FINALLY the US is taking action against Deutsche Bank for its role in the financial crisis. This is very good news indeed, and there will be much more analysis to follow. The New York Times broke the story:
The United States government sued Deutsche Bank on Tuesday, accusing it of lying about the quality of home loans it handled under a government program and demanding that the bank repay hundreds of millions of dollars of losses on those loans.
Officials from the Justice Department and the Department of Housing and Urban Development said the lawsuit should serve as a warning to other lenders that are issuing loans using a government guarantee. At a news conference on Tuesday, the United States attorney for the Southern District of New York, Preet Bharara, said Deutsche “cannot get away with lies and recklessness.” He said there was not evidence to justify a criminal complaint and declined to say whether there would be more cases claiming F.H.A. fraud.
The lawsuit can be read in its entirety here (pdf warning). The complaint makes for interesting reading about Deutsche Bank's reckless practices and the activities of its mortgage unit MortgageIT. But this passage stands out, and is representative:
In or about 2004, MortgageIT contracted with an outside vendor, Tena Companies, Inc. (“Tena”) , to conduct quality control reviews of closed FHA-insured loans. As noted above, those reviews did not include early payment defaults because MortgageIT failed to identify early payment defaults to Tena.
Throughout 2004, Tena prepared findings letters detailing underwriting violations it found in FHA0insured mortgages underwritten by MortgageIT. The findings letters included the identification of serious underwriting violations… No one at MortgageIT read any of the Tena findings letters as they arrived in 2004. Instead, MortgageIT employees stuffed the letters, unopened and unread, in a closet in MortgageIT’s Manhattan headquarters.
The letters remained unopened until December 2004 or January 2005.
In December 2004, MortgageIT hired its first quality control manager. The quality control manager asked to see the Tena findings, but was not provided with any findings. After searching throughout the office, the head of the credit department at MortgageIT showed the quality control manager to the closet. The quality control manager opened the closet and found a series of envelopes, unopened and still sealed, in the closet.
The envelopes were disorganized. They contained the unread Tena findings.
The US government is seeking treble damages from Deutsche Bank, which could amount to $1billion. "Peanuts", Deutsche Bank's CEO Josef Ackermann would say. But this could be just the first of many charges against the bank, as the US Justice Department begins to demand accountability from the financial institutions that were instrumental in the 2007 meltdown.
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