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Deutsche Bank agrees to pay $7.2 billion to settle mortgage-abuse case

Deutsche will pay U.S. a $3.1 billion penalty and agree to an additional $4.1 billion in loan modifications and other homeowner relief over a five-year period. (Ralph Orlowski/Reuters)

When Sen. Jeff Sessions’s nomination as attorney general is considered by the Senate Judiciary Committee next month, Democrats say they expect to grill him about his approach to prosecuting Deutsche Bank, the troubled financial institution that is Donald Trump’s biggest lender.

Concern among Democrats and ethics experts continued Friday even after the German financial giant said in a statement that it plans to pay $7.2 billion to settle a landmark mortgage-abuse case brought by the Justice Department. If approved, the proposed settlement would resolve one outstanding question facing the bank, but others remain.

“Despite this tentative settlement, I will be asking about the Justice Department plans to investigate Deutsche Bank and culpable individuals,” Sen. Richard Blumenthal (D-Conn.), a member of the Judiciary Committee, said in an interview Friday. Earlier, Blumenthal had called for an independent counsel to review alleged violations by the bank, including an inquiry into alleged suspicious trading involving its Moscow office. Blumenthal vowed to quiz Sessions (R-Ala.) closely during upcoming confirmation hearings about how he would handle the bank “and other potential conflicts of interest involving Donald Trump.”

The tentative settlement, which the bank announced late Thursday, follows a months-long Justice Department investigation into Deutsche mortgage-securities abuses at the dawn of the financial crisis. The bank will pay roughly half what the department had suggested for a penalty earlier.

The settlement was reached “in principle” and could still change, the bank said. The Justice Department declined to comment Friday on the proposed settlement and additional inquiries regarding the bank’s conduct.

The news came as Deutsche is under scrutiny for the potential influence it could exert on the president-elect, who in financial filings has listed the European megabank as his companies’ biggest lender, with roughly $364 million in outstanding debts.

But the settlement will likely not close the book on worries over Trump’s close ties to the bank, which has faced a series of investigations over suspicious trading activity and market manipulation, including in Russia and around the world.

Deutsche will pay a $3.1 billion penalty and agree to an additional $4.1 billion in loan modifications and other homeowner relief over a five-year period. Justice investigators in September requested a settlement of up to $14 billion, triggering unease within the bank and highlighting the soon-to-be businessman-in-chief’s debts. Trump’s private real estate fortune has for nearly two decades depended on a steady flow of Deutsche loans.

Ethics advisers have questioned whether conflicts of interest concerning what Trump owns could color his presidential policies and dealmaking. But what he owes could prove just as influential, because those weighty debts aren’t easily shaken off, and because the Trump family’s real estate business could rely on Deutsche funds for future work.

Messages left with Trump representatives were not returned Friday. Deutsche declined to comment for this report.

In September, Alan Garten, an executive vice president of the Trump Organization, told The Washington Post that Trump’s Deutsche loans were not a conflict. “Every president takes office with prior dealings,” Garten said.

Justice Department investigators targeted Deutsche for allegedly selling toxic home loans and deceiving investors about their risky debts between 2005 and 2007, in the years before the financial meltdown. Other banks have faced similar penalties, including Bank of America and Goldman Sachs, the latter of which settled this year for about $5 billion.

Deutsche Bank said in September that Justice negotiators were seeking a budget-busting $14 billion penalty, which led the bank's stock to plunge after analysts said the bank was "significantly undercapitalized." But in a note to employees, Deutsche chief executive John Cryan said the bank had an "extremely comfortable buffer" of more than $220 billion in reserve funds.

Deutsche executives and German politicians disputed speculation that the prominent bank had sought a bailout from the German government. The bank’s share price has climbed 30 percent since Trump’s Nov. 8 electoral victory.

Founded in 1870, Deutsche is one of the world’s most formidable financial institutions, with more than 20 million clients and about 100,000 employees in 70 countries. Its total assets are larger than those of American megabanks Wells Fargo and Citigroup.

The Frankfurt-based bank’s deep roots in Germany, where half of its employees and shareholders live, could prove disconcerting for Trump in his role as U.S. head of state. In 2008, German Chancellor Angela Merkel hosted a taxpayer-funded dinner celebrating the 60th birthday of Josef Ackermann, then the bank’s chief executive.

The mortgage-securities settlement will not resolve a series of other potential hurdles for the European banking giant. Deutsche is also facing inquiries from the Justice Department and other countries over allegations it used so-called “mirror trading” to launder money on behalf of wealthy clients in Russia and other nations.

In a separate market-manipulation case, Russia's central bank said Tuesday that a Deutsche trader had made millions of dollars by buying and selling stocks under his relatives' names.

Plagued by a series of costly scandals over the past decade, Deutsche has agreed to pay billions of dollars in fines for violating international trading sanctions and conspiring to manipulate foreign exchange rates and the prices of gold and silver.

The bank last year agreed to pay a $2.5 billion fine to the Justice Department and international regulators over its role in a scheme to rig the London Interbank Offered Rate, or LIBOR, which is used to calculate interest payments across the globe. In June, an International Monetary Fund report said the bank was one of the biggest “contributors to systemic risks in the global banking system.”

The potential for conflicts between Deutsche and Trump’s presidency could influence the future of broad regulations crafted in the aftermath of the financial meltdown.

Deutsche was the first bank penalized last year, with a $2.5 million fine, under a provision of the Dodd-Frank financial-reform act aimed at tracking trades of financial instruments known as swaps.

The bank’s overhaul of its swaps-reporting system is now being overseen by Paul Atkins, a former Securities and Exchange Commission official and an influential member of the Trump transition team. Atkins has criticized Dodd-Frank and questioned the effectiveness of corporate penalties as a means to deter bad behavior.

Atkins’s views on Dodd-Frank appear to align with those of Deutsche, which has paid more than $1 million since the start of 2015 to Peck Madigan Jones lobbyists targeting members of Congress, records show. Their lobbying priorities have included Dodd-Frank rules, tax reforms and issues related to the regulation of foreign banks.

Trump’s relationship with Deutsche stretches back nearly two decades, beginning with a $125 million loan in 1998 for Trump’s Manhattan skyscraper at 40 Wall St., loan documents show.

The relationship has seen its tension points. Trump sparred with Deutsche’s investment-lending division in 2008 during a messy legal battle over a $640 million loan to fund construction of Trump’s Chicago tower.

When lenders demanded Trump pay $40 million in unpaid debts he had personally guaranteed, Trump sued Deutsche for $3 billion, claiming the tower’s struggles had been triggered by a recession partially sparked by the bank itself. That case has been settled.

In recent years, Trump’s loans have come not from Deutsche’s investment bank but its private-wealth division, where Trump works with a veteran banker, Rosemary Vrablic, whose clientele includes other deep-pocketed real estate developers. In a New York Times interview in May, Trump called Vrablic “the head of Deutsche Bank” and “the boss.”

“She’s a real banker’s banker,” said one of Vrablic’s clients, Herbert Simon, former chairman of the Simon shopping-mall giant and the current owner of the Indiana Pacers basketball team. “When I needed some quick action, a quick turnaround, she produced.”

Vrablic did not respond to requests for comment.

Deutsche is one of the only Wall Street banks to be listed as one of Trump’s active lenders. A former bank director said lenders in recent years were leery of partnering with Trump following years of high-profile trouble in his businesses, including six corporate bankruptcies.

Deutsche is now the biggest publicly known lender to Trump businesses, with four outstanding loans tied to Trump’s most high-profile properties, according to financial-disclosure filings released in May.

Deutsche lent $170 million last year for the new Trump International Hotel in Washington, or about 80 percent of what the Trump Organization said it spent toward redevelopment.

Trump also borrowed $125 million for his Trump National Doral golf course in south Florida and $69 million for the Trump International Hotel and Tower in Chicago. All of those loans come due by 2024, during what could be Trump’s second term in office.

A Deutsche subsidiary, the Bank of China, and other lenders also partnered to lend nearly $1 billion in 2012 to a New York office building where Trump owns a minority stake.

Deutsche has also helped fund side interests close to Trump, including making a $3.6 million loan in 2011 to Titan Atlas, a failed South Carolina factory venture in which Trump’s son, Donald Jr., was involved. Deutsche lenders have also worked with the company of Trump’s son-in-law, Jared Kushner.

Blumenthal last month said that a special counsel, independent of the president and the attorney general, should be appointed to ensure the impartiality and forcefulness of the Justice Department’s mortgage probe.

The department earlier this month rejected Blumenthal’s request. Assistant Attorney General Peter J. Kadzik wrote, “The Department has full confidence in its law enforcement professionals and career attorneys to follow the established Department policies and procedures, which are designed to ensure the integrity of all ongoing investigations.”

Trevor Potter, a former chairman of the Federal Election Commission who has advised several Republican presidential candidates, said that the Deutsche situation presents “enormously complex and worrisome issues” for the president and his administration and for bank officials.

“The idea that the bank might offer the president better terms in return for the government going easier on the terms of enforcement and fines is truly horrific,” Potter said. “It is a possibility that illustrates the perils of this situation,” he added, and it doesn’t just affect the president.

“Anyone the president appoints in DOJ or Treasury is going to be aware — could not fail to be aware — that the president has a real stake with that enormous loan outstanding,” Potter said. “As a result, everyone will be in fear of making a decision that might anger the president, their boss, or might cause him trouble.”