US asks Deutsche to pay $14 billion in settlement

The German bank says it has no intention of paying a penalty anywhere near the amount demanded by the US DoJ for its role in selling poor quality mortgage-backed securities to investors ahead of the 2008 financial meltdown.

Photo by: Reuters
Photo by: Reuters

Protesters of Cologne's 'Anonymous' group demonstrate against banking and finance in front of a branch of Germany's largest bank 'Deutsche Bank' in Cologne.

Updated Sep 17, 2016

Now that it's time to pay for the financial crisis which plunged the world in an economic depression, the Deutsche Bank says there is no way it’ll foot the huge bill - at least not as much as $14 billion – the price tag set by the US Department of Justice.

The German lender, which also happens to be one of the largest banks in the world, faces the penalty for its role in pumping up the US mortgage market before the 2008 financial crisis.

It is among many international banks which sold residential mortgage-backed securities to investors, such as pension funds, around the world. 

The scheme worked like this:

People in the US aspiring to buy homes were given loans. But most of the borrowers had such poor credit score that they were sure to default if lending cost went up. Loans were approved anyway.

The banks then took the loans and packaged them as marketable securities, which were sold to investors hungry for better returns. But the investors had no clue about the quality of the securities.

Once the housing market boom collapsed, a chain reaction of financial losses set in.

Deutsche already knew that it was in for a settlement but what the DoJ has brought forward has not just shocked the bank but also its investors.

According to Reuters, the claim Deutsche was looking at was somewhere around the figure of $3.4 billion.

"Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited," the bank said in a statement.

"The negotiations are only just beginning. The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts."

The headquarters of Germany's Deutsche Bank is photographed early evening in Frankfurt. Source: Reuters

If Deutsche is made to settle for anything over what it has reserved for such legal cost, it will badly impact the bank's financial position, according to The Wall Street Journal.

Even a $7 billion fine would still rank among one of the largest paid by banks to US authorities in recent years. It is unlikely that the claim would be settled anytime soon.

In past, the DoJ has insisted other banks pay substantial sums as well but the subsequent settlements were not what was initially demanded.

Take Citigroup. In 2014 the US bank was asked to pay $12 billion to resolve investigation into sale of shoddy mortgage-backed securities. The fine eventually came in at $7 billion.

In a similar case, Goldman Sachs agreed in April to pay $5 billion to settle claims that it misled mortgage bond investors during the financial crisis.

The largest settlement has so far been by Bank of America, which agreed to pay over $16 billion.

Deutsche Bank's problems are likely to alarm political leaders in Europe's largest economy and the home to the European Central Bank.

The German finance ministry said on Friday that the government expected a "fair result" from the negotiations but that the talks were a matter for the bank and the American authorities.

Deutsche was once one of Europe's most successful players on Wall Street. Like many of its peers, it has since faced a slew of lawsuits that often trace back to the boom years before the crash. Its litigation bill since 2012 has already hit more than 12 billion euros.

TRTWorld and agencies