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DB refuses to pay $14 billion US fine

Chris Hamblin, Editor, London, 16 September 2016

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Deutsche Bank has decided to reject the US Department of Justice's offer of a settlement of charges that it mis-sold mortgage-backed securities in the run-up to the financial crisis that began in 2008.

Earlier today the banking giant, whose shares have plummeted by 8% in value and approached their all-time low, issued a press release that said: "Deutsche Bank AG confirms that it has commenced negotiations...with a view to seeking to settle civil claims that the DoJ may consider in connection with the bank’s issuance and underwriting of residential mortgage-backed securities and related securitisation activities between 2005 and 2007. The bank confirms market speculation of an opening position by the DoJ of USD 14 billion and that the DoJ has invited the bank as the next step to submit a counter-proposal. Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited. 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."

Bloomberg notes that other European banks under investigation by the DoJ or American regulators such as the Securities and Exchange Commission in relation to residential mortgage-backed securities have also dropped because of the news. UBS slipped by 2.9%, Credit Suisse Group by 5.2%, Royal Bank of Scotland Group by 4½% and Barclays by 2.8%.

The DoJ has a habit of asking for very high sums, only to be bargained down later. Nevertheless, the fines it has awarded for similar transgressions have been far lower than Deutsche's. The German Government seems to be backing Deutsche in its determination to stand up to the Americans. Nobody knows whether the $14 billion figure includes relief for customers, but the DoJ is insisting on Deutsche admitting guilt.

The bank was, by all accounts, taken by surprise by the severity of the fine. It said in its 'results' for Q2 2016 (published in late July) that it had €5½ billion ($6.2 billion) in its so-called 'litigation reserves' Under the diagram it used to illustrate this, it said that "settlements and resolutions have been achieved in 2Q2016, in particular several civil litigations in the US related to Deutsche Bank’s pre-financial crisis residential mortgage-backed securities business."

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