US DoJ multi-billlion dollar windfalls as Credit Suisse, Deutsche settle over bond mis-selling

US DoJ multi-billlion dollar windfalls as Credit Suisse, Deutsche settle over bond mis-selling

The US Department of Justice (DoJ) has finally extracted a pair multi-billion dollar settlements from two of the world’s largest financial institutions as Credit Suisse and Deutsche Bank have both agree to settle a decade-old toxic bond mis-selling scandal.

Deutsche, Germany’s largest bank will pay a fee of US$7.2bn (£5.9bn) and Credit Suisse has agreed to pay US$5.3bn. (£4.26bn)

Both figures are considerably less than was originally requested by the DoJ as the deal was rushed through, after months of negotiations, led by by the out-going president Barrack Obama’s administration just weeks before Donald Trump takes over. The deals were announced via statements from Credit Suisse, Deutsche Bank and the US DoJ and Loretta Lynch, the US attorney general.

Bonds mis-selling

The fines dates back to 2005 and 2007, when banks packaged up home loans and sold them on to investors. These are the first settlements with the US DoJ and with non-US banks as JP Morgan, Goldman Sachs, Morgan Stanley, Bank of America Merrill Lynch and Citi have all been punished.

There are more penalties to come, with the UK government backed Royal Bank of Scotland also in the firing line. The bailed-out bank could face a bill of as much as £9bn, analysts have warned.

And at the same time, it was announced that Barclays failed to agree a settlement figure and will now face legal action from the US authorities. Barclays will now face an extensive public court case.

The DoJ did not disclose the size of the fine that it wanted to levy against Barclays but it accused the bank of “plainly irresponsible and dishonest conduct”.

Barclays vs DoJ

In a statement on the matter, Barclays said that it 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.”

The DoJ did not comment on the announcements by Deutsche and Credit Suisse but Lynch said as it filed legal papers against Barclays: “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.

“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,” she said.

Deutsche shares increase

The settlement by Deutsche has immediately increased the company’s share value by 4% at time of going to press. Deutsche has been fighting the authorities’ original attempt to impose a US$14bn fine and when news first leaked early this year, the German bank’s shares plunged to 31-year lows amid concerns over liquidity.

Under the settlement, Deutsche Bank will pay US$3.1bn and provide US$4.1bn in compensation to customers. Credit Suisse will pay US$2.5bn and compensation of US$2.8bn over five years.

Credit Suisse statement

In its statement announcing that it has reached a settlement in principle with the DoJ related to its legacy Residential Mortgage-Backed Securities (RMBS) business Credit Suisse said that the agreement would now “release Credit Suisse from potential civil claims by the DoJ related to its securitization, underwriting and issuance of RMBS”.
The settlement is subject to the negotiation of final documentation and approval by the Credit Suisse board of directors, the statement read.

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Gary Robinson

Commercial Director, Head of Video at International Investment.