by Wolf Richter, Wolf Street:
The fine that broke the bank?
Deutsche Bank investors just can’t catch a break. They keep thinking that shares have dropped so low that it’s time to grab them. Herd instinct sets in, and this buying perks up the shares. Then the bank’s sins once again come to the foreground. And what investors had grabbed was a falling knife, and fingers are now getting sliced off.
Early morning on Friday in Frankfurt – in the US, Thursday after the markets had closed, a strategic time for bad news – Deutsche Bank announced that the US Justice Department was trying to wring $14 billion out it. The fine is based on the investigation into mortgage backed securities that the bank had rolled into complex toxic products and sold to unsuspecting investors between 2005 and 2007, just before the Financial Crisis.
The Justice Department already nailed other banks for it and extracted large fines; and it’s still investigating some banks, including UBS, Credit Suisse, Royal Bank of Scotland, and Barclays – which saw their shares get pummeled today.
Deutsche Bank has already paid over $9 billion in fines and settlements since 2008. Other scandals are still simmering on the front burner, unresolved, including the money laundering scandal in Russia for which Deutsche Bank has reserved €5.5 billion this summer to cover the fines.
In its statement early Friday in Frankfurt, Deutsche Bank said it “has commenced negotiations” with the Justice Department:
The bank confirms market speculation of an opening position by the DoJ of USD 14 billion and that the DoJ has invited the bank as the next step to submit a counter proposal.
Deutsche Bank has no intent to settle these potential civil claims anywhere near the number cited. The negotiations are only just beginning. The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts.
So let the horse trading begin. As always, a deal will be worked out. For most big banks, it would just add to the cost of doing business. These huge fines might amount to a quarter or two of reported income, nothing more. For a highly profitable, well-capitalized bank that isn’t teetering on the brink, such fines are essentially a slap on the wrist.
But these three conditions – highly profitable, well-capitalized, and not teetering on the brink – are not applicable to Deutsche Bank.
So Friday, all heck broke loose in Frankfurt. Deutsche Bank’s shares plunged 8.6% to €11.97, the biggest drop since June 27 following the Brexit vote. On July 7, they’d hit €11.38, a three-decade low, down nearly 50% from a year earlier, and lower even than during the doom-and-gloom days of the euro debt crisis and the Global Financial Crisis.
Most indicatively, Deutsche Bank’s contingent convertible bonds – the infamous CoCo bonds – plunged 6.5% to 77.61 cents on the euro.
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