announced it had reached an agreement to pay more than $7 billion. The announcement, which landed at 2:30 a.m. Zurich time, surprised some Credit Suisse lawyers and executives, who hadn't realized the German bank was so close, a person familiar with the matter said.

The news spurred the Swiss bank to alert the Justice Department that the bank wanted to move swiftly to announce its own deal by morning, people close to the discussions said. Credit Suisse didn't want to be the only one of the three banks without an announcement when the markets opened in Europe, one of the people said.

Barclays said in a statement that it would seek the suit's "dismissal at the earliest opportunity," and that it considers the claims "disconnected from the facts."

Barclays fell 1% in Friday trading. Deutsche Bank shares, which had been up 4% earlier in the day, were up 0.4%. Credit Suisse shares were down 1%.

Investors have focused most strongly on Deutsche Bank, which is struggling to mount a turnaround and can't afford to pay large cash penalties to settle legal bills. Thursday's deal had some good news for the German bank: Of the penalty, $3.1 billion is in cash, and the rest, another $4.1 billion, is in the form of recompense to consumers that can be spread over five or more years. Tax benefits can also reduce its cost, and ultimately a fraction of that amount could come out of the bank's pocket, bank officials have told investors.

"Christmas comes early," Stuart Graham, a banking analyst with Autonomous Research in London, said in a Friday morning note about Deutsche Bank. Other fines are outstanding, he wrote, "but Deutsche should rightly be relieved to get its biggest case settled at a very reasonable cost."

Analysts and investors are divided over whether Deutsche Bank might still need to raise capital in early 2017 -- estimates for a potential increase start at around $5 billion -- despite continued insistence from the bank that now isn't the time. Executives have said they have no immediate plans to raise capital.

Credit Suisse said it agreed to pay about $5.3 billion to close the probes -- a $2.48 billion penalty plus consumer relief of around $2.8 billion over five years.

--Devlin Barrett contributed to this article.

Write to Aruna Viswanatha at Aruna.Viswanatha@wsj.com, Max Colchester at max.colchester@wsj.com and Jenny Strasburg at jenny.strasburg@wsj.com

(END) Dow Jones Newswires

December 23, 2016 15:14 ET (20:14 GMT)

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