The US Department of Justice hopes to agree an omnibus settlement with Barclays, Credit Suisse and Deutsche Bank, extracting multibillion dollar fines from three of Europe’s biggest lenders for mis-selling mortgage securities.
By grouping the three banks together into a single deal the DoJ hopes to achieve maximum public impact by collecting an eye-catching sum in penalties from the trio just weeks before the US presidential election.
Until now, investors have been primarily focused on Deutsche’s talks with the DoJ, after an initial demand for the German bank to pay $14bn to settle the issue was leaked, triggering widespread jitters about the financial solidity of the bank.
Yet two people familiar with the discussions said the DoJ had indicated that it would prefer to combine the settlements of the three banks into a single announcement. That could shift some attention away from Deutsche and onto its UK and Swiss rivals
With only four months left in the administration of Barack Obama, such a move may also provide a career boost for Loretta Lynch, who is likely to be replaced as attorney general when the next president takes charge in January.
One of the people briefed on the discussions said it was not certain that the DoJ would succeed in completing the three settlements all at once.
Barclays, Credit Suisse, Deutsche and the DoJ declined to comment.
The DoJ’s unexpectedly high initial claim on Deutsche has knocked investor confidence in Germany’s biggest bank. Hedge funds have started to pull some business from Deutsche, setting up a potential showdown with German authorities over the lender’s future.
Shares in Deutsche fell almost 7 per cent in New York trading on Thursday, having hit a 33-year low earlier this week, even after the bank recirculated a statement emphasising its strong financial position.
Perversely, a liquidity panic could even strengthen [Deutsche’s] bargaining hand with the DoJ
– Stuart Graham, banks analyst at Autonomous
Some analysts believe the fears are exaggerated. Stuart Graham, banks analyst at Autonomous, said in a note published on Thursday that with €233bn of liquid reserves, including cash and sovereign bonds, Deutsche “does not have a near-term funding problem”.
“Perversely, a liquidity panic could even strengthen its bargaining hand with the DoJ,” he added. “Does the DoJ want to run the risk of being branded by European leaders as responsible for inadvertently bringing down the fourth most systemic bank in the world? Logically not, in our view.”
Deutsche said after the $14bn claim from the DoJ first emerged two weeks ago that it had “no intent to settle these potential civil claims anywhere near the number cited,” adding: “The negotiations are only just beginning”.
The German bank has built up a reserve of €5.4bn to deal with its legal woes and holds a further €1.7bn as unreserved contingent litigation liabilities, although it has not stated how much is earmarked for the US mortgage securities probe. It is widely expected to need to raise capital once it completes the settlement talks.
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Barclays set aside £2.5bn for investigations and litigation in the two years to June, while Credit Suisse had taken SFr1.76bn ($1.82bn) of equivalent provisions at the same point.
The DoJ is also still investigating Royal Bank of Scotland, HSBC, UBS and Wells Fargo over the same issue, but they are likely to be further away from any settlement.
US authorities including the DoJ have already collected more than $40bn from six US groups — Bank of America, JPMorgan Chase, Citigroup, Morgan Stanley, Goldman Sachs and credit rating agency S&P Global Ratings — for alleged mis-selling of residential mortgage-backed securities in the run-up to the 2008 financial crisis.