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Deutsche Bank to Pay $7.2B for Misleading Investors

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Deutsche Bank AG reached a final settlement with the U.S. Justice Department over its handling of mortgage-backed securities before 2008, resolving one of its biggest litigation risks.

The bank agreed to pay $7.2 billion and admitted to misleading investors, the Justice Department said on Tuesday. The penalty was in line with the bank’s Dec. 23 announcement that it had reached an agreement in principle in the matter. It will pay a $3.1 billion civil penalty and provide $4.1 billion in relief to homeowners.

“This resolution holds Deutsche Bank accountable for its illegal conduct and irresponsible lending practices, which caused serious and lasting damage to investors and the American public,” Attorney General Loretta Lynch said in a written statement. “Deutsche Bank did not merely mislead investors: It contributed directly to an international financial crisis.”

The final settlement caps a negotiation process that had sent the company’s shares to a record low in September, when Deutsche Bank said the Justice Department had made an opening request of $14 billion to settle. The news spurred concern that the bank might not have enough capital.

Deutsche Bank’s American depositary receipts declined about 3 percent to $18.61 at 3:11 p.m. in New York on Tuesday.

“Our conduct in this matter, which occurred from 2005 to 2007, falls short of our standards and is unacceptable,” Deutsche Bank Chief Executive Officer John Cryan said. “We apologize unreservedly for it. We have subsequently exited many of the underlying activities and comprehensively improved our standards. As we enter 2017, we are pleased to have resolved this matter.”

Mid-Range Penalty

The penalty against Deutsche Bank was in the midrange of mortgage-related settlements by big banks stemming from the financial crisis. Over the last few years, Bank of America Corp. agreed to pay $16.7 billion; JPMorgan Chase & Co., $13 billion; Citigroup, $7 billion; Goldman Sachs Inc., $5.1 billion; and Morgan Stanley, $3.2 billion.

Deutsche Bank, Germany’s biggest bank, continues to defend itself from other U.S. probes and potentially expensive civil suits — liabilities that Cryan has set out to resolve as he seeks to restore confidence. The bank declared a hit of $1.2 billion from the Justice Department settlement to fourth-quarter pretax profit on Dec. 23.

The bank still faces investigations into whether it manipulated foreign-currency rates and precious metals prices and whether it facilitated transactions that helped investors illegally transfer billions of dollars out of Russia.

In a memo to employees in December, the lender said it found “deficiencies” in the bank’s systems and controls in Russia, but no indications that it breached sanctions in the country.

And on Tuesday, the U.S. Supreme Court refused to stop antitrust lawsuits that accuse some of the world’s biggest banks, including Deutsche Bank, of conspiring to rig the London Interbank Offered Rate, known as Libor. The court rejected the banks’ appeal without explanation, leaving them vulnerable to the prospect of paying out billions of dollars in damages if the suits succeed.

Deutsche Bank had set aside 5.9 billion euros ($6.3 billion) for all of its outstanding legal costs as of Sept. 30, about 2 billion euros of which it used for the settlement with the U.S. Its common equity tier 1 ratio, a key metric of financial strength, stood at 11.1 percent, below the target level of at least 12.5 percent for 2018.

Independent Monitor

The bank, under the terms of the agreement, agreed to hire a monitor to review its compliance with its pledge to provide consumer relief. The lender already has monitors reviewing its compliance with foreign exchange practices, U.S. sanctions laws and derivatives trading.

The mortgage-securities monitor, Michael Bresnick, is a former Justice Department official now at the law firm Venable LLP.

In a statement of facts issued along with news of the accord, Deutsche Bank admitted to making false representations and omitting material information from disclosures to investors about the loans included in residential mortgage-backed securities sold by the bank.

“This misconduct, combined with that of other banks we have already settled with, hurt our economy and threatened the banking system,” said Benjamin Mizer, the principal deputy assistant attorney general and head of the Justice Department’s civil division. “To make matters worse, the bank’s conduct encouraged shoddy mortgage underwriting and improvident lending that caused borrowers to lose their homes they couldn’t pay their loans.”


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