Deutsche and Credit Suisse pay $12.5bn to settle MBS probes

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US authorities settled with Deutsche Bank for $ 7.2 billion on December 22. Early on December 23, Credit Suisse said it had agreed to pay about $ 5.3 billion to close the matter.

Deutsche Bank and Credit Suisse shares rose 4% and 2%, respectively. Shares in Barclays dropped less than 1% as investors digested the potential uncertainty of a protracted legal battle with the Justice Department.

The dramatic back-to-back announcements show the urgency among senior Obama appointees in the Justice Department to resolve the outstanding probes of precrisis conduct at major banks before those officials leave office in mid-January. Part of the rush stems from a great deal of uncertainty about how a Trump administration might pursue, settle or drop the remaining probes, according to people familiar with the discussions.

The Deutsche Bank settlement is likely to bring some relief for the German bank’s shareholders, who earlier in the year worried about a much bigger penalty. The Justice Department had originally sought $ 14 billion from Deutsche Bank, The Wall Street Journal reported in September, raising concerns about whether the institution would be able to negotiate that down.

Less than half the settlement requires a cash payment that would have an immediate impact on Deutsche Bank’s bottom line. The settlement was divided into a $ 3.1 billion penalty and a pledge to pay $ 4.1 billion over time to a “consumer relief” fund to be distributed by the government.

The terms of that relief – including loan modifications to help consumers – still must be finalised between the bank and the government.

Deutsche Bank said it had reached an agreement “in principle” with the Justice Department. A Justice Department spokesman declined to comment. In major corporate settlements, particularly when the deal isn’t yet finalised, it isn’t uncommon for firms to announce the framework of a deal before the government, often in the hopes of a garnering a positive reaction from shareholders.

Credit Suisse said it would take a $ 2 billion charge to cover its settlement. The Swiss bank’s deal includes a penalty from the Justice Department of $ 2.48 billion, and consumer-relief payments of about $ 2.8 billion, to be paid over five years. Again, the deal remains subject to “final documentation”.

The settlements follows similar multibillion-dollar agreements reached over the past three years with other big banks, like JP Morgan, Citigroup and Goldman Sachs.

The decision to sue Barclays is more unusual but not unheard of. The Justice Department filed two lawsuits against Bank of America related to precrisis sales of mortgage-backed securities in 2012 and 2013. One of those was thrown out earlier this year on appeal. The damages sought against Barclays weren’t quantified.

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.” Bank officials declined to elaborate on why the talks broke down, but one person familiar with the matter said that continuing the talks under “a fresh pair of eyes” – in a new presidential administration – might be more beneficial.

A prolonged legal battle would be handled by Justice Department officials appointed by President-elect Donald Trump. Neither Trump nor his aides have indicated how they might handle legacy financial-crisis fallout inherited from President Barack Obama. But Trump in 2013 criticised JP Morgan CEO Jamie Dimon that year as “the worst banker in the United States” for reaching a $ 13 billion settlement in a similar case. “What happened to the days when you actually go to trial?” Trump said at the time.

The Justice Department still has probes outstanding with other big European banks including Royal Bank of Scotland Group and UBS.

This article was pulished by The Wall Street Journal. For more, click here.

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