December 20, 2013 3:01 pm

Deutsche Bank strikes $1.9bn deal on US bad mortgages

Deutsche Bank has agreed to pay $1.9bn to settle allegations in the US that it mis-sold mortgage-backed securities, the latest institution to resolve legal action brought two years ago against 18 banks worldwide.

The settlement with the US Federal Housing Finance Agency could see Germany’s largest bank forced to increase its litigation reserves again after upping them in October to a hefty €4.1bn.

While the settlement will be paid from Deutsche’s existing reserves, the bank is still preparing for possible fines over the battle with the estate of media mogul Leo Kirch in Germany and for the Libor rate-rigging scandal. Deutsche Bank also recently paid a €725m fine for its role manipulation of yen Libor and Euribor.

“While this settlement is materially covered, we have other unresolved litigation matters that could force us to increase our litigation reserves in the future,” said a spokesman for Deutsche Bank.

It now has less than €2bn remaining in its litigation pot to deal with possible Libor and Kirch fines, with the latter estimated to be as high as €1bn. Deutsche Bank said that the US settlement would be paid out of its existing litigation reserves.

The deal with the FHFA follows a $5.1bn payment to the agency by JPMorgan Chase and four smaller settlements with Citigroup, UBS, Wells Fargo and Ally Financial.

It is another strong recovery for the government agency – the best yet in terms of making up for losses, according to one person familiar with the matter. It also ramps up pressure on the holdout banks led by Bank of America and Royal Bank of Scotland, with an exposure which is more than twice as large as Deutsche Bank’s.

“We look forward in 2014 to the first trials on the merits against the defendants in our 10 remaining securities cases for FHFA,” said Philippe Selendy, a partner at law firm Quinn Emanuel, which is acting for the agency.

“FHFA remains committed to satisfactory resolution of the remaining actions,” said the agency, which brought the action on behalf of Fannie Mae and Freddie Mac, the government-backed mortgage companies that came close to collapse in 2008 because of their toxic assets.

Deutsche Bank will pay $1.6bn to Freddie and $300m to Fannie, according to the settlement documents.

“We have exited the mortgage businesses that gave rise to these claims and have further improved our controls,” said Jürgen Fitschen and Anshu Jain, the bank’s co-chief executives.

It does not resolve all of Germany’s largest bank’s entanglement with US housing authorities. The settlement specifically carves out separate claims that Fannie and Freddie lost money because of Deutsche Bank’s actions as one of the banks alleged to have rigged the London interbank offered rate.

Deutsche Bank is also being pursued by the FHFA as an underwriter on separate MBS deals on which Société Générale and Countrywide were the lead sponsors.

BofA is being asked for more than $6bn to settle claims against it. If RBS settles on the same proportion to the notional value of the securities, it would pay more than $4bn. Those banks are still fighting in court, along with institutions such as Barclays and Goldman Sachs, which face more modest claims.

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