A Sudden Burst of Activity on Mortgage Litigation

In the span of just 12 hours, three U.S. enforcement matters left over from the financial crisis made significant progress: Deutsche Bank AG and Credit Suisse Group AG separately announced that they would pay a combined $12.5 billion to resolve U.S. investigations into their sales of toxic mortgage debt, whereas Barclays Plc chose to roll the dice and let the Justice Department file a fraud lawsuit over its debt sales. Before these latest two deals, the U.S. investigations had already yielded more than $46 billion from six U.S. financial institutions.

1. What does this mean for Deutsche Bank and Credit Suisse?

So far, all that’s been disclosed is what they will pay -- $7.2 billion for Deutsche Bank, $5.3 billion for Credit Suisse. Because the Justice Department hasn’t commented, we don’t know what non-financial terms are contained in the agreement or what behavior, if any, the banks will admit. It’s also unclear when these preliminary deals will be made official: In February 2015, Morgan Stanley told investors that it had reached a deal with U.S. prosecutors over its mortgage-backed securities, but the agreement wasn’t finalized until a year later.

2. What should we make of the numbers?

The settlement amounts are roughly in line with previous settlements. In Deutsche Bank’s case, the figure was just more than half what the Justice Department had initially suggested. The banks may get credit for money they’ve already spent to help homeowners, and may be able to take large tax deductions for the penalties. So the overall settlement figures aren’t quite as large as they may seem.

3. Where will the money go?

The penalties are split almost evenly between a civil fine and consumer relief. The relief portion is incorporated into the everyday expenses of the banks and so doesn’t require lump-sum payments. That’s important because the banks won’t have to exhaust the money they’ve set aside for the litigation -- $6.2 billion in Deutsche Bank’s case and $2.1 billion for Credit Suisse.

4. What’s next?

Unless there’s a sudden change of heart and Barclays strikes a deal with the Justice Department before Jan. 20, that case will be inherited by the incoming Trump administration. Although banks under multiple investigations over the same behavior typically settle simultaneously, the deals that Deutsche Bank and Credit Suisse disclosed are with the Justice Department only, leaving unresolved parallel investigations by several state attorneys general.  The Securities and Exchange Commission, which typically has a five-year statute of limitations, brought its most significant cases, including the $550 million settlement against Goldman Sachs Group Inc. for misleading investors, years ago and has likely moved on. Three European banks -- UBS Group Inc., HSBC Holdings Plc and Royal Bank of Scotland Group Plc -- have yet to resolve mortgage-related inquiries by the Justice Department.

5. What might the change in presidents mean?

President-elect Donald Trump has criticized Wall Street in general terms, but his approach to financial enforcement is a wild card.

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