By Jenny Strasburg and Max Colchester in London and Devlin Barrett in Washington
The Obama administration scrambled to resolve its remaining
crisis-era megabank mortgage cases, striking multibillion-dollar
settlements with Deutsche Bank AG and Credit Suisse Group AG over
toxic securities while separately filing a lawsuit against Barclays
PLC alleging more than $30 billion in fraud-tainted sales.
U.S. authorities settled with Deutsche Bank for $7.2 billion
Thursday. Early Friday, 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, on Friday morning. 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.
Shares in Deutsche Bank and Credit Suisse were up 4% and 2%,
respectively, early Friday morning, while Barclays shares were down
less than 1%.
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 finalized between the bank and the
government.
Deutsche Bank announced the pact Thursday evening in the U.S.,
saying 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
finalized, 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 follow similar multibillion-dollar agreements
reached over the past three years with other big banks, like J.P.
Morgan Chase & Co., Citigroup Inc. and Goldman Sachs Group.
Inc.
The decision to sue Barclays is more unusual but not unheard of.
The Justice Department filed two lawsuits against Bank of America
Corp. 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 Mr.
Trump nor his aides have indicated how they might handle legacy
financial-crisis fallout inherited from President Barack Obama. But
Mr. Trump in 2013 criticized J.P. Morgan CEO James 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?" Mr. Trump said at the time.
The Deutsche Bank settlement and Barclays suit come as the
Justice Department still has probes outstanding with two other big
European banks-- Royal Bank of Scotland Group PLC and UBS Group
AG.
The Justice negotiations this year have been a big cloud hanging
over an already-fragile European banking industry, weighing on
several major lenders' stock prices. Investors have worried about
whether those institutions' capital is sufficient to cover any
possible U.S. fines.
The Deutsche Bank settlement came together quickly in the latter
part of this week following intense negotiations between lawyers
representing the bank and the government, a person familiar with
the matter said. Going into the week, the two sides still had
significant differences to overcome, people close to the
discussions said.
Deutsche Bank and the government were steadily closing in on
terms, including the government's statement of facts about alleged
wrongdoing, each day this week, according to a person close to the
talks. The final main issue boiled down to money, the person
said.
A Deutsche Bank settlement was appearing more promising earlier
Thursday even without the Barclays lawsuit, but the government's
move to sue the U.K. bank added incentive to close a deal, the
person said.
The German bank said it will take a roughly $1.17 billion pretax
charge this quarter as a result of the $3.1 billion penalty. The
additional consumer relief has less immediate and less solid
consequences, because it is to be paid out over at least five
years, the bank said, adding that the settlement isn't expected to
have a material impact on its 2016 financial results.
Hours before the Deutsche Bank settlement was announced, the
Barclays talks broke down as executives at the U.K.'s
second-largest bank made clear they were wary of being pressured to
make a big payout.
Barclays Chief Executive Jes Staley had told people in recent
months that the bank wouldn't give U.S. authorities a blank check,
and wouldn't settle if he felt the price was too high, according to
people familiar with the discussions.
Government officials had discussed with Barclays lawyers the
possibility of suing, but the bank only learned Thursday that a
lawsuit was arriving the same day, according to a person familiar
with the matter.
The impasse between the two sides was still big: They remained
multiple billions of dollars apart, with Barclays unwilling to pay
$5 billion--an amount the government had said was in the range of
possibilities, according to a person familiar with the matter.
The 198-page lawsuit by the U.S. government says the bank
"engaged in a fraudulent scheme to sell tens of billions of dollars
of residential mortgage-backed securities, in which it repeatedly
deceived investors about the characteristics of the loans backing
those trusts."
Barclays sold the securities to a wide range of investors,
including financial institutions, Fannie Mae and Freddie Mac,
federal home-loan banks, credit unions, pension plans, charitable
and religious organizations, and university endowments.
"Many of these investors suffered devastating losses," according
to the suit, which was filed in a U.S. District Court in New York.
The suit singles out two former New York-based Barclays executives,
Paul Menefee and John Carroll, who had been hired in 2003 to help
run the bank's asset-securitization team, according to an
announcement at the time. Both were previously at Morgan Stanley
and left Barclays in 2008.
The complaint is filled with expletive-laced conversations
involving those men and others familiar with the loans, taken from
transcripts of recorded phone calls and emails. In one, the
complaint says that Mr. Menefee, who was in charge of due diligence
on the subprime deals at issue, allegedly said that one loan pool
"scares the sh*t out of me." At another point, that same executive
said about a Wells Fargo & Co. pool, according to the
complaint: "We have to eat their sh*t loans."
Mr. Menefee's lawyer called the complaint "a misguided attempt"
to blame his client and others for losses incurred by sophisticated
institutional investors after an industrywide housing market
collapse.
Mr. Carroll's lawyer didn't respond to requests for comment.
The suit also alleges that companies hired to conduct
due-diligence checks on the mortgages warned the bank, and those
warnings were essentially ignored. "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.
The allegations relate to activities and employees at Barclays,
before the bank's 2008 buy of the collapsed investment bank Lehman
Brothers.
During Barclays's settlement negotiations, one of the key
arguments the bank made to Justice Department lawyers was that
Barclays was the most-exposed investor in the securities in
question, and had already taken a big write-down during the
financial crisis as a result of losses.
Barclays also insisted that losses from the securities were
related to broad market events, not its own practices, and argued
that its due diligence on the deals was deemed at or above industry
standards, including by government-backed entities that approved of
Barclays's methodology at the time.
In recent days, government lawyers were scheduling calls with
Barclays lawyers, pushing for progress in the talks, a person
familiar with the matter said.
On Thursday, the government gave the bank a brief heads-up
before filing the complaint about 3 p.m. ET.
Lawyers for the bank could respond to the lawsuit as early as
next month, people close the matter said.
Aruna Viswanatha and John Letzing contributed to this
article.
Write to Jenny Strasburg at jenny.strasburg@wsj.com, Max
Colchester at max.colchester@wsj.com and Devlin Barrett at
devlin.barrett@wsj.com
(END) Dow Jones Newswires
December 23, 2016 03:37 ET (08:37 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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