This week, the Department of Justice settled two lawsuits involving residential mortgage-backed securities (RMBS) over activities leading up to the financial crisis.
Most notably, the DOJ reached a settlement with Deutsche Bank [1]—the largest RMBS solution of its kind for a single entity—totaling $7.2 billion.
According to the Justice Department, this settlement resolves allegations that Deutsche Bank misled investors in its “packing, securitization, marketing, sale, and issuance of residential mortgage-back securities between 2006 and 2007.”
As part of the settlement, Deutsche Bank will pay $3.1 billion in civil penalties under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA.) Another $4.1 billion will go toward relief for distressed borrowers, underwater homeowners, and their communities.
“This resolution holds Deutsche Bank accountable for its illegal conduct and irresponsible lending practices, which caused serious and lasting damage to investors and the American public,” said Attorney General Loretta E. Lynch. “Deutsche Bank did not merely mislead investors: it contributed directly to an international financial crisis. The cost of this misconduct is significant: Deutsche Bank will pay a $3.1 billion civil penalty, and provide an additional $4.1 billion in relief to homeowners, borrowers, and communities harmed by its practices. Our settlement today makes clear that institutions like Deutsche Bank cannot evade responsibility for the great cost exacted by their conduct.”
Just four days before the Deutsche Bank settlement, the DOJ, 21 states, and the District of Columbia settled another RMBS-related case [2] with Moody’s Investors Service Inc., Moody’s Analytics Inc., and Moody’s Corporation, this time for $864 million.
The suit alleged Moody's provided substandard credit ratings for RMBS and Collateralized Debt Obligations, thus contributing to the Great Recession.
“Our investigation revealed, and Moody’s has now acknowledged, that Moody’s used a more lenient standard than it had itself published, said Benjamin C. Mizer, Principal Deputy Assistant Attorney General and Head of the Justice Department’s Civil Division. “Investors relied on Moody’s credit ratings to be objective and independent, and they naturally expected Moody’s to follow its own published methods.”
U.S. Attorney Paul J. Fishman summed it up succinctly.
“People making decisions on how to invest their money thought they could rely on the ratings Moody’s assigned to these products,” Fishman said. “When securities are not rated openly and honestly, individual investors suffer, as does confidence in all parts of the financial sector."
Deutsche Bank CEO John Cryan released the following statement [3]: "Although it is good that we can bring this matter to a close, the price we are paying is high. The DOJ is highly critical of these transactions. The conduct they cite, which occurred from 2005 to 2007, falls short of our standards and is unacceptable. We apologize unreservedly for it. We have subsequently exited many of the underlying activities and comprehensively improved our standards."
Cryan continued, "The settlement with the DOJ is also a financial burden for us. As announced in December, Deutsche Bank agreed to pay a civil monetary penalty of 3.1 billion dollars and to provide 4.1 billion dollars in consumer relief in the United States, to be delivered over a period of five years. For the fourth quarter of 2016 we expect the civil monetary penalty to have a negative impact on our pretax result of nearly 1.2 billion dollars. Despite this financial impact, we are pleased to have resolved this matter. We had to invest a vast amount of time and energy in these negotiations, and the resolution of this matter creates a lot more certainty."
Moody's Investor Service released the following statement [4] on its settlement: "After careful consideration, Moody’s determined that the agreement, which removes significant legacy legal risk and avoids costs and uncertainty associated with continued investigations and litigations, is in the best interest of the company and its shareholders. Moody’s stands behind the integrity of its ratings, methodologies and processes, and the settlement contains no finding of any violation of law, nor any admission of liability. . . The agreement acknowledges the considerable measures Moody’s has put in place to strengthen and promote the integrity, independence and quality of its credit ratings. As part of the resolution, Moody’s has agreed to maintain, for the next five years, a number of existing compliance measures and to implement and maintain certain additional measures over the same period. This agreement is final and is not conditioned on court approval."