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As Barclays is Sued, U.S. Probes are Settled by Deutsche Bank and Credit Suisse

As Barclays is Sued, U.S. Probes are Settled by Deutsche Bank and Credit Suisse
In order to resolve U.S. investigations into sales of the toxic debt that fueled the financial crisis, Deutsche Bank AG and Credit Suisse Group AG agreed to pay a combined $12.5 billion. With this the two banks have put behind them a major dispute – one that had weighed on their shares and raised questions about their turnaround plans.
The banks said in separate statements that Deutsche Bank will pay $7.2 billion and Credit Suisse agreed to a $5.3 billion deal. Just hours before the announcement, the Justice Department sued Barclay’s Plc for fraud after the bank balked at paying the amount the government sought in negotiations. The bank is also being probed in a related case.
Investigations of Wall Street firms for creating and selling the subprime mortgage bonds that fueled the 2008 financial crisis is being pressed to be wrapped up by the Obama administration. Due to their dealings in mortgage-backed securities, authorities had already extracted more than $46 billion from six U.S. financial institutions before the two deals on Friday. Agreement to pay $16.7 billion over bonds that were worth four times those of Deutsche Bank, was announced by Bank of America Corp., which had the largest such settlement.
“The settlements are reducing a major uncertainty for the banks," said Raimund Saxinger, a fund manager at BHF Bank.
Paring losses this year to 19 percent, Deutsche Bank rose 3.1 percent in Frankfurt. After earlier gaining as much as 2.2 percent, Barclays fell 0.9 percent in London.
Michael Huenseler, an investor at Assenagon Asset Management, which holds about 0.8 percent of Deutsche Bank’s shares said that Deutsche Bank’s settlement “might help in the short run because a major source of uncertainty has been cleared.”
“But it’s still higher than many have expected and it will pose a long-term drag on profitability.”
George Boubouras, the chief investment officer of Melbourne-based Contango Asset Management Ltd said that the settlement will probably spare the bank from having to raise capital. A fine exceeding $9 billion would cause the bank’s capital to fall to dangerous levels requiring action, estimated analysts at Keefe, Bruyette & Woods.
Under a settlement in principle with U.S. authorities, $4.1 billion would be provided in relief to consumers and a $3.1 billion will be aid civil penalty by Deutsche Bank. As the firm taps existing legal reserves to blunt much of that cost, the fine will cut pretax profit by $1.2 billion this quarter. Earlier this year stock and bond holders were spooked by the Justice Department’s initial request of $14 billion and the deal is far below that amount.
Over a period of five years following the settlement, $2.8 billion will be paid in relief and a $2.48 billion in civil penalty by Credit Suisse. In addition to its existing reserves during the fourth quarter, the bank will take a pretax charge of about $2 billion. By the end of the third quarter, Credit Suisse had set aside about 2.1 billion francs ($2.1 billion) in general litigation provisions.
“With this settlement, the largest remaining major uncertainty is now eliminated” for Credit Suisse, said Peter Casanova, an analyst at Kepler Cheuvreux who has a buy rating on the stock. “This is good news.”

Christopher J. Mitchell

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