Deutsche and Credit Suisse reach settlement in US mis-selling cases

US federal prosecutors suing Barclays and executives over mortgage-backed securities

Deutsche Bank: has said it had reached a $7.2 billion (€6.9 billion) deal with US authorities. Photograph: Ralph Orlowski

Deutsche Bank: has said it had reached a $7.2 billion (€6.9 billion) deal with US authorities. Photograph: Ralph Orlowski


Deutsche Bank and Credit Suisse have agreed to pay out billions to resolve a probe into the alleged mis-selling of mortgage-backed securities at the height of the US housing bubble, striking deals before the Trump administration takes power.

The deals came as federal prosecutors announced they were suing Barclays and two of its executives over the issue of allegedly fraudulent residential mortgage-backed securities. The suit followed the breakdown of talks aimed at reaching a negotiated settlement with the department of justice and seeks unspecified civil penalties.

After months of its negotiations with the department, Deutsche said it had reached a $7.2 billion (€6.9 billion) deal with US authorities. Germany’s biggest bank had agreed “in principle” to pay a $3.1 billion civil penalty and also provide $4.1 billion in relief to consumers, over time.

Credit Suisse has also agreed to pay $5.28 billion to resolve a department probe of similar alleged actions. The Swiss bank said it will pay a civil penalty of $2.48 billion and, like Deutsche’s agreement, provide consumer relief to the tune of $2.8 billion over the course of five years.

Turbulent months

The Deutsche deal caps a turbulent few months for the German bank, which saw its share price drop to a record low in September after it emerged the department of justice had made a $14 billion claim.

Investors were concerned about Deutsche’s ability to withstand a $14 billion hit after Angela Merkel’s administration was forced to state that it would not bail out the bank, whose market capitalisation had sunk to just $18 billion.

Deutsche had insisted it was not expecting to settle the claims for anything like that sum. The $7.2 billion figure is higher than some analysts and investors had expected, though many may be relieved the cash component of the deal is $3.1 billion.

“We see the announcement by DB [Deutsche Bank] today around reaching a settlement in principle with the DoJ [department of justice] on the RMBS [residential mortgage-backed securities] issue in the US as very positive,” said Kian Abouhossein of JPMorgan, adding that the settlement “removes a major overhang” from the bank and has a “manageable impact on capital in the short term”.

Ingo Speich, a portfolio manager at Union Investment, one of Deutsche’s top 25 shareholders, said: “It’s a good compromise. The bank has shed one of the issues weighing on it, and a little bit of uncertainty will come out of the share price . . . It’s not the end of all their problems, but it’s certainly not a disappointment either.”

Loan modifications

The consumer relief portions of the settlements are typically far less painful for the banks than the straight payments since they are paid out over a period of years and not in cash. In the case of Deutsche Bank, Mr Abouhossein said the relief would be “primarily in the form of loan modifications and other assistance to homeowners and borrowers, and other similar initiatives to be determined, and delivered over a period of at least five years”.

The Deutsche and Credit Suisse deals are the latest in a series of settlements the US government has reached with banks for creating and selling mortgage-backed securities ahead of the 2008 financial meltdown.

They include a $13 billion bill for JPMorgan Chase, $7 billion for Citigroup and $17 billion for Bank of America. Royal Bank of Scotland and UBS are both still negotiating settlements with the department of justice. RBS was one of the biggest issuers of RMBS before the crisis and is expected to face penalties of as much as $13 billion. – Copyright The Financial Times Limited 2016