Risk & Compliance

Deutsche, Credit Suisse Settle MBS Cases for $12B

The settlements with U.S. authorities ease investor concerns over the impact of the MBS scandal on the shaky European banking industry.
Matthew HellerDecember 23, 2016
Deutsche, Credit Suisse Settle MBS Cases for $12B

The shaky European banking industry got a pre-Christmas boost Friday as Deutsche Bank and Credit Suisse announced they will pay a combined $12.5 billion to settle U.S. investigations into their sales of toxic mortgage-backed securities.

Under the settlements, Deutsche will pay $3.1 billion and provide $4.1 billion in customer relief, such as loan modifications and other assistance to homeowners and borrowers, spread over five years. Credit Suisse will pay $2.5 billion and compensation of $2.8 billion over five years.

The Obama administration has been scrambling to resolve its remaining crisis-era megabank mortgage cases before Donald Trump takes office. On Thursday, the Justice Department filed civil charges against Barclays after settlement negotiations broke down.

The deals with Deutsche and Credit Suisse bring the penalties meted out by the DoJ over one of the largest financial scandals ever to $58 billion.

“We will continue holding both banks and their executives responsible for their role in contributing to this unfortunate period in our history,” the head of the DoJ’s civil division, Benjamin Mizer, said on Thursday.

As The Wall Street Journal reports, the negotiations with the DoJ “have been a big cloud hanging over an already-fragile European banking industry, weighing on several major lenders’ stock prices. Investors have worried about whether those institutions’ capital is sufficient to cover any possible U.S. fines.”

Both Deutsche and Credit Suisse’s share prices rose Friday as investor concerns receded. “We see the announcement  . . .  as very positive” for Deutsche, analyst Kian Abouhossein of JPMorgan told The Financial Times, adding that the settlement “removes a major overhang” from the bank.

The fact that Deutsche will not have to pay the $4.1 billion in customer relief as a lump sum helped soothe some of the anxiety, according to The Guardian.

“A key area of concern has been removed,” analysts at Goldman Sachs said, noting that the $1.2 billion charge Deutsche would take in its fourth quarter was “towards the lower end of market expectations.”

Credit Suisse, meanwhile, is in the midst of a significant restructuring. “This will be another distraction out of the way for [chief executive Tidjane] Thiam,” said Chris Wheeler of Atlantic Equities.