Shares in Germany’s biggest lender have come under selling pressure after the bank confirmed that the US Justice Department is seeking $14 billion to settle civil claims over its residential mortgage-backed securities.
Deutsche Bank shares were down almost eight percent in early trading at the Frankfurt Stock Exchange on Friday, weighing heavily on the performance of Germany’s blue-chip DAX index.
The stock nosedived on the news that the US Justice Department had proposed a $14 billion (12.4 billion euros) settlement related to the bank’s dubious handling of mortgage-backed securities which had collapsed in 2007/2008, unleashing the financial crisis.
Deutsche Bank suffered enormous selling pressure on Friday despite its claim that the US demand was only an “opening position” and that Washington was asking for a counterproposal from the bank.
Noting that negotiations were just beginning, Deutsche said it had “no intent” to settle potential civil claims over its products “anywhere near the number cited.”
Deutsche Bank is among many financial institutions investigated for selling shoddy residential mortgages to gullible investors who believed the packaged securities were reaping healthy profits.
However, the financial products often contained loans that had been sold to mostly American home builders during the real estate boom in the early 2000s and which became non-performing as the housing market collapsed. The US Justice Department has accused the banks of misleading investors about the quality of their loans.
The settlement demanded from Deutsche Bank would be the largest ever inflicted on a foreign bank in the United States, easily surpassing the $8.9 billion that the French bank BNP Paribas paid in 2014 for Iran sanctions violations.
US investment bank Goldman Sachs, for example, agreed in April to pay more than $5 billion to settle similar allegations.
Deutsche Bank said it was working to secure an outcome “similar to those of peer banks which have settled at materially lower amounts.” According to securities filings, Deutsche Bank had set aside $5.5 billion to resolve pending legal matters. In the mortgage-backed securities matter, the bank is aiming for an amount between $2 billion and $3 billion, according to sources familiar with the matter.
In recent years, Deutsche Bank has found itself mired in litigation and enforcement actions around the world. Last year, US market regulators fined the German lender $55 million, concluding that it had overvalued its holdings of credit derivatives by at least $15 billion during the financial crisis.
In April 2015, Deutsche Bank also paid a record $2.5 billion to settle American and British charges that it had manipulated the London Interbank Offered Rate, or Libor, affecting commercial interest rates. The bank also settled with the US Fed and New York’s Department of Financial Services of alleged sanctions violations in Syria and Iran.
As a result, the bank posted a 98 percent year-on-year drop in second-quarter profits, with net earnings recorded at only $22 million. And in a report by the International Monetary Fund (IMF) released in June, the bank was described as a “major systemic risk.”
uhe/jd (Reuters, dpa, AFP)