Wowsers. Jamie Dimon had a bit of a hissy fit back in the day over the proposed settlement of JP Morgan’s mortgage liabilities. And while the settlement did come in lower, it wasn’t ginormously lower. By contrast, Deutsche Bank has gone out aggressively after the Wall Street Journal reported that the Department of Justice was seeking a $14 billion settlement for crisis-related mortgage liabilities versus the German bank’s position that $3 billion was a reasonable figure. Note that Deutsche Bank has €5.5 billion set aside in litigation reserves and seems to think it can hold the damage to this level.
As we’ve pointed out, the gap between the headline figure for these mortgage settlements and the actual economic value has always been large. So it would not appear to be wise to defy the DoJ by engaging in a media war, particularly since Deutsche is widely seen to be a garbage barge and its CEO is not Obama’s favorite banker. But the bank’s stock has taken a drubbing in the wake of the Wall Street Journal story and desperation may be overruling prudence.
Deutsche Bank AG slumped after receiving a $14 billion claim from the U.S. Justice Department to settle an investigation into the firm’s sale of residential mortgage-backed securities, a figure the German lender said it’s not willing to pay.
“Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited,” the company said in a statement early Friday in Frankfurt. “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.”
Given that settlements involve not just dollar amounts but can also involve behavioral issues, if CEO John Cryan is willing to admit to bad conduct, fire some executives or claw back pay, the DoJ might be quite willing to trade a lot of settlement dollars against the sort of things that US bank reformers have demanded but have not gotten to any meaningful degree in other settlements.
But absent that, Cryan’s argument that Deutsche’s settlement should be lower based on a simple comparison to other banks headline figures isn’t sound. A $14 billion ask in in range. Whether that is fair or not depends on the severity of the bank’s misconduct and also how cooperative it was during the investigation. Deutsche has been the target of a raft of private and government actions for price fixing in foreign exchange, precious metals, and Libor markets. So it’s unlikely to be getting good actor points in the settlement.
However, as we noted in our earlier post, the senior staff at the DoJ may feel time pressure to wrap up the settlement before the election-determined regime change. If so, that considerably weakens their bargaining position, and may explain why Deutsche has decided to take the unusual approach of being frontal. But the last time a big banks tried that, which was Barclays with the Bank of England over Libor price fixing, and later Standard Chartered’s CEO Peter Sands versus the New York’s Superintendent of Financial Services Benjamin Lawksy, both came out losers in a big way. The three top executives of Barclays were forced to resign. Peter Sands backed down and ate a lot of crow, and when his bank defied the regulators again (he claimed by negligence rather than design), he was defenestrated.
Now this is an argument over price, rather than a more fundamental fight over government authority, so even in a worse case scenario, any battle of wills between Deutsche and the DoJ is very unlikely to go as far as it did with financial regulators versus Barclays and Standard Chartered. But the question remains: will the DoJ flex its muscles or will careerist considerations (the need to notch up the Deutsche Bank settlement relatively soon) prevail? Stay tuned.