Banks rush to cut deals over toxic mortgages

NEW YORK • European banks have rushed to cut deals with prosecutors over longstanding claims that they pushed toxic mortgage securities in the years before the financial crisis.

The payouts are steep: Deutsche Bank and Credit Suisse said that they would disgorge nearly US$13 billion (S$18.8 billion) combined to settle with the United States Justice Department.

But with the clock ticking before President-elect Donald Trump takes over, there appears to be an eagerness in Washington to conclude cases before a new administration begins.

As a result, these banks may have benefited from paying billions less than once proposed.

The US$7.2 billion settlement with Deutsche Bank was a relief last Friday to its investors, who were rattled when it emerged in September that prosecutors were seeking a penalty of as much as US$14 billion.

Shares of Deutsche Bank rose as much as 5 per cent in Frankfurt, Germany, before settling up 0.8 per cent.

The crackdown on banks for those tainted securities was the Obama Justice Department's biggest and most prominent crisis-era legal effort by far. Banks, most of them American, have paid more than US$100 billion in settlements with the government.

In May, a federal appeals court overturned a US$1.27 billion penalty against Bank of America over the sale of troubled mortgages to Fannie Mae and Freddie Mac.

The appeals panel found that prosecutors did not provide sufficient evidence that either the bank's countrywide unit or a former countrywide executive had committed fraud in a loan programme known as "the hustle".

Deutsche Bank and Credit Suisse have been eager to move past their troubled legal legacies and overhaul their respective banks.

Credit Suisse said last Friday that it would pay US$5.3 billion over its role in mortgage securities.

For Deutsche Bank, in particular, a settlement lifts a cloud that had been hanging heavily over the bank, and making it all the more difficult for its leader to break with its past.

In recent years, its legal woes have gone beyond toxic mortgage securities to include manipulating benchmark interest rates and allegations of Russian money laundering.

Since taking over in the middle of last year, Mr John Cryan, Deutsche Bank's chief executive, has been trying to undo this legacy. But the settlement does not dispel doubts about whether Mr Cryan can retain membership among the world's top investment banks.

Especially in the United States, Deutsche Bank's ability to compete with Goldman Sachs and JPMorgan Chase is likely to be hampered by the costly settlement.

And no institution can call itself a global investment bank without a strong presence on Wall Street.

"It's the most important market for investment banking," said Mr Ingo Speich, a senior fund manager at Union Investment in Frankfurt.

"If they want to offer investment banking services globally, they can't get around the US."

One US connection of Deutsche Bank has drawn attention lately.

In a financial disclosure form filed last year, Mr Trump disclosed that the wealth management division of the bank was among the firms that managed stock investments for him.

In that same filing, Mr Trump reported that his businesses have taken out loans or mortgages from Deutsche worth as much as US$125 million.

Some critics have suggested Mr Trump's business and personal dealings with Deutsche Bank could pose a conflict of interest.

NYTIMES

A version of this article appeared in the print edition of The Sunday Times on December 25, 2016, with the headline 'Banks rush to cut deals over toxic mortgages'. Print Edition | Subscribe