Deutsche Bank Has Been Shanked
Just days after the 8 year anniversary of the collapse of Lehman Brothers, news has surfaced of a massive fine (much bigger than expected) coming for Deutsche:
Today’s news that the U.S. Justice Department (DOJ) wants to slap a $14bn (€12.5bn) fine on Deutsche for mis-selling mortgaged backed securities before the financial crisis would seem to strengthen their hand.
Also keep in mind:
The fine is equivalent to 74% of Deutsche Bank’s market capitalization
Deutsche Bank’s market capitalization currently stands at €16.9bn ($19bn). The DOJ fine is therefore 74% of the bank’s current value. It’s no surprise Deutsche’s shares are plummeting.
Monkeys, what are your thoughts? Deutsche already has a bad rep in IB, this does not help.
I read the below article from Reuters earlier today, and it's just amazing just how inaccurate DB was in estimating what their penalty would be. They thought the penalty would be $3.4 billion- an underestimate of over 400%.
Just thinking past the obvious "what happens if DB fails", I think the real ramification here will be increased regulation and an impossibility of Wall Street lobbyists to get parts of Dodd-Frank overturned, though, I think Wells Fargo took care of that themselves. Put together with the increased populist political sentiment in the U.S., and I think the banking industry is about to see some tough times.
http://www.reuters.com/article/us-deutsche-bank-mortgages-idUSKCN11L2VQ
how do you see this affecting their stock? I know they took a pretty big hit but do think they can still go a lot lower?
Interesting thoughts as always Sil, thank you for sharing.
They will probably settle for much less if the court will even rule in DOJ favor. If it will posses a threat to the bank government will have to bail them since the cost of DB failure is less than the cost of the bailout anyway.
what?
DB failed the US stress-test, it is over 40x leveraged and it receives 19% of its revenues from GB. In the context of the $12.5bn penalty - DB held $6.2 billion in total litigation reserves as of June 30. It's a perfect storm for DB and it will come down to whether Germans allow it to go under or not.
While the EU is not in a position to withstand another rattle in the banking system.
Rock solid compared to the Italian banks solvency though
How do you think this will affect Germany's trading stance with Britain post Brexit, given that DB generate a lot of revenue from GB. Merkel is making it seem as if her government will strong arm Britain in negotiations, do you reckon this changes anything?
Don't think Germany will allow DB go under, considering the aftermath of catastrophe that will follow. Having said that, let's just hope we move past this funk (even though the Wells Fargo scandal doesn't really paint a rosy picture on the industry, even if it's not related to the world economy...).
Agreed
People are speculating that the US are using this fine as a retaliatory swipe at the EU for their fine on Apple. Should be noted that until the appeal happens, this fine is not final. Several firms have successfully appealed ludicrous fines which is where I imagine the logic for DB's significantly lower reserve comes from.
I wouldn't be surprised. People thought this same thing about how the U.S. went after Toyota for their acceleration issues, but basically ignored GM's wrongdoings.
Basically...all hearsay until it is ruled in court?
To clarify: 14B was the opening offer for a settlement. Although this amount was greater than what was expected both DB and the market expect the final amount to be materially lower. This is not an outright fine, hence no question of appeal.
An ideal amount from DB's perspective, according to analysts at JPM, would be $3-3.5B as any amount over that would cause capital erosion. According to analysts at Societe Generale a settlement over $6B could trigger a capital raise, which would create further downward pressure on the stock price.
I do agree with McLovin's speculation above that the DOJ could have some sort of agenda here. Banks stateside paid much lower for MBS probes (Citi paid 7bn in 2014 while GS paid 5bn earlier this year).
I'm thinking out loud here, but in a big picture sense, this is economic warfare. What I see is: here you have a US government entity going after a linchpin of the German (EU) markets>economy. Either the German gov (taxpayers) bail out DB, in which case the US gets a small bundle, or the German banking system craps itself and gets everything that comes with said crapping, leaving the US relatively stronger.
It's especially easy to make the connection in this instance because it's so damn linear. Stated backwards:
DB implosion = potentially major damage to German/EU markets/economy Payout of massive fine = greater likelihood of DB implosion US DOJ is trying to force payout of massive fine
Then again, the other banks paid up to some degree or another, so maybe DOJ is just trying to avoid moral hazard here (let's not get into how collected monies will be allocated and spent).
Similar argument could be made around competitive currency devaluation
Worth noting that this number is only an opening "bid." It's funny that governments' aim was to make banks more stable in the aftermath of the crisis, yet they are going after punitive fees that would help destabilize them at every turn.
http://www.wsj.com/articles/deutsche-bank-is-asked-to-pay-14-billion-to…
Stable, but playing by their rules. "We can't afford to pay the fine for our wrongdoing, so just don't go after us." Won't quite fly.
It's a pushback from the US to the EU for the Apple tax ruling- both about ~$14B
Wow - glad somebody got that...
Here's what's going to happen (if Hillary becomes president). It's gonna take quite a few months with all this court stuff and then when the hype has died down. The DOJ will "re-analyse" (after thinking about it for many months obviously) their fine and reduce it to a couple $100 mil.
Some people will cry out and complain but the everyone else will be too busy with Kim Kardashian and Beyoncé. And the world keeps spinning.
And, if Trump becomes president:
Led by America, western governments will continue this type of economic warfare amongst "allies". Protectionist trade policies throughout the region will create a global depression (just like last time), China's supply economy will collapse, the European led green revolution will die and as a result, expensive Russian gas will allow the Ruskies to regain their place amongst the worlds strongest powers. After around 3 - 5 years of Global Depression (maybe longer, because central banks have nowhere to go and we may have to also pay the piper for decades-long monetary policies which we still do not fully understand the effects of) The burgeoning American LNG trade will dominate the globe, we will have bombed the shit out of ISIS, and American will be Great again.
Disclaimer: still voting for Trump, although not very happy about it.
I'm not even gonna attempt what would happen if Trump won. Too many variables with constantly changing probabilities on a weekly basis.
Last one out turn off the light... In all seriousness even if the fine sticks at 14 billion (very unlikely) and Germany doesn't bail out DB in that case (Extremely unlikely) globally we definitely have things unfolding for some chop near term. It will be an interesting end of 2016.
So instead of their initial fine of 14bn, the penalty will most likely be around one third of it. Shares went down and up again today and even broke through the 10EUR barrier. Clients lost trust in DB and several HF left them. DB still has a bolster of 5.5bn aside for litigations but not all planned for the current issue. But I don't think that anyone is seriously planning to take them over, they have enough assets aside to get through this current unpleasant time.
time to buy?
I reduced my short position. But as soon as the fine settlement is done the moment might be good to buy some stocks. Price is very low and the EU and Germany are never going to let them go bankrupt.
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