US hits Credit Suisse, Deutsche Bank with toxic debt penalties

Credit Suisse and Deutsche Bank have been hit with a combined penalty of more than $12 billion over the sale of U.S. toxic debt, further hampering two of Europe's leading investment banks as they struggle with weak earnings.

The penalties stem from an initiative launched by U.S. President Barack Obama to pursue banks for selling sub-prime debt without warning of the risks, a practice that led to the worst economic crisis since the Great Depression.

Credit Suisse agreed to pay more than $5.2 billion in a deal with U.S. authorities and the penalty is likely to push it to a second consecutive annual loss.

The payment, to settle claims it misled investors when selling mortgage-backed securities in the run-up to the 2008 financial crisis, is split into two parts.

It will first pay $2.48 billion and later provide $2.8 billion over five years to offset the impact on consumers, the bank said.

That news came after Deutsche Bank agreed to a total $7.2 billion settlement for its pooling and sale of toxic mortgage securities, the settlement also divided in a similar manner. The German bank had previously said that the Department of Justice was seeking twice that figure.

"I think the fines are reasonable and represent a positive for the system," said Alberto Gallo, head of global macro strategies at hedge fund Algebris Investments.

The penalties put the two European banks at a further disadvantage to larger U.S. rivals, many of whom have already absorbed their own fines for such wrongdoing and have strong capital cushions.

U.S. banks earlier paid $46 billion in such penalties.

Investors, who had feared an even bigger penalty for Deutsche, were relieved and its shares gained more than 2 percent. They...