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Banks Settle Deals with US Department of Justice

Published on: 23/12/2016

After a few eventful weeks, it seems that 2016 is on its way out much more calmly than expected as there was barely any excitement on the financial markets over the past 5 days. In fact, some of the bigger conflicts of this year seem to finally have been resolved – both Deutsche Bank and Credit Suisse managed to reach a deal with the US Department of Justice and calm their investors.

Earlier in 2016 the United States government tried to impose substantial fees on several major banks as punishment for their unethical proceedings that contributed to the financial disaster of 2008. A few months back we published an article about what happened. Here’s a quick reminder to refresh your memory:

"The bank has allegedly taken a wrong turn when handling residential mortgage-backed securities (RMBS). RMBSs are a financial instrument which basically boils down to the bank that issued the mortgage on your home selling the right to collect yield to outside investors." (read more)

So instead of waiting for 30 years for you to pay back your mortgage plus interest, the banks would sell these mortgages in packages to investors, who then collect the debt. In order for the banks to have more and more money, they began issuing mortgages even to people whose credit score wasn’t good enough, causing massive losses for investors.

Many banks engaged in this practice. The US Department of Justice has been gradually preparing cases against each one and calculating the proper financial repercussions. Earlier banks such as Goldman Sachs and Bank of America settled. Late this summer investors went in a wild frenzy after the Department of Justice proposed a fine of $14 billion for Deutsche Bank – a substantial sum exceeding the bank’s supposed readiness.

The good news is that DB was able to negotiate and settle for $7 billion – twice less than the initially demanded sum. However, this is still quite a lot and Germany’s biggest bank is likely to make some tough calls in the years to come. The German press was quick to point out that while it could have been much worse, $7 billion is still quite a burden and may cause some further complications in the near future.

In addition, Credit Suisse has also reached a similar agreement for about $5 billion. Citigroup stated that it also got a deal for $7 billion.

The Department of Justice now has its eye on Barclays. Considering the turbulent year they have had in the United Kingdom, it is definitely worth it to pay attention to what’s going to happen with the British bank.

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