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Deutsche Bank and Credit Suisse agree multibillion-dollar settlements with US Deutsche Bank and Credit Suisse agree multibillion-dollar settlements with US Deutsche Bank and Credit Suisse agree multibillion-dollar settlements with US
(about 7 hours later)
The US Department of Justice has extracted multibillion-pound settlements from Deutsche Bank and Credit Suisse for a decade-old toxic bond mis-selling scandal. The US Department of Justice has extracted $12.5bn in settlements from Deutsche Bank and Credit Suisse for a decade-old toxic bond mis-selling scandal.
At the same time, it has issued legal action against Barclays, which, in an unprecedented move, has refused to settle with the authorities. It has also started legal proceedings against Barclays, which, in an unprecedented move, has refused to settle with the authorities.
Deutsche, Germany’s biggest bank, will pay $7.2bn (£5.9bn) to the DoJ. This is considerably less than the $14bn that had originally been demanded but higher than analysts had expected. Credit Suisse has agreed to pay $5.3bn. Deutsche, Germany’s biggest bank, will pay $7.2bn (£5.9bn) to the DoJ. The sum is considerably less than the $14bn that had originally been demanded. Credit Suisse has agreed to pay $5.3bn. Both settlements relate to the complex packaging up of home loans which was a lucrative business for the banking industry until the 2008 crisis.
The DoJ did not disclose the size of penalty it wanted to levy on Barclays but accused the bank of “plainly irresponsible and dishonest” conduct. The DoJ did not disclose the size of penalty it wanted to levy on Barclays but it is understood to be $4bn. It accused the bank of “plainly irresponsible and dishonest” conduct.
The flurry of announcements come weeks before Donald Trump takes over as US president and follow months of negotiation between the banks and the DoJ, led by Loretta Lynch, the US attorney general. The flurry of announcements just hours before the markets closed for the Christmas holiday came only weeks before Donald Trump takes over as US president and follow months of negotiation between the banks and the DoJ, led by Loretta Lynch, the US attorney general.
The scandal dates back to 2005 and 2007, when banks packaged up home loans and sold them on to investors. The penalties are part of an effort by outgoing president Barack Obama to hold banks accountable. The scandal dates back to 2005 and 2007, when banks packaged up home loans and used them to help create bonds - known as residential mortgage backed securities (RMBS) - which were sold on to investors. The mortgage repayments made by borrowers then provided a yield to the investor - so long as the borrower kept paying. The schemes fell apart when loans were made to borrowers who could not repay.
These are the first settlements with non-US banks – JP Morgan, Goldman Sachs, Morgan Stanley, Bank of America Merrill Lynch and Citi have all been punished. There are further penalties to come, notably for Royal Bank of Scotland. The bailed-out bank could face a bill of as much as £9bn, analysts have warned. The penalties are part of an effort by outgoing president Barack Obama to hold banks accountable.
Much of the focus will be on Deutsche, run by the UK’s John Cryan, which has been fighting the authorities’ original attempt to impose a $14bn fine. When news of that first leaked, the German bank’s shares plunged to 31-year lows amid fears about its ability to withstand such a high bill. These are the first major agreements to be reached with non-US banks – JP Morgan, Goldman Sachs, Morgan Stanley, Bank of America Merrill Lynch and Citi have all been punished.
Deutsche was forced to make clear in September that it would not need help from Angela Merkel’s government with the potential fine. There are further penalties to come, notably for Royal Bank of Scotland. The bailed-out bank could face a bill of as much as £9bn, analysts have warned. But its shares rose 1% amid hopes that it might soon be able to reach a settlement of the DoJ - which it had hoped would take place year - or at least start to estimate its own bill.
Shares in Deutsche rose 4% after the news on relief over the scale of the penalty, but some analysts say it may still need to raise fresh funds. Shares in Deutsche - which initially jumped 4% - ended almost 1% higher. Credit Suisse slipped 1% while Barclays fell 1% in thin pre-holiday trading.
“Positively, the deal is settled and out of the way, as it was thought that the issue could drag on into 2017,” said Thomas Kinmonth, an analyst at ABN Amro. “On the negative side, the amount of the fine does lead us to believe that a cash call will have to be performed before 2019.” Under the settlement, Deutsche Bank will pay $3.1bn and provide $4.1bn in customer relief, such as loan modifications and other assistance to homeowners and borrowers, spread over five years. Credit Suisse will pay $2.5bn and compensation of $2.8 bn over five years.
However, the bank might be able to avoid a cash call if it were to sell off parts of its business or if there were a significant change to the way in which it operates, he said. Much of the focus was on Deutsche, run by Briton John Cryan, which had been fighting the authorities’ original attempt to impose a $14bn fine. When news of that first leaked, the German bank’s shares plunged to 31-year lows amid fears about its ability to withstand such a high bill.
Deutsche’s shares have been pummelled on stock markets during 2016 over fears about its financial position. It had already set aside billions of euros in anticipation of the fine and in the early hours of Friday said it expected to take another hit of $1.2bn in its fourth quarter. There had been fears that Deutsche would need to embark on a cash call - or even ask the German government for assistance - but the fact that $4.1bn of its payout for customer relief was not a lump sum helped soothe some anxiety.
Under the settlement, Deutsche Bank will pay $3.1bn and provide $4.1bn in compensation to customers. Credit Suisse will pay $2.5bn and compensation of $2.8 bn over five years. “A key area of concern has been removed,” analysts at Goldman Sachs said, noting that the $1.2bn hit Deutsche warned it would take in its fourth quarter was “towards the lower end of market expectations”.
Barclays is the first bank to fail to reach a settlement and now faces lengthy court proceedings in New York to defend itself. Some analysts said Deutsche would need to press on with its restructuring to avoid a cash call. “Positively, the deal is settled and out of the way, as it was thought that the issue could drag on into 2017,” said Thomas Kinmonth, an analyst at ABN Amro, who said that without restructuring a cash call will have to be performed before 2019.”
It said in a statement: “Barclays rejects the claims made in the complaint. Barclays considers that the claims made in the complaint are disconnected from the facts. We have an obligation to our shareholders, customers, clients, and employees to defend ourselves against unreasonable allegations and demands. Barclays will vigorously defend the complaint and seek its dismissal at the earliest opportunity.” Deutsche’s shares have been pummelled on stock markets during 2016 over fears about its financial position. It had already set aside billions of euros in anticipation of the fine.
The DoJ did not comment on the announcements by Deutsche and Credit Suisse but as it filed legal papers against Barclays, Lynch said: “Financial institutions like Barclays occupy a position of vital public trust. Ordinary Americans depend on their assurances of transparency and legitimacy, and entrust these banks with their valuable savings. Barclays is the first bank to fail to reach a settlement and now faces lengthy court proceedings in New York to defend itself against claims it said ”are disconnected from the facts”.
“As alleged in this complaint, Barclays jeopardised billions of dollars of wealth through practices that were plainly irresponsible and dishonest. With this filing, we are sending a clear message that the Department of Justice will not tolerate the defrauding of investors and the American people,” Lynch said. Two of its executives Paul Menefee and John Carroll are named by the DoJ. Crowell & Moring partner Glen McGorty, representing Carroll, said he would challenge “these ill-conceived and baseless allegations, and expects to be fully vindicated”.
The DoJ did not comment on the announcements by Deutsche and Credit Suisse but as it filed legal papers against Barclays, Lynch said: ““As alleged in this complaint, Barclays jeopardised billions of dollars of wealth through practices that were plainly irresponsible and dishonest. With this filing, we are sending a clear message that the Department of Justice will not tolerate the defrauding of investors and the American people,.
Where the money will go
The precise detail of the $6.9bn in “customer relief” - or redress - that Deutsche Bank and Credit Suisse will have to pay for their misdemeanours is yet to be finalised with the Department of Justice.
But the redress schemes are likely to match those agreed with other banksfor misselling of residential mortgage bond securities..
For example, Goldman Sachs in April agreedto pay $1.8 bn in consumer relief as part of its $5bn settlement. This was described as writing off loans “for underwater homeowners and distressed borrowers” and making other payments “for construction, rehabilitation and preservation of affordable housing”. It also had to provide cash to support debt restructuring, to prevent foreclosure and back housing quality improvement programs.
Goldman was also told to put $240m into community projects to finance affordable homes for rent and sale.
The DoJ typically installs monitors – a lawyer or housing expert – to police the terms of the customer relief. The banks involved in the DoJ settlements do not necessarily have direct relationships with the home owners but have packaged up their loans to back the bonds.