News the US Department of Justice is seeking $14 billion from Deutsche Bank to settle civil claims over its handling of the mortgage-backed securities crisis sent the troubled German lender’s shares reeling and back towards multi-year lows.
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Deutsche’s new CEO John Cryan has led a cost-cutting and restructuring drive that’s involved job cuts and the bank’s withdrawal from some smaller countries. US stocks are slightly higher in early trading Wednesday, Sept. 14, 2016, as utility companies climb.
US and European stocks were moderately lower in early trading Friday after Deutsche Bank said it wouldn’t settle with the Department of Justice over its handling of mortgage-backed securities in the run-up to the 2008 financial crisis.
The cost of insuring Deutsche Bank debt against default rose by around eight per cent. “The bank confirms market speculation of an opening position by the DoJ of Dollars 14 billion and that the DoJ has invited the bank as the next step to submit a counter proposal”, as per the bank’s press release.
“Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited”.
In an overnight statement, the bank called the DoJ’s 12.5 billion euro claim in relation to the 2008 mortgage crisis an “opening position”, saying it expected to reach a “materially lower” figure in negotiations.
JPM expects RBS to provision an additional $4.2 billion by the end of 2017, to cover a series of litigation and conduct issues which may include settlement of a US style class action brought by investors who claim they were misled about the bank’s financial health at the time of its rights issue in spring 2008.
Deutsche Bank’s problems are likely to alarm political leaders in Europe’s largest economy and the home to the European Central Bank.
German Finance Ministry spokeswoman Friederike von Tiesenhausen weighed into the debate, saying Germany is “aware that United States authorities have agreed with other banks on settlement payments, and so the German government assumes that a fair result will be reached at the end of this process as well, on the basis of equal treatment”.
While the German lender has signalled that it would fight the demand, the news has nevertheless reignited fears that the FTSE 100 group could also face a higher-than-expected bill for selling toxic mortgage-backed securities in the USA before the financial crisis.
Banks’ alleged misconducts related to the MBS dates back to the financial crisis of 2008-09, when the German lender allegedly misled investors through inadequate underwriting and issuance of MBS over the 2005-2007 period. But I’m sure in the end it won’t be that high.
In 2014, the DoJ asked Citigroup to pay $12 billion to resolve an investigation into the sale of shoddy mortgage-backed securities, sources said. The fine eventually came in at US$7 billion.
Goldman Sachs Group Inc., being the most recent bank to settle the charges, agreed to pay a settlement charge of $5 billion in April.
The concern comes after The Wall Street Journal reported late Thursday that the Justice Department is proposing the bank pay $14 billion to settle several high-profile mortgage probes in the USA dating back to mortgage-backed securities the bank sold between 2005 and 2007.
A $14 billion fine, or even half that sum, would still rank among one of the largest paid by banks to United States authorities in recent years.
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Investors are concerned over the uncertain settlement amount while keeping in view Deutsche Bank’s provisions for legal settlements of €5.4 billion ($6 billion) for the year.
