Ruling exposes Deutsche’s US arm to fresh legal battle
Case to proceed that pits bank against investors over its handling of RMBS trusts
A verdict by a California judge last week may have opened up a new multibillion-dollar litigation risk for Deutsche Bank, the German bank still in the grip of settlement talks over mortgage-backed securities with the US Department of Justice.
The risk relates to claims from a group of institutional investors that Deutsche should have done a better job as the administrator of trusts that held residential mortgage-backed securities in the years after the crisis. Lawyers for the investors — led by BlackRock — claim that as those assets plummeted in value, Deutsche had a duty to return them to the originators, and order them to replace them with better loans.
Yet Deutsche failed to do so, the lawyers claim, because it feared that if it took action within the six-year statute of limitations, it would trigger similar claims from other trustees administering toxic assets originated by Deutsche.
According to a document filed last week in a state court in Orange County, Deutsche’s trust bank “discovered and knew of widespread errors, breaches and systematic servicing violations triggering events of default under the governing documents for the trusts, but failed to protect the trusts in order to avoid exposing [its] own misconduct.”
Deutsche had tried to get the action thrown out but failed last week, with judge Gail Andler ordering that the case could proceed. The complaint relates to 465 trusts with a total face value of about $433bn, which allegedly suffered total realised collateral losses of $75.7bn. The claimants — which also include Pimco, TIAA and Prudential — do not specify an amount for damages, but a person familiar with their strategy said the claim could run to several billion dollars.
Deutsche declined to comment.
The action exposes another vulnerable flank for Deutsche’s US business, which is trying to reach a settlement with the DoJ over the way it sold mortgage-backed products in the run-up to the crisis. The DoJ wants to extract as much as $14bn from Deutsche but the bank is holding out for a much lower penalty.
Shares in the Frankfurt-based bank have roughly halved this year, as investors fret over the bank’s ability to pay fines on top of its persistent losses and thin capital.
But this month the shares have recovered, gaining about 14 per cent on talk of cost-cutting measures and signs that the bank will be able to agree a lower settlement with the DoJ.
Deutsche served as trustee for more than a fifth of the private-label RMBS deals sold between 2003 and 2009, according to the investors’ complaint.
It was also an active originator in its own right. According to public filings, Deutsche sold about $84bn of loans into private-label securitisations and $71bn of loans through whole-loan sales between 2005 and 2008.
Trustees of securitisations are supposed to protect the interests of investors in the deal, ensuring that the underlying assets are clear of claims and charges, notifying investors of any breaches by any party to the deal, and often collecting payments.
In a filing in July this year the bank said it was a defendant in eight separate civil lawsuits brought by various investor groups over its role as trustee of RMBS trusts, including the BlackRock-led action in California.
“The group believes a contingent liability exists with respect to these eight cases, but at present the amount of the contingent liability is not reliably estimable,” it said.