Last Hurrah for Obama’s Justice Department: Bank Settlements Over Toxic Mortgages

Last Hurrah for Obama’s Justice Department: Bank Settlements Over Toxic Mortgages By LANDON THOMAS Jr. and JACK EWINGDEC. 23, 2016 Continue reading the main storyShare This Page Share Tweet Email More Save Photo Deutsche Bank on Wall Street. Investors were relieved this week when the bank reached a $7.2 billion settlement with the Justice Department to end an investigation into the sale of toxic mortgage securities. Credit Mark Kauzlarich/Bloomberg 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 payouts 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, these banks may have benefited from what appears to be an eagerness on the part of Washington to conclude cases before a new, potentially more sympathetic, administration begins. 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 percent in trading in Frankfurt, before settling up 0.8 percent. Continue reading the main story RELATED COVERAGE Credit Suisse to Pay $5.3 Billion to Resolve Mortgage Inquiry DEC. 23, 2016 Deutsche Bank to Settle Mortgage Inquiry for $7.2 Billion DEC. 22, 2016 Justice Department Sues Barclays Over Mortgage-Backed Securities DEC. 22, 2016 ADVERTISEMENT Continue reading the main story 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 Mr. 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 percent 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 era 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 in recent years. Yet the Obama administration has been criticized 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 in particular, a settlement lifts a cloud that had been hanging heavily 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 gone beyond toxic mortgage securities to include manipulating benchmark interest rates and allegations of Russian money laundering. Photo John Cryan, who became chief executive of Deutsche Bank in 2015, has been trying to move the bank beyond its legal problems. Credit Boris Roessler/European Photopress Agency 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 Mr. 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. “It’s the most important market for investment banking,” said Ingo Speich, a senior fund manager at Union Investment in Frankfurt. “If they want to offer investment banking services globally, they can’t get around the U.S.” One American connection of Deutsche Bank has drawn attention lately. In a financial disclosure form filed in 2015, Mr. Trump disclosed that the wealth management division of the bank was among the firms that managed stock investments for him. The transition team for Mr. Trump has since said it has sold the president-elect’s stock holdings. In that same filing, Mr. Trump reported that his businesses have taken out loans or mortgages from Deutsche worth as much as $125 million. Some critics have suggested that Mr. Trump’s business and personal dealings with Deutsche Bank could pose a conflict of interest. Mr. Cryan, meanwhile, is trying to pull off several transformations at once. He has been hacking away at a catalog of charges of wrongdoing and litigation that, in the bank’s most recent quarterly report, required more than eight pages to explain. Other charges include violating international embargoes against countries like Iran and manipulating currency markets. In addition, Mr. Cryan has been trying to infuse the bank with a stronger sense of ethics to avoid future scandals. He also has been shrinking the bank’s assets — the sum of its outstanding loans, derivatives and other holdings — to reduce its need for capital and meet stricter regulatory requirements. And he has been trying to cut costs and improve efficiency, including laying off thousands of workers and bringing order to the bank’s Balkanized information technology systems. As Deutsche Bank made acquisitions over the years to expand its services, it acquired a variety of computer systems that were never properly integrated. American regulators have criticized Deutsche for not being able to answer requests for information because its technology was antiquated. Most important, Mr. Cryan has been trying to convince investors and demoralized employees that Deutsche Bank can find new sources of profit and growth despite its setbacks. Only then can it avoid the fate of European rivals that have sharply curtailed their investment banks, like Credit Suisse. Deutsche Bank’s supporters point out that it still has many strengths. It ranks among the world’s top currency traders. With its operations in Frankfurt and London, Deutsche Bank could benefit as clients shift financial operations to the Continent because of Britain’s vote to leave the European Union. The bank may also be well positioned to take advantage of growth in Europe’s corporate bond markets. Companies in Europe tend to rely on traditional bank loans, but increasingly are turning to debt markets, as is already the case in the United States. Deutsche Bank is a leading issuer of corporate debt. And some clients are wary of the dominance of the big American investment banks and are eager to do business with a European bank instead. But attempts to capitalize on those opportunities are likely to be hampered for years by errors of the past. “The question is how many risks are still in the pipeline,” Mr. Speich of Union Investment said. “It’s too early to say the worst is over.” Follow Jack Ewing on Twitter @JackEwingNYT. Matthew Goldstein and Chad Bray contributed reporting. Continue reading the main story FROM OUR ADVERTISERS RELATED COVERAGE Credit Suisse to Pay $5.3 Billion to Resolve Mortgage Inquiry DEC. 23, 2016 Deutsche Bank to Settle Mortgage Inquiry for $7.2 Billion DEC. 22, 2016 Justice Department Sues Barclays Over Mortgage-Backed Securities DEC. 22, 2016