Deutsche Bank faces Toxic Mess:
On Tuesday, May 3rd of 2011, the United States
Federal Government formally issued a suit against Deutsche Bank, a financial
power based out of Germany. To date, the United States Federal Government has
brought few cases against Wall Street titans in response to the mortgage crisis
that nearly crippled the global financial markets in 2008. The unwillingness to
act on the mortgage crisis, in regards to government intervention; however,
seemingly did a 180, when the Justice Department filed an aggressive lawsuit
against the financial power for several hundreds of millions of dollars.
The United States Justice Department alleged that the
financial giant unjustly stuck taxpayers with enormous tabs for toxic home
loans it previously issued. The complaint, which was filed in the Federal
District Court in New York, formally accused Deutsche Bank of failing to
properly scrutinize potential borrowers, then subsequently lying to government
officials concerning administrative negligence.
According to U.S. Attorney Preet Bharara, “Deutsche Bank
ignored every type of red flag and breached every duty of due diligence before
underwriting thousands of federally insured mortgages. While the homes the
defendants issued loans for may have been built on solid ground, the lending
practices were built on quicksand. Ultimately, prudence was trumped by profit,
and good faith took a back seat to good fees.”
The complaint states that MotgageIT, a powerful arm of
Deutsche Bank, issued roughly 39,000 toxic loans amassing over $5 billion,
between 1999 and 2009. As a result of the lenient mortgage laws and the fact
that such loans won government backing, the bank was then able to flip these
loans to investors. In order to legally re-package these loans, however, the
financial giant had to obtain certification from the FHA to affirm the lending
practice met the HUD’s standards.
The suit filed against Deutsche Bank revolves around this
certification process; federal prosecutors allege that when the bank applied
for certification, it “repeatedly lied to H.U.D. to obtain and maintain legal
certification.” The foundation of these claims centers on the accusation that
the bank did not properly monitor the default rate of these risky loans, even
though it definitively claimed to do so.
Although Deutsche Bank claimed these charges to be
“unreasonable and unfair” the extent to which this suit establishes whether
such neglectful lending practices are criminal will yield far-reaching
ramifications for the prominent players in the controversial mortgage market.