Early on Friday, I outlined the deals Deutsche Bank and Credit Suisse were able to strike with the US government to settle fraud allegations related to the sale of securities tied to shoddy mortgages.
The damage: $7.2 billion for Deutsche and $5.3 billion for Credit Suisse. Investors greeted the Deutsche deal with some measure of enthusiasm, bidding the shares up as much as 4% in overnight trading.
Also accused is Barclays, but as it turns out, they’re in no mood to settle. “Barclays is accused of deceiving investors about the quality of loans underlying tens of billions of dollars of mortgage-backed securities between 2005 and 2007, according to the lawsuit filed in U.S. District Court in Brooklyn,” Reuters notes, adding that “Barclays [says] the claims in the lawsuit are ‘disconnected from the facts’ and that it has an obligation to defend against ‘unreasonable allegations and demands.'”
In a press release, the Justice Department went into some of the specifics about the allegations leveled against the bank:
The United States Department of Justice today filed a civil complaint in the Eastern District of New York against Barclays Bank PLC and several of its United States affiliates (together, Barclays), alleging that Barclays engaged in a fraudulent scheme to sell residential mortgage-backed securities (RMBS) supported by defective and misrepresented mortgage loans. As alleged in the complaint, from 2005 to 2007, Barclays personnel repeatedly misrepresented the characteristics of the loans backing securities they sold to investors throughout the world, who incurred billions of dollars in losses as a result of the fraudulent scheme. The suit also names as defendants two former Barclays executives: Paul K. Menefee, of Austin, Texas, who served as Barclays’ head banker on its subprime RMBS securitizations, and John T. Carroll, of Port Washington, New York, who served as Barclays’ head trader for subprime loan acquisitions.
Ok, got it. Of course the truly amusing soundbites come from the complaint itself (which is 198 pages). Below, find some screenshots which highlight the funniest quotes from the various bankers involved in the deals:
And that’s just a small sample. The full complaint is embedded at the end of this post.
Meanwhile (and I found this particularly hilarious) Barclays is out with its take on how the settlements to which Deutsche and Credit Suisse agreed will affect the firms. Here are some excerpts:
Headline $7.2bn penalty is in line with expectations. Deutsche Bank has reached a settlement in principle with the DoJ regarding RMBS, involving a $3.1bn penalty plus $4.1bn consumer relief. The total headline amount ($7.2bn) is in line with expectations, and consistent with consensus earnings estimates (which include E3bn additional litigation charges in 4Q16-2018 on top of E5.9bn existing reserves of which we estimated E4bn related to RMBS). However, the details and the timing if anything look more benign than consensus allows for.
4Q16 E1.1bn charge is lower than consensus E1.5bn. The company says it will take a $1.17bn 4Q16 pretax P&L charge relating to this settlement, or E1.12bn at current exchange rates, whereas consensus estimates have E1.53bn litigation charges in 4Q. If there are no other litigation provisions booked in the quarter, the E0.4bn lighter charge would add 11bps to consensus CET1 ratio expectations (11.3% 4Q16 versus consensus 11.2% and 3Q16 11.1%).
Subsequent P&L impacts may be less than consensus E1.9bn. Additionally, the consumer relief component ($4.1bn) may not translate directly into P&L charges, may attract some tax offset, and is likely to be spread over several years. (“The consumer relief is expected to be primarily in the form of loan modifications and other assistance to homeowners and borrowers, and other similar initiatives to be determined, and delivered over a period of at least five years.”) So whereas the headline number implies E1.8bn further costs to DB ($7.2bn / E6.9bn minus estimated E4bn existing reserves and E1.1bn 4Q16 charge), the reality could be substantially lower P&L impacts. So the consensus estimates of E1.9bn extra in 4Q16-2018 (E0.4bn extra in 4Q16, E1.1bn 2017, E0.4bn 2018) may have scope to come down materially, giving potential upside to the 12.4% consensus 2018 CET1 ratio (each E1bn worth 30bps on the ratio).
On Credit Suisse:
Headline $5.3bn penalty is heavier than expected. Credit Suisse has reached a settlement in principle with the DoJ regarding RMBS, involving a penalty of $2.48bn and consumer relief of $2.8bn. The total headline amount ($5.3bn / SFr5.4bn) is bigger than expected. Press reports earlier this week had referred to the DoJ seeking $5-7bn, but the company expecting to settle for less than that, and we had used $3-4bn as a base case expectation. The penalty is also substantially bigger than the bank’s existing reserves for the case (cSFr0.5bn), and bigger than consensus expectations for further litigation expenses (SFr1.7bn over 4Q16-2018).
4Q16 $2bn charged is bigger than consensus SFr0.7bn, takes 50bps off CET1 (to 11.2%). The company says it will take a 4Q16 P&L charge of approximately $2bn (Sfr2.1bn), compared to consensus estimates of SFr0.7bn. The additional amount would bring down the 4Q16 CET1 ratio from consensus 11.7% to 11.2% (versus 3Q 12.0%).
Subsequent P&L impacts may be in-line with consensus SF1bn 2017-18 (and CET1 12.3%). It is possible that the consumer relief component ($2.8bn, SFr2.9bn) has a smaller direct financial impact than the headline number suggests, depending on the form it takes and if there is some tax offset, plus it will be spread over a five year period. Current consensus estimates include SFr1bn of litigation charges in 2017-18 (SFr0.7bn 2017, SFr0.3bn 2018), which is close to the SFr1.15bn that would be implied by two years’ worth of the five-year SFr2.9bn total. If that estimate remains valid, then the 2018 CET1 ratio would come down from consensus 12.8% to 12.3%, with just the 50bps impact of the 4Q16 charge, and remaining within the company’s 12-13% target range. If the full $2.8bn had to be expensed in 2017-18 that would further reduce the 2018E CET1 ratio to 11.6%, but that seems unlikely at this stage.