Deutsche Bank will need to cough up around $15 billion if they want a mortgage-backed securities investigation by the Department of Justice to end.
In response Deutsche said they “believe the figure cited is preposterous and are unlikely to settle potential civil claims in that region.”
The scandal has hit the German bank’s US operations hard and their shares fell over 6 percent in the morning session in New York. There could be worse to come as the negotiations and investigation could take the rest of the year.
A spokesman for the Department of Justice (DOJ) said the “scale of the investigation is being widened; it’s much bigger than first thought.”
Deutsche said in a statement this morning, “This is just the start of talks between us and the DOJ. Going on previous settlements by banks in a similar situation we believe the end figure will be much lower.”
The German banking giant is being blamed for playing a role in the global economic crisis of 2007-2009 when it sold residential mortgage-backed securities. Deutsche is not the only bank in the U.S. who has been probed.
Many banks are accused of offering mortgages to unqualified borrowers, then selling the loan off as a solid investment, essentially passing on the risk.
But the fine the DOJ are proposing for Deutsche is by far the largest since the financial crisis. They penalised Citigroup $11 billion in 2014 for repackaging financial products related to mortgages. The eventual settlement was $8 million.
Some observers are wondering whether financial watchdogs are doing more harm than good at this stage.
“Some of these settlements are huge. Obviously there need to be penalties for what happened, but we want our economy to get back on our feet don’t we?” said ETX Capital chief analyst Neil Wilson in a TV interview on Friday.
Goldman Sachs settled for close to $5 billion early in 2016, while JP Morgan Chase got a $14 billion penalty for overstating the stability of mortgages being sold to their investor base.
“The timing of Deutsche’s fine is unfortunate to say the least,” said Stuart Poulson, Head of Corporate trading at Nikko-Desjardins Asset Management. “Revenues have been down nearly 25 percent this quarter and profits have suffered badly. There was also the Fed affair in the summer when Deutsche’s U.S. unit failed a stress test from the central bank.”
