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Deutsche Bank and Credit Suisse have cleared one of the last big legal hurdles of the financial crisis by agreeing settlements worth a combined $12.5bn with US authorities for allegedly fuelling the 2008 market meltdown by mis-selling toxic mortgage securities.

However, Barclays unnerved investors by breaking ranks with its rivals and rejecting the penalty demanded by the US Department of Justice, which responded by filing a rare lawsuit against the UK bank and two of its ex-employees.

The settlements, which follow months of negotiations, take the total penalties that banks have paid to the DoJ for mis-selling subprime mortgage securities to $58bn. That means the misconduct made famous by the Hollywood blockbuster The Big Short has become one of the costliest financial scandals ever.

With only a few weeks before Donald Trump takes office, Barack Obama’s administration has been rushing to fulfill its pledge to punish the big banks that played a central role in packaging up subprime mortgages that left investors nursing huge losses around the world. 

Most US banks have already agreed multibillion dollar settlements — the biggest of which came from Bank of America and JPMorgan. But some European lenders are yet to resolve the issue, including Royal Bank of Scotland, HSBC and UBS.

Deutsche said it had reached a $7.2bn deal with US authorities, agreeing “in principle” to pay a $3.1bn civil penalty and also provide $4.1bn in relief to consumers spread over several years. Germany’s biggest bank said it would take an additional $1.17bn charge in the fourth quarter.

Credit Suisse said it had agreed to pay $5.28bn to resolve the DoJ probe, including a civil penalty of $2.48bn and consumer relief to the tune of $2.8bn over five years. The Swiss bank said it would take a fourth-quarter charge of $2bn. 

There was widespread relief at how Deutsche came out relatively lightly from the process. The German bank’s shares fell to record lows in September when it emerged that the DoJ had made a $14bn claim, which panicked some hedge fund clients and triggered speculation about a possible government bailout.

Deutsche shares rallied early on Friday and were up 0.3 per cent in late trading, while Credit Suisse and Barclays were both down about 1 per cent.

Kian Abouhossein, analyst at JPMorgan, described the Deutsche settlement as “very positive”, adding that it “removes a major overhang” from the bank and has a “manageable impact on capital in the short term”. 

Ingo Speich, a portfolio manager at Union Investment, one of Deutsche’s top 25 shareholders, said: “It’s a good compromise. . . It’s not the end of all their problems, but it’s certainly not a disappointment either.”

A person familiar with the matter said the DoJ would not make an announcement about the Deutsche and Credit Suisse settlements until agreements were formally signed.

The DoJ lawsuit against Barclays claims the bank “securitised billions of dollars of loans it knew had material defects” and defaulted “at exceptionally high rates early in the life of the deals”.

The prosecutors said that companies that reviewed the mortgages for Barclays had informed the bank that many did not meet underwriting guidelines or legal standards, describing some of them as “craptacular” and others as having the “distinct aroma of default”.

From 2005 to 2007, Barclays fraudulently sold more than $31bn of mortgage-backed securities in 36 separate deals, prosecutors in New York said on Thursday.

“Barclays jeopardised billions of dollars of wealth through practices that were plainly irresponsible and dishonest,” said Loretta Lynch, the US attorney-general. “We are sending a clear message that the Department of Justice will not tolerate the defrauding of investors and the American people.”

Barclays said the DoJ claims were “disconnected from the facts” and vowed to “vigorously defend the complaint and seek its dismissal at the earliest opportunity”.

“The amount asked for bore no relation to the underlying facts of the case or relativities with the US banks who had already settled,” said one person briefed on Barclays’ decision.

Barclays felt it should pay a fine of only about $1bn if its settlement was to be proportional with those of its rivals. It was prepared to settle for a total of about $2bn, including customer redress, according to two people briefed on the matter. But the DoJ pushed for something closer to $5bn. One analyst complained that the bank was “arguing over peanuts”.

The two former Barclays executives named in the suit were Paul Menefee and John Carroll, who both worked on subprime mortgage securities at Lehman Brothers before its US operations were bought by Barclays in 2009.

Settlements with US authorities over selling of mortgage securitiesAmount
Bank of America$16.65bn
JPMorgan Chase$13bn
Deutsche Bank$7.2bn
Credit Suisse$5.28bn
Goldman Sachs$5.1bn
Morgan Stanley$2.6bn
Wells Fargo$1.2bn

Reporting by Alistair Gray and Peter Wells in New York, David Lynch in Washington, Martin Arnold, Caroline Binham and James Shotter in London, and Laura Noonan in Dublin

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