• by Thom Forbes  @tforbes, December 23, 2016

After months of negotiations with the Department of Justice, Deutsche Bank announced a $7.2 billion deal in principle yesterday to settle allegations that it had sold residential mortgage-backed securities (RMBS) that contributed to the global financial crises of 2008. The amount is nearly half of what the bank had warned the feds were looking to get; it is broken into $4.1 billion in “consumer relief” and $3.1 billion in fines.

“The consumer relief is expected to 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,” according to the Deutsche Bank release.

Credit Suisse also announced a provisional deal for $5.3 billion —  $2.48 billion in fines and $2.8 billion to be paid over five years in consumer relief. The deal is in line with the $5 to $7 billion the DOJ was looking for, Reuters’ Michael Shields and Arno Schuetze report. 

“The settlements, which focus on activities in 2005 to 2007, revisit an ugly chapter of the global financial crisis, in which banks bundled mortgages from people with shaky credit into bonds whose risks many investors did not understand. When the mortgages went into default as the U.S. real estate market collapsed, so did the bonds, spreading losses and panic through the financial system,” the AP’s David McHugh and Jamey Keaten recap for USA Today.

The DOJ, meanwhile, said yesterday that it had issued a civil claim against Barclays and two of its executives in federal court in the Eastern District of New York. 

“The widespread fraud that investment banks like Barclays committed in the packaging and sale of residential mortgage-backed securities injured tens of thousands of investors and significantly contributed to the Financial Crisis of 2008,” said principal deputy associate attorney general Bill Baer in the release announcing the action. “Millions of homeowners were left with homes they could not afford, leaving entire neighborhoods devastated.”

It is “thought to be the first time an institution had failed to reach a settlement with the U.S. authorities over the sale of residential mortgage-backed securities in the run-up to the banking crisis. Responding to the news on Thursday night, Barclays said it would fight the case,” Jill Treanor reports for the Guardian.

The suit names two of its former executives — Paul K. Menefee, of Austin, Texas, who served as Barclays’ head banker on its subprime RMBS securitizations, and John T. Carroll, who served as Barclays’ head trader for subprime loan acquisitions — claiming they “were central to Barclays’ allegedly fraudulent scheme.”

The Deutsche Bank deal “comes after many months of uncertainty that cast a pall over the bank’s future after reports last fall that the government had asked the bank to pay $14 billion as negotiations got underway,” observe Ben Protess and Landon Thomas Jr. for the New York Times. “That such an enormous number was even mentioned raised concerns not just about the bank’s business model in the years ahead, but its short-term prospects as well.”

The Washington Post’s Drew Harwell and Tom Hamburger observe: “If approved, the proposed settlement could help dampen concern about a conflict facing incoming President-elect Donald Trump, whose businesses have borrowed more than $300 million from the troubled German bank.” Trump has listed it as his companies’ biggest lender, with roughly $364 million in outstanding debts, in financial filings.

In Die Welt, “Tobias Kaiser writes that the deal “will generate a sigh of relief at Deutsche Bank headquarters. … But the punishment that has now been agreed on is still a hefty one,” reports the BBC.

“Other banks that have been ordered to pay fines by the DOJ include Citigroup, which says its $12 billion penalty has been reduced to $7 billion,” the BBC continues. “In 2013, JP Morgan Chase was fined $13 billion, following allegations that it overstated the quality of mortgages being sold to investors. In the following year, Bank of America paid $16.7 billion to settle similar charges. Goldman Sachs settled for $5.1 billion in January this year.”

The British lender RBS “now looks like the last of the European banks facing [DOJ] fines that could reach as high as $16 billion,” writesThe Street’s James Skinner. “The bailed-out lender has been widely expected to face the largest of all mortgage-related fines given its position as a preeminent underwriter in the RMBS market before the crisis, second only to Lehman Brothers and Bear Stearns,” both of which are defunct as a result.