RBS to pay $4.9 billion to settle U.S. claims it sold risky mortgage bonds, half of what was expected

If HSBC Holdings, UBS Group and Wells Fargo & Co. were concerned that the Trump administration might continue the big-ticket bank penalties of the Obama era, there are mounting signs that they need not be.

Royal Bank of Scotland Group says it has reached a tentative deal with the U.S. Justice Department to pay $4.9 billion to resolve an investigation into its sale of toxic mortgage-backed securities a decade ago. The Justice Department, without citing a figure, confirmed a pact was near.

The RBS penalty would be about half of what many analysts had expected the bank to pay. Those estimates were based, in part, on the size of the bank’s mortgage-backed securities portfolio, which was larger than most. An RBS deal for under $5 billion would be the first time that a bank’s mortgage settlement with the Justice Department was lower than its penalty to the Federal Housing Finance Agency, according to Bloomberg Intelligence.

RBS’s proposed deal looks to be welcome news for HSBC, UBS and Wells Fargo, which are among the last remaining big banks with unresolved U.S. investigations over mortgage-backed securities. The global banking giants that previously reached settlements with the Justice Department racked up overall penalties of more than $45 billion.

Those remaining banks could now expect to pay less than had been estimated — in UBS’ case, less than half of the top-end forecast of $5 billion, Elliott Stein, a Bloomberg Intelligence analyst, wrote in a note on Thursday.

The RBS deal isn’t final, of course, and negotiations can shift at the last minute. But evidence is mounting that U.S. enforcers are willing to settle for smaller penalties to end mortgage probes. As the Obama administration was winding down in 2016, Barclays said it would pay no more than $2 billion, practically daring the government to sue, which the Justice Department did.

That suit ended on March 29, when Barclays reached an agreement with the Trump Justice Department to pay the same $2 billion it had offered the prior administration.

Obama-era settlements were significantly more costly. Bank of America Corp., for example, paid $12 billion even though its FHFA penalty was about the same size as RBS’. Deutsche Bank and Citigroup Inc. were assessed much smaller FHFA penalties than Bank of America or RBS but paid about $7 billion each to the Justice Department.

Top Justice Department officials have been signaling their less punitive approach to enforcement. Last year, Attt. Gen. Jeff Sessions instructed U.S. attorneys to no longer include third-party consumer relief in corporate penalties, which had been an Obama administration practice that contributed to the headline-grabbing penalty sizes for Bank of America, Credit Suisse, Deutsche Bank and Citigroup. Sessions argued that such money too often went to groups that weren’t harmed by the illicit conduct and had political agendas.

On Wednesday, Deputy Atty. Gen. Rod Rosenstein told members of the New York City Bar Assn. that some companies were overpaying for their crimes because of “piling on” by multiple government agencies. He described a new policy in which U.S. prosecutors will work closely with their counterparts in other enforcement agencies to coordinate penalties, with the Justice Department adjusting its assessments to account for other fines.

“We need to consider the impact on innocent employees, customers and investors who seek to resolve problems and move on,” he said. “We need to think about whether devoting resources to additional enforcement against an old scheme is more valuable than fighting a new one.”

Stein, the Bloomberg Intelligence analyst, said that “RBS’ billions in payments to other agencies and states no doubt played a role in its less-than-expected DoJ settlement.”

RBS has already paid mortgage-related penalties of $5.5 billion to the FHFA, $1.25 billion to the National Credit Union Administration, $500 million to the New York attorney general’s office and $150 million to the Securities and Exchange Commission.

Farrell and Schoenberg write for Bloomberg

UPDATES:

1:40 p.m.: This article has been updated with a Bloomberg story.

This article was originally published at 10:20 a.m.