Deutsche Bank and Credit Suisse last month agreed to pay a combined $12.5 billion in penalties related to the packaging, securitization, marketing, sale, and issuance of residential mortgage-backed securities, whereas Barclays and several of its U.S. affiliates are battling a civil complaint over similar claims.

Deutsche Bank

After announcing a preliminary deal in December, Deutsche Bank finalized a $7.2 billion settlement with the Department of Justice and other federal agencies resolving federal civil claims that it misled investors in the packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities.

“This $7.2 billion agreement represents the single largest RMBS resolution for the conduct of a single entity,” the Justice Department has stated.

The settlement requires Deutsche Bank to pay a $3.1 billion civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), which authorizes the federal government to impose civil penalties against financial institutions that violate various predicate offenses, including wire and mail fraud. It is one of the largest FIRREA penalties ever paid, the Justice Department said.

The settlement does not release any individuals from potential criminal or civil liability.  As part of the settlement, Deutsche Bank has agreed to fully cooperate with investigations related to the conduct covered by the agreement.

Deutsche Bank will also provide $4.1 billion in relief to homeowners, borrowers, and communities harmed by its practices. Specifically, Deutsche Bank will provide loan modifications, including loan forgiveness and forbearance, to distressed and underwater homeowners throughout the country. 

It will also provide financing for affordable rental and for-sale housing throughout the country. Deutsche Bank’s provision of consumer relief will be overseen by an independent monitor who will have authority to approve the selection of any third party used by Deutsche Bank to provide consumer relief.

As part of the settlement, Deutsche Bank agreed to a detailed Statement of Facts describing how Deutsche Bank knowingly made false and misleading representations to investors about the characteristics of the mortgage loans it securitized in RMBS worth billions of dollars issued by the bank between 2006 and 2007.

“In the Statement of Facts accompanying this settlement, Deutsche Bank admits making false representations and omitting material information from disclosures to investors about the loans included in RMBS securities sold by the bank,” said Principal Deputy Assistant Attorney General Benjamin Mizer, head of the Justice Department’s Civil Division.

“Instead of ensuring that its representations to investors were accurate and transparent, so that investors could make properly informed investment decisions, Deutsche Bank repeatedly misled investors and withheld critical information about the loans it securitized,” U.S. Attorney Robert Capers for the Eastern District of New York, said in a statement. “Time and again, the bank put investors at risk in pursuit of profit. Deutsche Bank has now been held accountable.”

“Although it is good that we can bring this matter to a close, the price we are paying is high,” Deutsche Bank CEO John Cryan said in a statement. The conduct cited by the Department of Justice, which occurred from 2005 to 2007, “falls short of our standards and is unacceptable. We apologize unreservedly for it,” Cryan said. “We have subsequently exited many of the underlying activities and comprehensively improved our standards.”

“Given other lawsuits, it is still too early to talk of having drawn a line under all matters,” Cryan added. “We are, however, nearing our objective of being able to concentrate primarily on the future instead of repeatedly having to look over our shoulders at past events.”

Credit Suisse

In another action, the Justice Department reached a $5.28 billion settlement with Credit Suisse related to its conduct in the packaging, securitization, issuance, marketing and sale of RMBS between 2005 and 2007. The resolution requires Credit Suisse to pay $2.48 billion as a civil penalty under FIRREA. 

It also requires the bank to provide $2.8 billion in other relief, including relief to underwater homeowners, distressed borrowers and affected communities, in the form of loan forgiveness and financing for affordable housing. Investors, including federally-insured financial institutions, suffered billions of dollars in losses from investing in RMBS issued and underwritten by Credit Suisse between 2005 and 2007.

This settlement includes a statement of facts to which Credit Suisse has agreed. That statement of facts describes how Credit Suisse made false and misleading representations to prospective investors about the characteristics of the mortgage loans it securitized. 

"Credit Suisse is pleased to have reached an amicable settlement that allows the bank to put this legacy matter behind it, while also protecting the interests of its clients, employees, and other stakeholders," the bank stated. Credit Suisse said it will take a pre-tax charge of approximately US$2 billion, in addition to its existing reserves of US$550 million against this matter. This charge will be taken in its fourth quarter 2016 financial results, which will be announced on Feb. 14, 2017.

Barclays Bank

Meanwhile, the Justice Department has filed a civil complaint in the Eastern District of New York against Barclays several of its U.S. affiliates over similar allegations as Deutsche Bank and Credit Suisse

As alleged in the complaint, from 2005 to 2007, Barclays personnel repeatedly misrepresented the characteristics of the loans backing securities they sold to investors throughout the world, who incurred billions of dollars in losses as a result of the fraudulent scheme. The lawsuit also names as defendants two former Barclays executives: Paul Menefee, who served as Barclays’ head banker on its subprime RMBS securitizations, and John Carroll, who served as Barclays’ head trader for subprime loan acquisitions.

The detailed allegations in the complaint describe Barclays’, Menefee’s, and Carroll’s misconduct in connection with RMBS securitizations Barclays underwrote between 2005 and 2007. The complaint alleges violations of FIRREA, based on mail fraud, wire fraud, bank fraud, and other misconduct.

"Menefee and Carroll were central to Barclays’ allegedly fraudulent scheme," the Justice Department stated. "Menefee was the head banker in charge of due diligence and securitization on all of Barclays’ subprime deals, and he decided which loans would be subject to due diligence, as well as which loans would be removed from loan pool purchases."

"Carroll was the head trader on all of Barclays’ principal subprime deals, and he determined which subprime loan pools Barclays would bid on, at what price, and on what terms," the Justice Department added. "As alleged in the complaint, both men made representations about the characteristics of the loans backing the securities that they knew were false when they made them."

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