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Deutsche Bank and Credit Suisse agree multi-billion-dollar settlements with US

Banks to pay out for mis-selling mortgage securities, as Department of Justice launches legal action against Barclays

The US Department of Justice has extracted $12.5bn in settlements from Deutsche Bank and Credit Suisse for a decade-old toxic bond mis-selling scandal. It has also started legal proceedings against Barclays, which, in an unprecedented move, has refused to settle with the authorities.

Deutsche, Germanys biggest bank, will pay $7.2bn (5.9bn) to the DoJ. The sum is considerably less than the $14bn originally demanded. Credit Suisse has agreed to pay $5.3bn. Both settlements relate to the complex packaging of home loans, which was a lucrative business for the banking industry until the 2008 crisis.

The DoJ did not disclose the size of penalty it wanted to levy on Barclays, but it is understood to be $4bn. It accused the bank of plainly irresponsible and dishonest conduct.

The flurry of announcements just hours before the markets closed for the Christmas holiday came weeks before Donald Trump takes over as US president and follows months of negotiation between the banks and the DoJ, led by the US attorney general, Loretta Lynch.

The scandal dates back to 2005 and 2007, when banks packaged up home loans and used them to help create bonds known as residential mortgage-backed securities (RMBS) which were sold to investors. The mortgage repayments made by borrowers then provided a yield to the investor, so long as the borrower kept paying. The schemes fell apart when loans were made to borrowers who were unable to repay.

The penalties are part of Barack Obamas efforts to hold banks accountable, and the first major agreements to be reached with non-US banks. JP Morgan, Goldman Sachs, Morgan Stanley, Bank of America Merrill Lynch and Citi have all been punished already.

There are further penalties to come, notably for Royal Bank of Scotland. The bank could face a bill of as much as 9bn, analysts have said. Its shares rose 1% on hopes that it might soon be able to reach a settlement with the DoJ which it had hoped would take place this year or at least start to estimate its own bill.

Deutsche shares, which initially jumped 4%, ended almost 1% higher. Credit Suisse and Barclays slipped 1% in thin pre-holiday trading.

Barclays
Barclays Capital Bank building near Times Square in New York. Photograph: Alamy Stock Photo

Under the settlement, Deutsche will pay $3.1bn and provide $4.1bn in customer relief, such as loan modifications and other assistance to homeowners and borrowers, spread over five years. Credit Suisse will pay $2.5bn and compensation of $2.8 bn over five years.

Much of the focus was on Deutsche, run by Briton John Cryan, which had been contesting the authorities original $14bn fine. When that news first leaked, its shares plunged to 31-year lows over fears about its ability to withstand such a high bill.

There had been fears that Deutsche would need to embark on a cash call or even ask the German government for assistance, but the fact that $4.1bn of its payout for customer relief was not a lump sum helped soothe some of the anxiety.

A key area of concern has been removed, analysts at Goldman Sachs said, noting that the $1.2bn hit Deutsche would take in its fourth quarter was towards the lower end of market expectations.

Some analysts said Deutsche would need to press on with its restructuring to avoid a cash call. Positively, the deal is settled and out of the way, as it was thought that the issue could drag on into 2017, said Thomas Kinmonth, an analyst at ABN Amro, who added that without restructuring a cash call would have to be undertaken before 2019.

Deutsches shares have been pummelled on stock markets during 2016 over fears about its financial position. It had already set aside billions of euros in anticipation of the fine.

Barclays is the first bank to fail to reach a settlement and now faces lengthy court proceedings in New York to defend itself against claims it said were disconnected from the facts.

Two of its executives, Paul Menefee and John Carroll, are named by the DoJ. Crowell & Moring partner Glen McGorty, representing Carroll, said he would challenge these ill-conceived and baseless allegations, and expects to be fully vindicated.

The DoJ did not comment on the announcements by Deutsche and Credit Suisse, but as it filed legal papers against Barclays, Lynch said: As alleged in this complaint, Barclays jeopardised billions of dollars of wealth through practices that were plainly irresponsible and dishonest. With this filing, we are sending a clear message that the Department of Justice will not tolerate the defrauding of investors and the American people.

Where the money will go

The precise detail of the $6.9bn in customer relief, or redress, that Deutsche Bank and Credit Suisse will have to pay for their misdemeanours is yet to be finalised with the DoJ. The schemes, however, are likely to match those agreed with other banks for the mis-selling of residential mortgage bond securities..

Goldman Sachs agreed in April to pay $1.8bn in consumer relief as part of its $5bn settlement. This was described as writing off loans for underwater homeowners and distressed borrowers and making other payments for construction, rehabilitation and preservation of affordable housing. It also had to provide cash to support debt restructuring, to prevent foreclosure, and to back housing quality improvement programmes. Goldman was also told to put $240m into community projects to finance affordable homes for rent and sale.

The DoJ typically deploys monitors, lawyers or housing experts to police the terms of the customer relief. The banks involved in the DoJ settlements do not necessarily have direct relationships with the homeowners, but have packaged up their loans to back the bonds.

Read more: https://www.theguardian.com/business/2016/dec/23/deutsche-bank-credit-suisse-us-mortgage-securities-barclays


UK loses triple-A credit rating after Brexit vote

Standard & Poors issues downgrade and pound hits 31-year low despite chancellors attempts to soothe markets

The UK has been stripped of its last AAA rating as credit agency Standard & Poors warned of the economic, fiscal and constitutional risks the country now faces as a result of the EU referendum result.

The two-notch downgrade came with a warning that S&P could slash its rating again. It described the result of the vote as a seminal event that would lead to a less predictable stable and effective policy framework in the UK.

The agency added that the vote to remain in Scotland and Northern Ireland creates wider constitutional issues for the country as a whole.

S&P was the last of the big three ratings agencies to have a blue-chip rating on the UKs credit-worthiness. Moodys, which stripped the UK of its top notch rating amid the austerity cuts of 2013, said last week it might further cut its view of the UK.

Rating agency moves have the potential to make it more expensive for the government to borrow.

The S&P move came after another torrid day on the financial markets. The pound hit fresh 31-year lows and 40bn was wiped off the value of the UKs biggest companies on Monday, despite efforts by George Osborne to quell investors concerns about the economic and political ramifications of the Brexit vote.

After three days of silence, the chancellor made a statement on Monday morning to try to calm the markets. However, sterling remained under sustained pressure on the foreign exchange markets as economists slashed their forecasts for UK economic growth. Wall Street was also weaker while continental bourses sold off sharply after Fridays record $2tn of losses on global stock markets.

Expectations are mounting that the Bank of England will cut interest rates possibly to zero from their historic low 0.5% to stimulate the economy, and yields on government bonds fell below 1% for the first time, which could spell cheaper mortgage rates.

In a live broadcast just after 7am, as dealers in London braced for another day of turmoil, Osborne insisted: Our economy is about as strong as it could be to confront the challenge our country now faces.

But moderate losses on the FTSE 100quickly deepened and at one point sterling was down 3.5% against the dollar, at $1.3122, its lowest level since 1985. Against the euro, the pound was down 2.4% at 1.19.

Speaking at the World Economic Forum in China, Nouriel Roubini, economist at New York University, described Brexit as a major significant financial shock that would create a whole bunch of economic, financial, political and also geopolitical uncertainties.

By the end of trading, the FTSE 100 index was down 2.6%, or 156.5 points, and below 6,000. The FTSE 250, the next tier of companies and more closely tied to the UK economy, was down 7%, coming on top of a 7% fall on Friday.

Its been another dramatic day of trading on the UK stock market, said Laith Khalaf, senior analyst at the financial firm Hargreaves Lansdown.

Companies likely to be impacted by a Brexit-induced recession were hit hard. In two days, about 40bn has been wiped off the value of banking stocks and 8bn off housebuilders. At one point, shares in the bailed-out Royal Bank of Scotland plunged 25%, while housebuilders such as Persimmon and Taylor Wimpey have lost more than 40% in just two trading days.

Michael Hewson, chief market analyst at CMC Markets, said while Osbornes statement had been measured his comments were unable to prevent the feeling that UK politics remains in a state of paralysis, with no clear contingencies in place to deal with the fallout of a leave vote.

The biggest faller in the FTSE 100 was short-haul airline easyjet, which plunged by 22% after warning that wary consumers would now rethink their travel plans. Exchange rate movements, the carrier added, would add 25m to costs.

Another profit warning came from the London-focused estate agent Foxtons. Its shares dived 25% after it said Brexit would hit sales for the rest of the year. Shares in so-called challenger banks such as Virgin Money were also pummelled.

Osborne spoke after it emerged that the Bank of England governor, Mark Carney, had cancelled a trip to Portugal to remain in the UK to oversee any response from Threadneedle Street.

The Banks financial policy committee, set in the aftermath of the financial crisis to look for threats to stability, will meet on Tuesday, when the Bank of England will again offer emergency loans to banks as part of its Brexit planning.

The fallout from the vote is being felt around the world. Italys main index fell 4%, extending Fridays record losses of 12.5%. In Germany and France there were losses of 3%. At the time of the London close, on Wall Street the main share indices were all down more than 1%.

The chancellor may have taken some comfort from the fall in yields on 10-year government bonds. Yields on these gilts, which move inversely to prices, fell below 1% for the first time. This fall in gilt yields will keep government borrowing costs down and lead to lower mortgage rates. However, they also mean pension companies have started cutting the amount paid to the newly retired.

Osborne refused to repeat his pre-vote warning of a Brexit recession, saying only that the economy would face adjustments. But analysts started to cut their forecasts for UK growth. Goldman Sachs, forecasts just 0.2% growth in 2017, down from 2% predicted previously.

The consultancy Oxford Economics said interest rates could be slashed to 0% within weeks. Morgan Stanley analysts said European and UK stocks would fall up to 10% over the coming months and sterling would fall to between $1.25 and $1.30.

Much of the markets focus has been on the pound, particularly after the speculator George Soros, who made $1bn when sterling fell out of the exchange rate mechanism in 1992, had warned of a black Friday in the event of Brexit. His spokesman stressed that he had not bet against the pound last week.

George Soros did not speculate against sterling while he was arguing for Britain to remain in the European Union, the spokesman told Reuters. However, because of his generally bearish outlook on world markets, Mr Soros did profit from other investments

Read more: https://www.theguardian.com/business/2016/jun/27/property-and-financial-shares-slide-as-referendum-fallout-hits-stock-markets


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