Flurry of settlements over toxic mortgages may save banks billions

European banks have rushed to cut deals with prosecutors over longstanding claims that they pushed toxic mortgage securities in the years before the financial crisis.

The pay-outs are steep: Deutsche Bank and Credit Suisse said that they would disgorge nearly $13 billion combined to settle with the United States Justice Department.

But with the clock ticking before President-elect Donald J Trump takes over, there appears to be an eagerness in Washington to conclude cases before a new, potentially more sympathetic, administration begins. As a result, these banks may have benefited from paying billions less than once proposed.

The $7.2-billion settlement with Deutsche Bank was a relief on Friday to its investors, who were rattled when it emerged in September that prosecutors were seeking a penalty of as much as $14 billion. Shares of Deutsche Bank rose as much as 5 per cent in Frankfurt, before settling up 0.8 per cent.

 

A smaller player in the mortgage-backed securities market, the British bank Barclays, appears to be willing to take its chances under the administration of Trump.

Barclays said on Thursday that it would "vigorously defend" itself in court against a complaint brought by the Justice Department after settlement talks collapsed. Its shares fell 0.9 per cent in London trading as investors weighed the legal risk.

The government says that Barclays, which like Deutsche Bank has significant operations in New York, sold more than $31 billion in mortgage securities that turned out to be "catastrophic failures."

A decade ago, bundling and structuring mortgages on American homes into securities to be sold to investors around the world was a hugely profitable business for Wall Street banks, American and European. But as risky mortgages began tumbling into default, the securities turned toxic, and the resulting panic led to a global financial crisis in 2008.

Holding the banks accountable for that meltdown continues to be debated in political campaigns, books, op-ed articles and movies like "The Big Short."

The crackdown on banks for those tainted securities was the Obama Justice Department's biggest and most prominent crisis-era legal effort by far. Banks, most of them American, have paid more $100 billion in settlements with the government.

Yet the Obama administration has been criticised for allowing banks to write big checks to settle claims and for not prosecuting Wall Street executives.
 

Now, as the end of the administration nears, recent legal setbacks may have emboldened Barclays. (The Swiss bank UBS and the Royal Bank of Scotland remain in settlement talks with the Justice Department.)

In May, a federal appeals court overturned a $1.27 billion penalty against Bank of America over the sale of troubled mortgages to Fannie Mae and Freddie Mac. The appeals panel found that prosecutors did not provide sufficient evidence that either the bank's Countrywide unit or a former Countrywide executive had committed fraud in a loan program known as "the hustle."

For its fight with the Justice Department, Barclays is bringing in a team of lawyers from Williams & Connolly who represented Bank of America in that case. Barclays will also rely on its usual counsel at Sullivan & Cromwell.

Deutsche Bank and Credit Suisse have been eager to move past their troubled legal legacies and overhaul their respective banks. Credit Suisse said on Friday that it would pay $5.3 billion over its role in mortgage securities.

For Deutsche Bank, a settlement lifts a cloud that had been hanging over the bank, and making it all the more difficult for its leader to break with its past.

In recent years, its legal woes have surpassed mortgage securities to include manipulating benchmark interest rates and allegations of Russian money laundering.

Since taking over in mid-2015, John Cryan, Deutsche Bank's chief executive, has been trying to undo this legacy. But the settlement does not dispel doubts about whether Cryan can retain membership among the world's top investment banks.

Especially in the United States, Deutsche Bank's ability to compete with Goldman Sachs and JPMorgan Chase is likely to be hampered by the costly settlement.

And no institution can call itself a global investment bank without a strong presence on Wall Street.

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© 2016 The New York Times News Service