The U.S. Justice Department proposed that Deutsche Bank AG pay $14 billion to settle a set of high-profile mortgage-securities probes stemming from the financial crisis, according to people familiar with the matter, a number that would rank among the largest of what other banks have paid to resolve similar claims and is well above what investors have been expecting.
The figure is described by people close to the negotiations between Deutsche Bank and the government as preliminary, and they said it came up in discussions between the bank and government lawyers in recent days. It hasn’t been previously disclosed. Deutsche Bank is expected to push back strongly against it, the people said, and it is far from clear what the final outcome will be.
Shares in the bank fell 8% Friday morning.
It is also unclear how much of that amount is proposed to be paid in cash, and how much could be in consumer relief, as past deals have been structured.
The Justice Department routinely opens high-stakes civil settlement talks with a tough posture, posing higher numbers than it might expect eventually to win, even from banks eager to close long-running probes, lawyers involved in current and similar negotiations say.
After the publication of this story by The Wall Street Journal, Deutsche Bank confirmed in a statement that the Justice Department’s opening bid is $14 billion and that the bank has been invited to submit a counterproposal.
“Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited,” the bank said. “The negotiations are only just beginning. The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts.”
Deutsche Bank hasn’t said what it has set aside in anticipation of a settlement. The bank held €5.5 billion ($6.2 billion) in total litigation reserves as of June 30, and said it expected to set aside more before the end of the year.
Privately, Deutsche Bank lawyers have suggested that the bank views between $2 billion and $3 billion as a reasonable cost to close out the Justice Department’s mortgage-related probe quickly, according to people familiar with internal bank discussions and signals communicated to investors. One factor in Deutsche Bank executives’ thinking is that the lender already paid $1.9 billion in 2013 to settle some U.S. claims tied to mortgage-backed securities, some of the people said.
A hefty settlement would be bad news for a clutch of big European lenders who also face potential penalties or litigation in connection with a U.S. crackdown on the selling and packaging of residential mortgage-backed securities before 2008.
“The point with coming in with a number like that is to set expectations, to express the seriousness of the conduct from the department’s perspective, and to signal that, in order for negotiations to continue, the financial institution is going to have to put a significant amount of money on the table as a counter,” said a former Justice Department official who was involved in previous mortgage-securities settlement negotiations. The former official also said the final number could be less than half the opening bid.
Big U.S. banks have paid multibillion-dollar settlements for allegedly misleading investors about the quality of such securities.
The largest so far has been $16.65 billion paid by Bank of America Corp. in 2014. Goldman Sachs Group Inc. agreed in April to a $5 billion deal that included a $2.4 billion cash penalty plus a pledge of $1.8 billion to help struggling borrowers and communities hard hit by the 2008 collapse in home prices.
The banks have been accused of bundling poorly-underwritten home loans and selling them as safer securities than they knew them to be, ultimately helping to fuel a bubble in rising home prices and exacerbating the consequences of the subsequent collapse.
Citigroup Inc., J.P. Morgan Chase & Co. and Morgan Stanley together paid more than $23 billion in penalties and consumer help to settle claims.
In all of these settlements, the banks acknowledged improper behavior.
The European banks that remain under investigation and could face penalties besides Deutsche Bank, include Barclays PLC, Credit Suisse Group AG, UBS Group AG and Royal Bank of Scotland Group PLC, according to bank disclosures and people familiar with the matter.
The banks haven’t commented on any potential settlements other than to say they are cooperating with the investigations. Some have set aside money for mortgage investigations as part of their broader legal provisions, without specifying allocations, according to company filings.
Lawyers working with various banks say they consider Deutsche Bank a test case in this next round of anticipated settlements, which come at a sensitive time for European banks already thin on capital and slogging through job cuts and restructuring. Lawyers for both Deutsche Bank and Barclays have met or are meeting with Justice Department officials this month to discuss a potential pact, according to people familiar with the talks. Some lawyers involved have expressed a desire to reach a deal by the November presidential election, the people said.
Barclays CEO Jes Staley and Deutsche Bank CEO John Cryan have both said they are eager to put big-ticket legal matters behind them.
The apparent gulf between figures viewed as palatable to the bank and those posed by Justice Department officials suggests negotiations could still have a long way to go, and could ultimately lead to court battles, the people said.
Government negotiators, for instance, first suggested a $20 billion price tag to both J.P. Morgan and Bank of America before settling on $13 billion for J.P. Morgan and $17 billion for Bank of America.
Analysts have estimated Deutsche Bank alone might pay between $2 billion and $5 billion, based on previous settlements with banks including Goldman Sachs and Morgan Stanley, and Deutsche Bank’s relative size in the precrisis market for packaging and selling residential-mortgage-backed securities.
In June, Barclays banking analyst Jeremy Sigee estimated Deutsche Bank might pay $4.5 billion, and Credit Suisse and UBS might each pay $2 billion. He and other analysts have said settlements ultimately could push Deutsche Bank and Credit Suisse toward capital hikes.
Past settlements haven't always been tied directly to the size of the business targeted. Citigroup, for example, paid a larger penalty than expected based on its size in the market for residential-mortgage securities. Officials said at the time it was commensurate with the strength of evidence against the bank. Goldman Sachs, Morgan Stanley and Citigroup declined to comment.
U.S.-listed shares of Deutsche Bank fell 5% in after-hours trading after the publication of this story by the Wall Stree Journal.