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Speaker 1: Deutsche Bank is settling the Justice Department's investigation into its

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Speaker 1: dealings in mortgage backed securities for seven point two billion dollars.

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Speaker 1: That's a little more than half the opening demand from

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Speaker 1: the Justice Department. Credit Suite has also announced that it's

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Speaker 1: settling with the d o J for five point to

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Speaker 1: eight billion. In contrast, Barkley's has decided to face off

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Speaker 1: against the government in its long running investigation over bank

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Speaker 1: sale of mortgage bonds ahead of the financial crisis. The

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Speaker 1: Justice Department is suing Barkeley's for repeatedly deceiving investors about

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Speaker 1: the quality of more than thirty one billion dollars in

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Speaker 1: loans backing the securities that were sold between two thousand

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Speaker 1: five and two thousand seven. My guests are John Coffee,

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Speaker 1: professor at Columbia University Law School, and Peter Henning, professor

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Speaker 1: at Wayne State University Law School. John how rare is

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Speaker 1: it for one of the big banks to risk drawn

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Speaker 1: out litigation rather than settling. Well, it is very rare

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Speaker 1: because large banks don't want to be in a position

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Speaker 1: or having the government of the largest financial country in

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Speaker 1: the world suiting them. On the other hand, they may

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Speaker 1: have reached a decision that it's in their own self

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Speaker 1: interest to wait for Mr Trump to come into office

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Speaker 1: in the belief that Mr Trump's administration will either give

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Speaker 1: up on the suit, abandon it, or settle it very cheaply.

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Speaker 1: And that's where we see different banks reaching very different decisions.

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Speaker 1: Peter Barkley's denies the charges. Is there anything different about

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Speaker 1: the case against Barkley's than the case about from the

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Speaker 1: other banks. It's hard to see any real difference between them.

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Speaker 1: The Justice Department is using fi Rhea, the the law

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Speaker 1: that comes out of the S and L crisis in

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Speaker 1: the late nineteen eighties that is built around claims of

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Speaker 1: mail and wire fraud, to then try to show that

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Speaker 1: these different banks put together essentially toxic resident cential mortgage

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Speaker 1: back securities and sold them. So I don't see much

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Speaker 1: of a difference. Although you know, each case has its

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Speaker 1: own little quirks, and in this one you had some

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Speaker 1: funny little emails, but the overall theory is the same.

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Speaker 1: And what's your what's your thought about trumping President and

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Speaker 1: whether Barkley's thinks that they can get a better deal

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Speaker 1: with the Trump administration. Well, I mean, I think that's

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Speaker 1: a pretty expensive roll of the dice. I don't see

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Speaker 1: um Jeff Sessions, who's going to be coming in at

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Speaker 1: least expected to come in as the Attorney general, uh,

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Speaker 1: taking a more favorable view of banks, and especially a

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Speaker 1: foreign bank that's accused of wrongdoing. And of course, you know,

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Speaker 1: one of the populist themes, if you will, from this

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Speaker 1: past election was we don't want banks taking advantage of customers.

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Speaker 1: So well, the claim of for less regulation is one thing.

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Speaker 1: This is really about enforcement. I think that's a little

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Speaker 1: different agenda. So if they are banking on President Trump,

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Speaker 1: then potential Attorney General Sessions going easy. You wonder how

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Speaker 1: good a bet that is, John. Deutsche Bank is settling

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Speaker 1: for seven point two billion dollars. That's down from the

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Speaker 1: fourteen billion that the Justice Department initially offered them for settlement.

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Speaker 1: Why how good a deal is that for Deutsche Bank.

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Speaker 1: I think it's actually a little better than appears at

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Speaker 1: first glance, because while at seven point two billion, only

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Speaker 1: three point one billion is a penalty that must be

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Speaker 1: paid in cash. Currently, the remainder of four point one

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Speaker 1: billion will be accounted for through modifications of existing loans.

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Speaker 1: Now they haven't agreed what those modifications will be that's

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Speaker 1: still a subject where there could be intense negotiation, and

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Speaker 1: it's not clear what the cost of this would be,

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Speaker 1: because if various borrowers have defaulted, your chances are getting

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Speaker 1: repaid are modest at best, and writing down that loan

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Speaker 1: by fifty cost you very little. So I think you

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Speaker 1: should look at this as a real payment of three

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Speaker 1: point one billion and an adjusted amount that still has

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Speaker 1: to be fleshed in with a lot more details, but

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Speaker 1: probably won't be the same as a face value loss

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Speaker 1: of four point one billion. Peter was Deutsche Bank under

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Speaker 1: pressure to settle? Oh, under enormous pressure to settle, especially

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Speaker 1: when word came out back in I believe it was

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Speaker 1: September that the Justice Department's opening bid was fourteen billion

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Speaker 1: dollars um. The market reacted very negatively. I think everyone

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Speaker 1: knew that that was just an opening bid and that

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Speaker 1: it would be much lower as we've seen here. But

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Speaker 1: Deutsche Bank really had to get this behind it. It

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Speaker 1: couldn't run the risk like Barclays is running, that it

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Speaker 1: could go to trial, because then the potential amount of

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Speaker 1: a penalty could have run over ten billion dollars. So

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Speaker 1: they had to get this finished. John, how has the

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Speaker 1: Obama administration done. As far as this investigation into the

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Speaker 1: banks and the money that it's gotten back, well, I

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Speaker 1: think the Obama administration really changed its policy in the

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Speaker 1: last two years. For a long time, they appeared to

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Speaker 1: be very reluctant to go after banks or bank executives.

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Speaker 1: Mr Holder was a little bit embarrassed by the claim

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Speaker 1: that he had allegedly said that some banks were too

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Speaker 1: big to fail or too big to jail. Uh And

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Speaker 1: the last two years they have stepped up the amount

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Speaker 1: of pressure and they've gotten numbers from for example, JP

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Speaker 1: Morgan or something like fourteen billions. So they found it

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Speaker 1: important to show that they were being tough with respect

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Speaker 1: to banks. And I think right now we're in the

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Speaker 1: shadow of the Obama administration, and it may be that

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Speaker 1: the regulators under Obama are scrambling a bit to see

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Speaker 1: if they can resolve this now, partly to get credit

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Speaker 1: for resolving the crisis, and partly to avoid the disposition

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Speaker 1: being made by the next administration and what may or

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Speaker 1: may not be a more lenient disposition. Peter, that was

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Speaker 1: my question actually, which is how how much scrambling is

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Speaker 1: going on at Justice right now? And is that why

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Speaker 1: they Barkley's decided perhaps to to take a step back,

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Speaker 1: let them sue and then see what happens. Well, certainly

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Speaker 1: that's possibility, and we're at the end of an administration.

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Speaker 1: The outgoing senior leadership wants to see the cases resolved.

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Speaker 1: The lower level people who do the actual work on

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Speaker 1: the cases aren't going to change. But what Barkley's may

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Speaker 1: be doing is looking at it going, well, once the

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Speaker 1: dust settles after the change, let's see what happens, Let's

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Speaker 1: see how much they want to litigate. I suspect Barclays

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Speaker 1: is hoping that they can whittle down any settlement. And

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Speaker 1: as Jack pointed out, it's really you know, when we

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Speaker 1: see these numbers of seven billion or five point to

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Speaker 1: eight that that's not the real number that's in the headline.

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Speaker 1: But it may be that they can whittle down the

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Speaker 1: penalty um come up with some way to do the

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Speaker 1: rebates to consumers and save themselves some money. So I

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Speaker 1: suspect that's their plan. John Is sessions on record as

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Speaker 1: far as antitrust, Well, of course you're saying any trust.

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Speaker 1: This is primarily a securities fraud case in which the allegations, Sorry,

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Speaker 1: I had our last set I had my last topic

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Speaker 1: still in my mind, You're right as far as the

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Speaker 1: securities fraud, well, I don't think he's ever said that

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Speaker 1: it's a good thing. He did criticized Jamie Diamond two

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Speaker 1: years ago for settling too cheaply and for too much.

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Speaker 1: He felt that that Chase Manhattan should have gone to

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Speaker 1: trial rather than settling at fourteen billion. But I don't

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Speaker 1: know that he's got a consistent position, And I think

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Speaker 1: actually the people who have real influenced here are the

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Speaker 1: Attorney General and the Secretary of the Treasury. Their disposition

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Speaker 1: towards all these cases and how they should be settled

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Speaker 1: is probably going to be more decisive, because this really

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Speaker 1: isn't the presidential issue. He's going to have his hand

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Speaker 1: soul with world affairs and other matters and probably leave

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Speaker 1: this to the directly responsible regulators, Treasury and Department of Justice.

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Speaker 1: An extraordinary twist in one of the most high profile

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Speaker 1: insider trading cases brought by Manhattan US Attorney pre Barra,

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Speaker 1: Las Vegas gambler Billy Walters may escape insider trading charges

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Speaker 1: because an FBI agent leak secrets of the criminal investigation

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Speaker 1: to reporters. Walters has pleaded not guilty to charges of

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Speaker 1: trading shares of Dean Foods based on inside tips for

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Speaker 1: the company's former chairman. The chairman has pleaded guilty and

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Speaker 1: his cooperating with investigators, but the case has been thrown

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Speaker 1: into turmoil because an FBI agent admitted to prosecutors that

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Speaker 1: he leaked confidential information about the investigation to two newspapers.

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Speaker 1: Federal Judge p. Kevin Castell said he was shocked after

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Speaker 1: reading the government memo about the leaks, and said defense

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Speaker 1: lawyers can file a motion to dismiss the case. I've

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Speaker 1: been talking with Peter Henning, the professor at Wayne State

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Speaker 1: University Law School, and John Coffee, professor at Columbia University

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Speaker 1: Law School. Peter tell us about what this FBI agent

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Speaker 1: did and why, Uh, well, I'm not sure the why.

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Speaker 1: The what is that he met with reporters from the

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Speaker 1: Wall Street Journal in the New York Times and backing

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Speaker 1: around and told them about the investigation of Walters along

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Speaker 1: with the big name that has come up in this

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Speaker 1: is Phil Mickelson, the major champion winner, and that uh

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Speaker 1: told these reporters about how the investigation was progressing, and

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Speaker 1: apparently it had hit something of a brick wall, and

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Speaker 1: so the idea, I guess the hy was to try

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Speaker 1: to get it jump started by getting the information into

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Speaker 1: the media and maybe that would get someone to come

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Speaker 1: in and cooperate. Now, one defendant, the tipper ultimately did

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Speaker 1: gentleman by the name of Thomas Davis, who had been

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Speaker 1: on the board of Dean Food. So it may have

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Speaker 1: had that effect. But of course FBI agents and prosecutors

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Speaker 1: can't disclose confidential information, and this was very much confidential

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Speaker 1: information and in fact might well have been grand jury

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Speaker 1: information that could result in a criminal prosecution of the

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Speaker 1: agent Jack. The judge seems quite upset, to say the least,

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Speaker 1: is he likely to throw this case out and on

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Speaker 1: what basis? Well, he did invite a motion to dismiss,

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Speaker 1: and that's unusual. Judge Castle has been on the bench

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Speaker 1: for twenty five years. He's not seen as hostel to prosecutors,

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Speaker 1: and he's probably encountered lots of other episodes. But he

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Speaker 1: did feel this was well out of the ordinary. Now,

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Speaker 1: in terms of how government officials behave uh, I'd have

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Speaker 1: to say that leaking and tipping of reporters is a

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Speaker 1: fairly common practice and some use attorneys, not Mr Bihara,

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Speaker 1: were quite famous for doing that regularly. Uh. The real

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Speaker 1: implication here for the future is this may very much

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Speaker 1: change the behavior of FBI and prosecutors in dealing with

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Speaker 1: the press, and the press may find that it's going

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Speaker 1: to lose one of its most valuable sources of information

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Speaker 1: if FBI agents find they can either be prosecuted and

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Speaker 1: they can be or that their careers will be ruined

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Speaker 1: because their court leaking information and Defense Council will investigate

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Speaker 1: this now more regularly. Peter, I have to say that

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Speaker 1: I was shocked that the judge was shocked, because it

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Speaker 1: seems that, you know, a lot of stories get into

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Speaker 1: into the papers and it has to be a leak,

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Speaker 1: usually from the prosecution or the prosecutors or the FBI agents.

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Speaker 1: So why is this so different? Something pushed the judge

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Speaker 1: over the line, and I think it's just the manipulativeness

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Speaker 1: that's involved. There are any number of cases in which

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Speaker 1: their leaks, and the judge orders the Justice Department to investigate,

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Speaker 1: and the Justice Department dutifully asked everyone, did you league information?

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Speaker 1: Everyone then responds no, we would never leak information. And

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Speaker 1: that's pretty much the end of it, and the judge

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Speaker 1: even said, look, when I first heard this claim from

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Speaker 1: Walter's attorney, I was skeptical, and he goes, now you've

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Speaker 1: convinced me. So when the government came back at the

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Speaker 1: claims of leaks and said, no, nothing to see here,

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Speaker 1: and then all of a sudden issues this letter that says, oops,

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Speaker 1: we were wrong, he got the judge's attention. And this is,

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Speaker 1: as Jack said, it's a very experienced judge. Something pushed

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Speaker 1: him and said, you know what, this is just not right.

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Speaker 1: So Jack, how will they decide and who will decide

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Speaker 1: whether or not to prosecute the FBI agent. Well, the

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Speaker 1: party that will decide is the Inspector General of the

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Speaker 1: Department of Justice. They have commenced a criminal probe of

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Speaker 1: this FBI agent. His name has not yet been disclosed,

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Speaker 1: but the judges indicated he may soon disclose that name.

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Speaker 1: You can prosecute the FBI agent either because of grand

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Speaker 1: jury secrecy, which I don't know whether that was violated

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Speaker 1: or not here, or because under our famous Supreme Court

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Speaker 1: decision called the Carpenter case, an employee cannot disclose confidential

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Speaker 1: information that belongs to his employer that can violate the

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Speaker 1: man on wire products, and there have been such prosecutions,

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Speaker 1: so it's not it's not unusual legal terrain if you

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Speaker 1: can establish the facts. Uh. But the impact I think

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Speaker 1: is going to really chill the behavior of prosecutors and

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Speaker 1: FBI agents, and the press is going to get a

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Speaker 1: far less information if this goes forward. I want to

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Speaker 1: ask you both for a yes or no answer on this. Uh? Jack,

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Speaker 1: will the judge throw the case out? I? I think

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Speaker 1: it's right now, okay? And Peter yes, But I also

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Speaker 1: said the en Ron case wouldn't go criminal, So anyone

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Speaker 1: who believes me my prediction, I'm gonna go yes. Thank

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Speaker 1: you both for being on Bloomberg Law. That's Peter Henning,

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Speaker 1: professor at Wayne State University Law School and John Coffee,

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Speaker 1: professor at Columbia University Law School. That's it for this

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Speaker 1: edition of Bloomberg Law. We'll be back on Monday at

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Speaker 1: one pm Wall Street Time. Thanks to our technical director

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Speaker 1: Chris try Comby and our producer David such Him in

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Speaker 1: Bloomberg Markets with Carol Masser and Corey Johnson starts right

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Speaker 1: now on Bloomberg Radio, and everyone at Bloomberg Law wants

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Speaker 1: to wish you the happiest of holidays. This is Bloomberg