U.S. Faults Foot-Dragging Banks Amid Deutsche Bank Talks

  • DOJ’s Baer says U.S. banks ‘chose not to’ help, raising fines
  • Deutsche Bank spurned $14 billion initial settlement offer

The Justice Department, locked in settlement talks with Deutsche Bank AG, said that several lenders caught up in long-running mortgage securities investigations had dragged out the government’s work by failing to cooperate and have only themselves to blame for the “cloud of uncertainty” that hung over them.

Bill Baer, the department’s No. 3 official said, used a speech in Chicago on Tuesday to recount the “stunning breakdown of ethics” and compliance among banks that packaged and sold faulty residential mortgage bonds at the heart of the 2008 financial crisis. Without help from the banks in several instances, he said, the government was forced to build cases from the ground up.

“Each prolonged the period in which a cloud of uncertainty hung over the institution. And each paid a lot more than it would have if it had cooperated early on,” Baer said.

Investors are monitoring the Justice Department for signals on how it’s handling negotiations with Deutsche Bank to settle an inquiry into the lender’s residential mortgage-backed securities operation. The U.S. opened settlement talks with a request for a $14 billion penalty, the bank has said. That’s more than the bank, which faces multiple U.S. investigations into its operations, says it’s willing to pay.

Deutsche Bank, which didn’t have a comment on Baer’s remarks, reiterated that its settlement negotiations had just begun and that it “expects an outcome similar to those of peer banks which have settled at materially lower amounts.”

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Baer didn’t discuss pending investigations. But as shareholders and analysts ask how much Germany’s biggest bank can afford to pay, he placed the onus for delayed settlements and high penalties on banks’ general response to investigators, referring to six firms that have already reached $46 billion in civil mortgage-related settlements.

“Whether to cooperate with the government in these matters is a choice companies need to make,” Baer said. The banks “chose not to,” he said.

Souring Mortgages

The government’s resolutions over mortgage bonds stem from a working group of prosecutors and other officials that President Barack Obama created in 2012 to punish Wall Street for fueling the financial crisis by selling bonds linked to souring mortgages. The Justice Department had been pilloried for years for not having brought significant cases against banks and their executives.

The banks that already settled claims over their mortgage dealings are JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp., Morgan Stanley and Goldman Sachs Group Inc. In addition to Deutsche Bank, the banks that have disclosed Justice Department inquiries are Credit Suisse Group AG, UBS Group AG, Royal Bank of Scotland Group Plc, HSBC Holdings Plc, Barclays Plc, and Wells Fargo & Co.

A Goldman Sachs spokesman, Michael DuVally, said, “We fully cooperated with the investigation” of the bank.

Spokesmen for JPMorgan, Bank of America, Citigroup, Barclays, UBS, Royal Bank of Scotland, Morgan Stanley, Wells Fargo and Credit Suisse declined to comment on Baer’s speech. The other banks didn’t immediately respond to requests for comment.

While Baer said cooperation is most valuable when it’s timely, there are still some steps that banks can take, he said, including acknowledging responsibility or helping to assist victims.

When many of the banks first approached the Justice Department about settling, Baer said, they claimed to have cooperated fully with their investigations and argued for significant cooperation credit.

“We dismissed the arguments quickly because they so lacked merit,” Baer said, noting that the experience prompted him to reiterate what the Justice Department considers meaningful cooperation in a civil investigation.

Seeking Individuals

Cooperation, he said, includes coming forward early with facts and documents beyond those the government may have sought. He repeated the call for information about individuals involved in wrongdoing, as outlined in a memo last year by Sally Quillian Yates, the department’s No. 2 official. Mere compliance with subpoena requests, or one-sided presentations urging officials to drop an enforcement action, won’t suffice, he said.

“We know meaningful cooperation when we see it,” Baer said.

(A previous version of this story was corrected to show that six firms have settled.)

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