Deutsche Bank plans $7.2 billion mortgage settlement with U.S.

NEW YORK/FRANKFURT Deutsche Bank (DBKGn.DE) has agreed to a $7.2 billion settlement with the U.S. Department of Justice over its sale and pooling of toxic mortgage securities in the run-up to the 2008 financial crisis.

The agreement in principle, announced by Deutsche Bank’s Frankfurt headquarters early Friday morning, offers some relief to the German lender, whose stock was hit hard in September after it acknowledged the Justice Department had been seeking $14 billion, nearly twice as much.

It also represents the Justice Department’s first accord with a European bank over misconduct that contributed to the U.S. housing-market collapse. The department sued Barclays PLC (BARC.L) on Thursday over similar claims.

Deutsche Bank does not plan a capital increase to cover the settlement, a person close to the bank said.

It does expect to record a pretax charge of about $1.17 billion in its fourth quarter because of the civil monetary penalty, according to Deutsche Bank’s press release.

As part of the agreement, Deutsche Bank would pay a civil monetary penalty of $3.1 billion and provide $4.1 billion in consumer relief, such as loan forgiveness. The bank cautioned that there is “no assurance” the two sides will agree on the final documents.

A spokesman for the Justice Department declined to comment on the bank’s announcement.

Settling the mortgage-securities case would mean Deutsche Bank has shaken off one legal headache. Three major probes remain.

Deutsche faces investigations into the alleged manipulation of foreign exchange rates, suspicious equities trades in Russia, as well as alleged violations of U.S. sanctions on Iran and other countries.

Deutsche bank also has already paid other big settlements related to the U.S. housing market.

They include a $1.9 billion settlement in 2013 over claims that it defrauded U.S. government-controlled Fannie Mae and Freddie Mac, America’s biggest providers of housing finance, into buying $14.2 billion in mortgage-backed securities before the crisis.

According to a 2011 U.S. Senate subcommittee report, the bank’s “troubling practices” were widespread, including when trader Greg Lippmann told colleagues that many home loans the bank was packaging into securities were “crap” and “pigs.”

Lippmann has declined to comment on the report.

The Justice Department is still pursuing mortgage allegations against other lenders in addition to Barclays.

Credit Suisse Group AG (CSGN.S) is in late-stage negotiations and has resisted a demand by the agency that it pay between $5 billion and $7 billion over its sale of mortgage securities, sources have said.

Royal Bank of Scotland Group PLC (RBS.L), Wells Fargo & Co (WFC.N), UBS Group AG (UBSG.S) and HSBC (HSBA.L) are also under investigation, according to company disclosures.

U.S. banks have paid tens of billions of dollars over the past three years to settle with U.S. authorities over misleading investors about the quality of mortgages underlying securities.

In 2013, JPMorgan Chase & Co (JPM.N) agreed to pay $13 billion. The following year, Bank of America Corp (BAC.N) agreed to pay $16.65 billion, while Citigroup (C.N) cut a deal for $7 billion. In February this year, Morgan Stanley (MS.N) agreed to pay $2.6 billion, and in April, Goldman Sachs Group Inc (GS.N) negotiated a $5 billion deal.

Deutsche is not the first bank to announce a settlement amount before both sides have agreed on the final documentation. Morgan Stanley disclosed its agreement a year before it was finalized and formally announced.

(Reporting by Karen Freifeld in NEW YORK and Arno Schuetze in FRANKFURT; Additional reporting by Anya George Tharakan and Parikshit Mishra; Writing by Lauren Tara LaCapra; Editing by Meredith Mazzilli, Sandra Maler and Christopher Cushing)