(Bloomberg)—International Monetary Fund chief Christine Lagarde is calling for a swift resolution of the U.S. civil investigation of mortgage securities sold by Deutsche Bank AG, pressing to clear up a question that has rattled markets for weeks: Will the Justice Department impose a penalty bigger than the bank can bear?
The answer: Not likely.
That’s because in setting penalties in past civil cases, the Justice Department has considered a company’s ability to pay. Similarly, in probes under the criminal code, the government has taken into account the potential ripple effect a penalty could have in the global market.
It’s doing that right now with another German company, Volkswagen AG, over how much it can afford to pay after cheating on emissions tests, people familiar with the matter have said. Also, in settlement talks with at least three big banks -- BNP Paribas SA, UBS AG and HSBC Holdings Plc -- the government settled for far less than it had initially sought.
Earlier: Deutsche Bank’s $14 Billion Scare Came as Ground Shifted in U.S.
“The government is looking for the Goldilocks number -- not too high and not too low,” said Katherine Toomey, a litigation partner at Lewis Baach Pllc in Washington who’s not involved in the Deutsche Bank case. “They want a deterrent for conduct and punishment, but without putting a major institution out of business or costing jobs.”
Justice Department spokesman Mark Abueg and Deutsche Bank spokeswoman Renee Calabro declined to comment. The bank has said it’s negotiating with authorities and has set aside 5.5 billion euros ($6.2 billion) for litigation as of June.
Ability to Pay
An ability-to-pay calculation could be a face-saving and market-calming resolution to U.S. efforts to close the book on its investigation of Deutsche Bank’s packaging and selling of residential mortgage-backed securities. The government has already extracted $46 billion from six firms over their dealings in the securities, which helped set off the 2008 financial crisis.
Investors fled Deutsche Bank’s shares in recent weeks, and counterparties started pulling out of some trades after the bank acknowledged that the U.S. had opened settlement talks by proposing a $14 billion settlement -- a number far higher than analysts had expected and more than the bank has said it intends to pay. As details of the negotiations have emerged, the shares have risen almost 20 percent since closing at a 24-year low on Sept. 26.
Deutsche Bank’s CEO has said he wants the matter resolved this year. Lagarde told Bloomberg Television on on Thursday, “The sooner, the better.” And German government officials have insisted that they won’t offer assistance.
Of course, there’s precedent for a U.S. investigation leading to the demise of a business. The accounting firm Arthur Andersen disintegrated after prosecutors won a conviction in 2002 for destroying documents. (The conviction was subsequently overturned, but long after the firm had ceased operations.)
The Justice Department called out Deutsche Bank last year, in fact, for deleting evidence in a separate probe over allegations that the bank’s traders manipulated key interest rates. That investigation was settled, with the bank admitting to “unintentional but significant mistakes” in cooperating with the government.
Still, a few prominent negotiations with foreign banks show how the dollar amounts can change over time.
BNP Paribas in 2014 pleaded guilty to violations of U.S. sanctions laws and agreed to pay a total of $8.9 billion to federal and state authorities. The total payment was the largest settlement in a criminal case at the time, but it was significantly lower than the $16 billion originally sought by some prosecutors working on the case, according to a person familiar with the matter.
UBS five years earlier agreed to pay $780 million to resolve allegations that it helped wealthy Americans hide their assets from the Internal Revenue Service, a sum lower than the billion-dollar-plus estimates that preceded the deal. The U.S. government agreed to the lower amount because of the bank’s eroding financial condition, a person familiar with the matter said at the time.
The Justice Department also gave lenient treatment to HSBC in 2012 over accusations that it helped launder hundreds of millions of dollars in drug cartel money. The bank admitted to aiding money launderers and violating sanctions laws, and agreed to pay $1.9 billion, but it received a deferred-prosecution agreement. House Republicans criticized then-Attorney General Eric Holder in a report this year, saying he overruled a senior Justice Department official who wanted to indict the bank after being lobbied by a British regulator.
Apart from those criminal inquiries, there’s a provision in civil law that could be helpful to Deutsche Bank. The government has brought its mortgage-related cases under the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The law, known as FIRREA, is a remnant of the savings-and-loan crisis of the 1980s. It allows the government to sue an individual or group, rather than charge them with a crime, for fraud that affects a federally insured financial institution.
A 2013 court ruling shows how the law might protect Deutsche Bank. In that case against a real estate broker, a federal judge pointed out that FIRREA doesn’t address whether a penalty should be tailored to a defendant’s financial condition. But she applied broader civil law in saying that the court had to consider eight factors including ability to pay. After that review, the judge reduced the penalty against the broker from $1.1 million to $40,000.
None of the five banks that previously settled with the government over residential mortgage-backed securities argued that they couldn’t afford the multibillion-dollar penalties, according to two people familiar with those negotiations.
Now that the $14 billion opening proposal has surfaced, U.S. government prosecutors don’t want to be seen as going soft. But there may be room to negotiate an agreement that all sides can accept. The government in prior settlements has devoted a large share of penalties to consumer relief, which has meant donating money to cities such as Detroit or forfeiting principal on people’s homes. In those cases the fine imposed by the government was actually a small subset of the overall penalty.
The government has also allowed such penalties to be paid over a period of years, taking some sting out of the punishment.
To contact the reporters on this story: Tom Schoenberg in Washington at [email protected]; Greg Farrell in New York at [email protected] To contact the editors responsible for this story: Jeffrey D Grocott at [email protected] David S. Joachim, Joe Schneider
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