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Banking fallout

September 3, 2011

The US government is suing Germany's largest bank in connection with the sale of billions of dollars of mortgage-backed securities. The US is seeking damages from 17 banks over losses inflicted during the credit crunch.

Deutsche Bank AG's headquarters in Frankfurt, Germany
Deutsche Bank denied having duped the US governmentImage: picture alliance/dpa

Frankfurt-based Deutsche Bank is being sued by the US government in an attempt to recoup losses from the economic crisis, the Federal Housing Finance Agency (FHFA) announced on Friday.

While the precise amount sought by the FHFA isn't yet clear, its complaint cites $14.2 billion (10 billion euros) in damages, stemming from the sale of residential mortgage-backed securities to the government sponsored enterprises (GSE) Freddie Mac and Fannie Mae between 2005 and 2007.

Freddie Mac and Fannie Mae were placed under the conservatorship of the FHFA in September 2008, after accumulating massive losses accrued after the housing bubble burst and foreclosure rates surged.

The lawsuit announced on Friday was also leveled against 16 other banks and financial institutions over losses totaling around $200 billion.

Hardest hit is Bank of America with a grand total of $57.5 billion in damages. JPMorgan Chase had the next highest damages at $33 billion, followed by the Royal Bank of Scotland at $30.4 billion.

Sophisticated investors?

According to the lawsuits, the securities never should have been sold since they failed to meet investor's criteria. The complaint against Deutsche Bank accuses the defendant of including false statements and misleading omissions which "significantly overstated the ability of the borrowers to repay their mortgage loans and the value of the collateralized property."

Deutsche Bank responded with skepticism that the two GSEs could have been so misled.

"Fannie Mae and Freddie Mac are the epitome of a sophisticated investor, having issued trillions of dollars of mortgage-backed securities and purchased hundreds of billions of dollars more," spokeswoman Mayura Hooper said in a statement.

The FHFA filed the suits before a three-year statute of limitations expired.

Deutsche Bank stocks fell on Friday in the NYSE, closing down 6 percent at $36.26 per share.

Author: Stuart Tiffen (Reuters, AP)

Editor: Sean Sinico