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Deutsche Bank's pending RMBS settlement follows unusual path

Media reports about how much will pay the U.S.Department of Justice have varied wildly, suggesting the actual amount mighthave more to do with politics than the facts of the case.

So far, the Justice Department's RMBS Working Group hasannounced a half dozen settlements regarding widespread mortgage-bondmisconduct that contributed to the 2008 financial crisis. None of thesettlements featured the sort of variance seen in recent media reportsregarding Deutsche Bank's impending settlement.

On Sept. 9, the FinancialTimes reportedthe bank would face $2.4 billion in fines. About a week later, The Wall Street Journal reportedthat the ask would be $14 billion, a figure that could sap the bank's capital.A couple weeks after that, news wire Agence France-Presse reportedthe bank and regulators were close to a $5.4 billion settlement.

Some have speculated the $14 billion figure was merely awarning shot from U.S. regulators as retaliation for a European Union demandthat Apple Inc. pay$14 billion in back taxes. Further, the heady sum has been attributed to PresidentBarack Obama's waning term and a desire to bolster his legacy. Progressiveshave criticized Obama for not being tougher on Wall Street after the financialcrisis.

"Couple those two things and you could see why theywould stray from the normal playbook," said Isaac Boltansky, an analystfor Compass Point Research & Trading.

In previous mortgage fraud settlements tied to the crisis,media reports have been relatively close to the actual settlements. In abest-efforts search of news articles in the months preceding announced deals,S&P Global Market Intelligence was able to find five reports that differedmaterially from the ultimate settlement — but none as large as Deutsche Bank's.

For example, in June 2014 CNN reportedthat Bank of AmericaCorp.'s settlement would be $12 billion, and the bank's settlementtab came in at $16.65 billion a few months later.

The New York Post reported in June 2014 that Citigroup Inc. was facing up to $10 billion in fines;the bank ultimately settled for $7 billion.

The amount Deutsche Bank will ultimately have to pay remainsunclear. Civil lawsuits from the Federal Housing Finance Agency, the regulatoroverseeing Fannie Maeand Freddie Mac, couldoffer some insight into the size of each bank's mortgage-backed securitiesoperations. The lawsuits hit Deutsche Bank for $14.2 billion of RMBS andGoldman Sachs GroupInc. for underwriting $11.1 billion.

That could suggest Deutsche Bank will have to paymeaningfully more than Goldman Sachs' $5.06 billion . But Department of Justicesettlements have not always aligned with the securities activity detailed bythe FHFA. For example, Citigroup sold one-third as much RMBS as Goldman Sachs but paid asettlement tab nearly $2 billion larger.

Deutsche Bank did not immediately respond to a request forcomment.

Arthur Wilmarth Jr., a law professor at George WashingtonUniversity who was written research on the financial crisis, said he expectsDeutsche Bank's fine to range from $7 billion to $9 billion. Based on the newsreports, Wilmarth said it seemed that Deutsche Bank leaked the $14 billionfigure as a "Hail Mary play" to negotiate a lower figure.

With the bank's thin capital cushion at risk, Wilmarth saidEuropean regulators have likely pressured their U.S. counterparts to lower thefine. European regulators have repeatedly criticized U.S. regulatory actions asoverly punitive and U.S. calls for tougher capital requirements as overdone. Itappears the ongoing argument on the proper balance between regulation and freemarkets will be as important as the facts of Deutsche Bank's case.

"This is as much politics as legal," Wilmarthsaid. "No question about that."

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For an analysis of bank settlements for the first half of 2016, click here.