CEO’s Winning Gamble May Keep Scrooge From Deutsche Bank Bonusesby and
Cryan dodges court fight, and settlement preserves needed cash
End-of-year cash bonuses may hang on mortgage-securities deal
Deutsche Bank AG employees may owe their cash bonuses for 2016, however modest, to a last-minute bargain by Chief Executive Officer John Cryan.
The beleaguered German bank, long embroiled in negotiations with the U.S. Justice Department, was inching closer in recent weeks to a resolution over its sale of defective residential mortgage-backed securities that fueled the financial crisis. Barclays Plc was deep in parallel talks with the government before hitting an impasse by mid-week.
Deutsche Bank had no desire for a drawn-out court fight. Around the same time prosecutors filed a lawsuit against Barclays on Thursday, Deutsche Bank’s lawyers said a holiday deal seemed possible.
Cryan pounced, according to someone close to the talks. The bank agreed to pay just $3.1 billion in cash to resolve the case and $4.1 billion in remediation to homeowners. It’s a victory for a firm that had faced an opening gambit from prosecutors of $14 billion, and for the CEO, who’s been hamstrung by myriad regulatory problems in the U.S. and abroad. The cash penalty is well within the range the bank had anticipated, easing concerns about capital pressure.
Resolution of the case before Dec. 31 may enable Deutsche Bank to set aside money for bonuses, a relief for a firm that has struggled to keep its best employees. In recent months, executives had contemplated replacing cash bonuses with stock.
Representatives of Deutsche Bank and the Justice Department declined to comment.
Cryan, 56, still has other legal hurdles, including compliance lapses detailed in an internal report over so-called mirror trades that individuals used to move money out of Russia. In that matter, the bank also said Thursday there was no indication that it had violated sanctions, suggesting the possible punishment would also be manageable.
When word leaked in September that prosecutors had initially sought $14 billion from Deutsche Bank over mortgage securities, the stock plunged on investor fears its capital would be depleted.
Against that backdrop, lawyers from Barclays and Credit Suisse Group AG conducted their own brittle exchanges over allegations of mortgage fraud with a team of civil prosecutors in Brooklyn and Colorado and the Justice Department in Washington, according to people with knowledge of the matter. Representatives of both lenders declined to comment on their cases.
The prosecutors asked for less in initial discussions with Barclays than they had of Deutsche Bank, said people close to the talks. Still, the first figure -- which the bank didn’t disclose -- stunned executives who believed it was far beyond what was merited, the people said.
Barclays, like Deutsche Bank and Credit Suisse, had responded to subpoenas begrudgingly, forcing the Justice Department to piece together cases from documents, according to a person familiar with the situation. Bill Baer -- who headed Justice’s antitrust unit before being elevated to its No. 3 official this year -- spoke with senior executives and lawyers for the banks, including Cryan and Credit Suisse CEO Tidjane Thiam, according to a person familiar with the talks.
Prosecutors made clear they were ready to sue the banks, this person said. Slowly, the firms moved closer to a deal.
Except for Barclays. By October, the bank’s management had decided to hold the line at $2 billion, Bloomberg News reported. Unlike the other two banks, Barclays wasn’t anywhere close to an acceptable number, one of the people said. On Thursday morning, Baer told Barclays CEO Jes Staley and the bank’s general counsel, Bob Hoyt, that the Justice Department was suing.
By that time, Barclays had added another law firm to its roster, Williams & Connolly, which specializes not in settlements but in aggressive courtroom litigation.
The banks didn’t coordinate their arguments, but their lawyers kept returning to a similar point, according to several people close to the talks: How could prosecutors justify the size of the penalties they were asking?
Deutsche Bank issued about $75 billion in RMBS in the 2005 to 2008 period, compared with about $110 billion from Goldman Sachs Group Inc., according to data from Fitch Ratings. Goldman settled its case for $5 billion, $1.8 billion of which was remediation, while Deutsche Bank was being asked for $14 billion.
Time and again, the Frankfurt-based bank’s legal team, led by Richard Owens of Latham & Watkins, asked how the government came up with such the proposed penalty, according to a person familiar with the matter. Prosecutors balked at quantifying the proposal, saying that Deutsche Bank had been one of the worst players in the RMBS market.
No Common Ground
Barclays’ lawyers had similar conversations with prosecutors. The London-based bank’s total RMBS issuance in 2005 to 2008 was $29 billion, according to Fitch, less than half of Deutsche Bank’s and Goldman’s. And yet the bank was being asked to pay far more than the $2 billion it had established as an upper limit.
Thursday’s complaint shows how difficult it was for the banks and the government to establish common ground: In the suit, prosecutors accused Barclays of selling $31 billion in securitizations that resulted in catastrophic losses.
The bank’s team, led by Karen Seymour and Jeffrey Scott of Sullivan and Cromwell, tried to get prosecutors to justify the proposed penalty. As with Deutsche Bank talks, the prosecutors didn’t elaborate, and called Barclays a bad actor, according to a person who provided information about the confidential conversations on the condition that he not be identified.
The Barclays team reminded prosecutors of the embarrassing loss the government had sustained in May when an appeals court overturned a fraud verdict against Bank of America Corp. in an RMBS case. Prosecutors dismissed the comparison.
Furthermore, the bank’s lawyers pointed out that, of the 36 securitizations identified by prosecutors as problematic, Barclays was an investor in 31 of them. If the firm were trying to defraud investors, they asked, why would it invest in the products?
The government’s lawyers didn’t flinch at the arguments. Instead, they decided to file suit.
In the case of Deutsche Bank, one person close to the talks said that the U.S. offered a sweetener: a smaller cash portion of the settlement. Another person said the matter was instead a last-minute offer by the bank.
Both sides claimed victory. The government and Deutsche Bank cut a deal, well within the amount that the bank could pay, and hours later the U.S. had a settlement with Credit Suisse as well. The Swiss lender will pay a $2.48 billion civil penalty and $2.8 billion in relief for homeowners and communities hit by the collapse in home prices, it said in a statement Friday.
Barclays and the government are headed to court.