Deutsche Bank V USA

by Mark Johnston

Prosecutors on behalf of the US have begun a civil suit against the banking giant, Deutsche Bank, citing that the group repeatedly applied poor lending standards resulting in significant cost to the US taxpayers. 

There is mounting pressure within the US for regulators and prosecutors to hold banks responsible for causing the financial crisis.  The Deutsche Bank suit is seeking damages of about $1 billion in a claim that they lied about their lending practices in order to take advantage of the government’s mortgage insurance program. 

The massive German bank reported a 17 per cent increase in first quarter profits and between 1999 and 2009 the banks mortgage arm MortgageIT received the backing of the US Government.  Deutsche Bank received the backing of the Federal Housing Administration to the tune of more $5 billion which covered more than 39,000 loans.  One of the requirements for taking on this assistance was for the lender to accept and implement federal lending standards.  What prosecutors are leading with is the fact that they don’t believe that Deutsche Bank have upheld their end of the deal

Preet Bharara, U.S. attorney for the Southern District of New York said that “Borrower after borrower defaulted — often within just months of closing — because those loans were doomed to fail,”

The complaint focuses on the hundreds of millions of dollars more that the government may have to pay out to cover bad loans underwritten by the MortgageIT part of the bank.  So far, by February, more than $386 million has been paid out in insurance to cover the costs of the bank that went bust. 

Deutsche Bank has come back and said that “close to 90 per cent” of the failures and claims were dated before the German Bank acquired the ailing bank in 2007.  “We believe the claims against MortgageIT and Deutsche Bank are unreasonable and unfair, and we intend to defend against the action vigorously,” said Deutsche Bank.  

When external auditors visited Mortgage IT and took a look around there were reports of serious short cuts and bad practices.  They also found evidence that the bank was violating requirements to check for quality of lending mortgages and that some issues were “literally stuffed in a closet and left unread and unopened”.  MortgageIT, it has been made clear, was far less concerned with good practice than with just lending more money out. 

Prosecutor Bharara said that “While they promised to select qualified mortgages to be insured, they repeatedly abused that public trust by brushing aside the rules, lying about the quality of their underwriting operation, and passing on the costs of the inevitable hundreds of millions of dollars of defaults to the government,” “It wasn’t their problem anymore. The government held all the risks and, ultimately, was left holding the bag.”  The bag they now hope to pass back to Deutsche Bank.

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