The Wall Street Journal reported that the Department of Justice is seeking $14 billion from Deutsche Bank to settle its claims in a series of mortgage abuses. According to the Journal, Deutsche’s position is that $2 to $3 billion as a reasonable figure. Analysts anticipated that the maximum settlement amount would be in the $4.5 to $5 billion range.
A few of the very high profile mortgage settlements have had leaks about the negotiations over the headline amount, such as the $16.6 billion Bank of America settlement for mortgage abuses. In those cases, the final amount was not terribly below the government regulators’ asking amount. One reason is that even though it’s generally understood that the government does not to devote the resources to litigating such complex cases, the flip side is that the defendant is even less able to stand the uncertainty and bad press of having talks break down and having the government move into another phase of discovery in preparation for a trial, which would be hugely damaging from a reputational standpoint.
Nevertheless, the fact of the leak and the Journal exposing the apparently big gap between the government’s ask and Deutsche’s bid can cynically be seen as part of the negotiation theater. In some past cases like the settlement negotiations with JP Morgan, the press leak appeared to be to put pressure on the bank to be more realistic, as well as manage shareholder expectations. Here, the dynamics may be different. First, Deutsche is in a weak position politically, not just by virtue of being a foreign bank, but as being widely recognized within the financial services industry and almost certainly by regulators as being awash in managerial and internal control failures. It’s walking wounded.
But the offset is end-of-Presidential term dynamics. For instance, financial regulators are rushing to close settlements before the Administration regime change so that senior staffers can flog their resumes and point to a list of accomplishments. As anyone who has worked on negotiations will tell you, someone who is in haste to close a deal is in a weak bargaining position and will wind up accepting worse terms than a party facing no time constraints.
And as we’ve shown, on every past mortgage settlement, there’s been a huge gap between the nominal settlement amount and the real economic cost to the perp. Any part of the settlement that is not a hard dollar fine or restitution should be treated with considerable skepticism. These pacts are larded up with undertakings like “give away a certain dollar amount of foreclosed properties” or “make a certain amount of mortgage modifications” that are set in such as way as to either cost the bank very little (or even impose costs on third parties) or amount to giving the bank credit for things they were going to do in any event. So the gap between $14 billion and $3 billion is far smaller than it appears. Expect as before for the government to get close to its asking number. If this settlement departs from precedent and Deutsche ponies up the overwhelming majority in hard dollars, it would confirm suspicions that the US is far more willing to play hardball with foreign banks than native sons. Barclays, Credit Suisse, UBS and Royal Bank of Scotland are still on the hot seat and could face similar rough (as in fully deserved) treatment.