The large $14 billion fine that the Department of Justice came up with a few months ago caused the bank's stock to tumble and threatened its very existence.
Deutsche Bank's investors and the entire global financial market could finally breathe a sigh of relief as the biggest German lender announced yesterday night that it had come to an agreement with the U.S. Department of Justice over mis-selling of mortgage-based securities between 2005 and 2007. According to the preliminary statement, the bank agreed to pay $7.2 billion fine that includes $3.1 billion of direct cash payments as well as $4.1 billion of "consumer relief" penalty.
The result of the months-long negotiations between the regulator and the bank came as a positive surprise to the investors since the total amount of the fine is significantly lower than the initial penalty of $14 billion. In addition to that, the immediate cash payment expected from the bank is "only" $3.1 billion whereas the consumer relief payments can be paid out over several years. This means that the fine will not significantly shake up Deutsche Bank's financials any further.
"In connection with the resolution of this matter, Deutsche Bank expects to record pre-tax charges of approximately US dollar 1.17 billion in the financial results for the fourth quarter as a consequence of the civil monetary penalty. The financial consequences, if any, of the consumer relief are subject to the final terms of the settlement, and are not currently expected to have a material impact on 2016 financial results," the bank said in the official statement.
More specifically, the "consumer relief" part of the deal will be satisfied through loan modifications as well as assistance to homeowners and borrowers within a time frame of at least 5 years, explained the German lender. The Financial Times said that the consumer relief was traditionally far less painful for the banks to deal with because it was not paid in cash but rather through specific actions as the ones mentioned above.
Even though no announcement from the DOJ has been received so far and the agreement was not formally signed, Deutsche Bank's preliminary announcement was enough to cheer investors up. At the European open today, the bank's shares were trading 5% higher on the news from the night before.
"It could have been even worse for Deutsche Bank, but the punishment that has now been agreed with the U.S. Department of Justice will put a heavy burden on the country's biggest financial institution for years to come," said Suddeutsche Zeitung, as reported by BBC.
Deutsche Bank (NYSE: Deutsche Bank [DB]) has lost over half of its value this year and the DOJ's penalty only further disappointed the bank's investors and depressed the global financial markets. For the bank, whose remaining market cap was only $18 billion, the $14 billion penalty was too big to carry and the German government made it clear that it would prefer not to get involved with bailing out the country's largest bank. The lender has repeatedly claimed that it was not planning to settle for a penalty anywhere near the suggested $14 billion, although some sources said that the bank had only €5.5 billion of available funds for legal settlements. That is why, the penalty amount is still a relief but some analysts expected a lower number.
The last days of the Obama administration
Apart from the long-awaited resolution of the DOJ-Deutsche Bank negotiations, the Justice Department made two other important announcements yesterday. Next to Deutsche Bank, Credit Suisse (SIX Swiss Exchange: Credit Suisse Group [CSGN]), another European lender accused of issuance and underwriting of residential mortgage-backed securities prior to the 2008 financial crisis, also agreed with the DOJ to pay $5.3 billion to resolve the matter. The Wall Street Journal mentions that Credit Suisse's repayment scheme mimics that of Deutsche Bank, with $2.48 billion of civil monetary penalty and about $2.8 billion of consumer relief. The news of the regulator's second agreement came in earlier today.
On top of that, the Department of Justice went on to file a separate lawsuit on yet another European bank, Barclays PLC (LSE: Barclays [BARC]), claiming that the bank "repeatedly misrepresented the characteristics of the loans backing securities they sold to investors throughout the world, who incurred billions of dollars in losses". Barclays, in turn, said in a statement that the regulator's claims were "disconnected from the facts", with some people close to the bank suggesting that it would help to continue the talks with the Justice Department in a few months, when the new administration enters the office, reported the Financial Times. Credit Suisse gained 2.2% at the open today whereas Barclays slipped 1.9%.
"This is very important. The US wants to be seen as fair. If it is going to go after these big banks, they've got to not just see the US take money from them, they must see some money go back to the people who bought mortgage-backed securities, be it institutional investors, the big fund managers, the big pension fund or be it individuals," a banking analyst Chris Wheeler told BBC Radio 4.
This is exactly why these three big issues were decided upon in a matter of a few hours, say the analysts. The Obama administration that is counting its last days in the office rushed to resolve the multi-billion mortgage-related cases with the European lenders before the year-end, which points at the ultimate urgency to take such decisions within a short time frame. Some believe this hurry comes from the fears of an incoming Trump administration that is expected to be much softer towards similar cases, what can result in lower settlement amounts for the lenders or even the discontinuance of the probes.
As it was previously reported, a group of the top Democrat representatives addressed governmental watchdogs a few weeks ago with a warning that the president-elect Trump together with his newly-appointed Justice Department heads might favor the banks in question. According to the Wall Street Journal, Trump received over $2.5 billion in lendings from the German bank over a number of years while all other Wall Street banks stopped working with the businessman. If Deutsche Bank was to struggle because of the huge penalty imposed by the DOJ, it would not be in Trump's interests to let the German lender collapse. This could explain a quicker than expected resolution of the months-long probes.